Swati Kotak Project


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Swati Kotak Project

  1. 1. SUMMER TRAINING PROJECT REPORT (M.B.A 035) “Comparative Study of Customer Behaviors towards LIFE INSURANCE, MUTUAL FUND & EQUITY MARKET” Submitted in partial fulfillment of the requirement for MBA Degree Programme O f U t t a r P r a d e s h Te c h n i c a l U n i v e r s i t y, L u c k n o w By Swati Gupta ROLL NO.-0806770068 MBA-III Semester (2008-2010) 1
  2. 2. Hindustan Institute of Management & Computer Studies, Farah, Mathura, (U.P) Acknowledgement “Knowledge is an experience gained in life, it is the choicest possession, which should not be shelved but should be happily shared with others”. Planning and motivation are two key factors in making any activity a success. Goal is a result of a group effort rather than individual effort. It has been same in the case of this report. The operation and support of many individual has made this project a success. As we know that the employees are the foundation of an organization and the whole of the organization is depended on the employees. In preparation of this report by me, I feel great pleasure because it gives me extensive practical knowledge in my career. I get idea about Indian financial Industry by this project. I would like to express my sincere gratitude to my project guide MR.SHALABH SRIVASTAVA (Senior Branch Manager of Pinnacle Wealth management Channel Partner of Kotak Life Insurance) & MR. SHAKEEL RATEEYA For valuable inspiration and guidance provided me throughout the course of this project. They have patient and critically gone the subject matter. I would like to take opportunity to express my gratitude towards all of them who have contributed directly or indirectly in my project work. I also thank (Kotak Mahindra Old Mutual Life Insurance ltd.) for providing me the opportunity to work for this project which was an excellent learning experience for me. Regard, Swati Gupta, HIMCS, Farah, Mathura. (U.P) 2
  3. 3. Declaration I, Swati Gupta, Student of MBA III Semester, Hindustan Institute of Management & Computer Studies Mathura, hereby solemnly declare that the Summer Training Project Report titled “Comparative study of Consumer behavior towards Life Insurance, Mutual Fund & Equity Market” is my own original work and has not been submitted to any other University or institute for the award of any degree or diploma. PLACE: - Agra DATE: 28 /10/2009 Name of Student: Swati Gupta Roll NO.0806770068 3
  4. 4. Preface The Harder You Work…… The Luckier You Get. In this era of globalization as a marketer it is essential to know the pulse of the consumer and the market trends. Thus it is essential not only to have theoretical knowledge but also to have the feel of the market as well. It was a privilege for us to work in a reputed organization- Kotak Mahindra Old Mutual Life Insurance Ltd. This has given us an opportunity to work in a truly professional environment where team work score over individual effort, where there is a helpful atmosphere. A well planned, properly executed and evaluated training helps a lot in inoculating good work culture. It provides linkage between student and industry in order to develop the awareness of individual approach to problem solving based on the broad understanding of plant machinery, process and mode of operation of individual organization. The project on “Comparative study of customer behavior towards life insurance, mutual fund & equity market” has been made to facilitate effective understanding about the marketing aspects. The project training has provided me an opportunity to gain practical experience, which has helped me to increase my sphere of knowledge to a greater extent. I have tried to summarize all our experience and knowledge acquired up till now, in this report. This project is a keen effort to obtain the expected results and fulfill all the information required. At the end annexure and bibliography are given for effective understanding. I am grateful to Kotak Mahindra Old Mutual Life Insurance Ltd for providing required support. I have tried to present this report to the best of my capabilitity .In case of any errors kindly pardon me. Thank you for your interest in my project report. 4
  5. 5. Swati Gupta TABLE OF CONTENT CONTENTS PAGE  Abstract 6-7  Introduction 8-22  Financial market  About Insurance Market  Insurance Sector Reforms 23-24  IRDA 25-26  COMPANY PROFILE 30-40  History, Group Structure  Mission, Vision& Values  Management  Concept of Human Life Value 41  Kotak Products-KSAP 45-49  Mutual Fund 50-61  Equity Market 62-73  Objective of the study 74  Research Methodology 75  Data Analysis 83-87  Findings 88  SWOT Analysis 90-92  Conclusion 93  References 94  Appendix 95-100 5
  6. 6. ABSTRACT The basic objective of any financial services company would be to provide an absolute tailor made products and services to the customer and to retain them into the organization, but to retain a particular customer is not easy because customer expectations change by time and it becomes a tough job for the companies to curb the needs of their customers This research is conducted to understand the customer’s perception towards mutual fund. Till yesterday people are having very less knowledge for mutual funds because of brokerage companies in India have not made efforts to expand the market Customer satisfaction is a measure of how products and services supplied by a company can meet the customer’s expectations. Customer satisfaction is still one of the single strongest predictors of customer retention. It’s considerably more expensive to attract new customers than it is to keep old ones happy. In a climate of decreasing brand loyalties, understanding customer service and measuring customer satisfaction are very crucial. There is obviously a strong link between customer satisfaction and customer retention. Customer's perception of Service and Quality of product will determine the success of the product or service in the market. With better understanding of customers' perceptions, companies can determine the actions required to meet the customers' needs. They can identify their own strengths and weaknesses, where they stand in comparison to their competitors, chart out path future progress and improvement. Customer satisfaction measurement helps to promote an increased focus on customer outcomes and stimulate improvements in the work practices and processes used within the company. Customer expectations are the customer-defined attributes of your product or service you must meet or exceed to achieve customer satisfaction.1 6
  7. 7. There are many reasons why customer expectations are likely to change over time. Process improvements, advent of new technology, changes in customer's priorities, improved quality of service provided by competitors are just a few examples. 7
  8. 8. Introduction Financial market: Financial market is a mechanism that allows people to easily buy and sell (trade) Financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction cost and at prices that reflect the efficient market hypothesis. Financial markets have evolved significantly over several hundred years and are undergoing constant innovation to improve liquidity. India Financial Market promotes the savings of the economy, providing an effective channel for transmitting the financial policies. It is a well-developed, competitive, efficient and integrated financial sector. There are large numbers of buyers and sellers of the financial product, the prices are fixed by the market forces of demand and supply within the Indian Financial Market. Financial markets facilitate – • The raising of capital (in the capital markets); • The transfer of risk (in the derivatives markets); • International trade (in the currency markets) 8
  9. 9. Types of financial markets- The financial markets can be divided into different subtypes: • Capital markets which consist of: • Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. • Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof. • Commodity markets, which facilitate the trading of commodities. • Money markets, which provide short term debt financing and investment. • Derivatives markets, which provide instruments for the management of financial risk. • Futures markets, which provide standardized contracts for trading products at some future date. • Insurance markets, which facilitate the redistribution of various risks. • Foreign exchange markets, which facilitate the trading of foreign exchange 9
  10. 10. The Financial Market in India focuses on these features: • Real-time India Financial Indices – BSE 30 Index, Sector Indexes, Stock Quotes, Sensex Charts, Bond prices, Foreign Exchange, Rupee Dollar Chart • Indian Financial Market news • Stock News – Bombay Stock Exchange, BSE Sensex 30 closing index, S&P CNX-Nifty NSE, stock quotes, company information, issues on market capitalization, corporate earning statements, Indian Business Directory • Fixed Income – Corporate Bond Prices, Corporate Debt details, Debt trading activities, Interest Rates, Money Market, Government Securities, Public Sector Debt, External Debt Service • Foreign Investment – Foreign Debt Database composed by BIS, IMF, OECD,& World Bank, Investments in India & Abroad • Global Equity Indexes – Dow Jones Global indexes, Morgan Stanley Equity Indexes • Currency Indexes – FX & Gold Chart Plotter, J. P. Morgan Currency Indexes • National and Global Market Relations • Mutual Funds • Insurance • Loans • Forex and Bullion 10
  11. 11. The following table illustrates where financial markets fit in the relationship between lenders and borrowers: Relationship between lenders and borrowers Financial Financial Lenders Borrowers Intermediaries Markets Interbank Individuals Banks Stock Exchange Companies Individuals Insurance Companies Money Market Central Government Companies Pension Funds Bond Market Municipalities Mutual Funds Foreign Exchange Public Corporations From all those financial market, I did detailed study about Insurance market, Stock market, and mutual fund market because mostly people usually invest their money in these markets. Insurance Market 11
  12. 12. Insurance may be defines as social device to protect the economic value of the Life and other assets. Under the plan of Insurance a group of people are brought together and their share of money is pooled to manage the loss suffered by any of them. In its basic form is defined as “ A contract between two parties whereby one party called Insurance insurer undertakes in exchange for a fixed sum called premiums, to pay the other party called insured a fixed amount of money on the happening of a certain event." Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of potential financial loss. Insurance is defined as the equitable transfer of the risk of a potential loss, from one entity to another, in exchange for a premium and duty of care In simple terms it is a contract between the person who buys Insurance and an Insurance company who sold the Policy. By entering into contract the Insurance Company agrees to pay the Policy holder or his family members a predetermined sum of money in case of any unfortunate event for a predetermined fixed sum payable which is in normal term called Insurance Premiums. Insurance is basically a protection against a financial loss which can arise on the happening of an unexpected event. Insurance companies collect premiums to provide for this protection. By paying a very small sum of money a person can safeguard himself and his family financially from an unfortunate event. For Example if a person buys a Life Insurance Policy by paying a premium to the Insurance company , the family members of insured person receive a fixed compensation in case of any unfortunate event like death. There are different kinds of Insurance Products available such as Life Insurance, Vehicle Insurance, Home Insurance, Travel Insurance, Health or Med claim Insurance etc. Characteristics of Insurance 12
  13. 13. 1. Sharing of Risk 2. Cooperative device 4. Payment on event of happening of any special event 5. The amount of payment depends on the size and type of loss. 6. The success of Insurance business depends on the law of large number of people insured against similar risk. 7. Insurance is a business which spreads the loss and the risk of few people in the large Number of people. 8. The insurance is a plan in which insured transfer his risk to insurer. 9. Insurance is a legal contract. ORIGINE OF INSURANCE 13
  14. 14. Almost 4,500 years ago, in the ancient land of Babylonia, traders used to bear risk of the caravan trade by giving loans that had to be later repaid with interest when the goods arrived safely. In 2100 BC, the Code of Hammurabi granted legal status to the practice. That, perhaps, was how insurance made its beginning. Life insurance had its origins in ancient Rome, where citizens formed burial clubs that would meet the funeral expenses of its members as well as help survivors by making some payments. As European civilization progressed, its social institutions and welfare practices also got more and more refined. With the discovery of new lands, sea routes and the consequent growth in trade, medieval guilds took it upon themselves to protect their member traders from loss on account of fire, shipwrecks and the like. Brief History of the Insurance Sector in India The business of life insurance in India in its existing form started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. The story of insurance is probably as old as the story of mankind. The same instinct that prompts modern businessmen today to secure themselves against loss and disaster existed in primitive men also. They too sought to avert the evil consequences of fire and flood and loss of life and were willing to make some sort of sacrifice in order to achieve security. Though the concept of insurance is largely a development of the recent past, particularly after the industrial era – past few centuries – yet its beginnings date back almost 6000 years. Life Insurance in its modern form came to India from England in the year 1818. Oriental Life Insurance Company started by Europeans in Calcutta was the first life insurance company on Indian Soil. All the insurance companies established during that period were brought up with the purpose of looking after the needs of European community and these companies were not insuring Indian natives. However, later with the efforts of eminent people like Babu Muttylal Seal, the foreign life insurance 14
  15. 15. companies started insuring Indian lives. But Indian lives were being treated as sub-standard lives and heavy extra premiums were being charged on them. Bombay Mutual Life Assurance Society heralded the birth of first Indian life insurance company in the year 1870, and covered Indian lives at normal rates. Starting as Indian enterprise with highly patriotic motives, insurance companies came into existence to carry the message of insurance and social security through insurance to various sectors of society. Bharat Insurance Company (1896) was also one of such companies inspired by nationalism. The Swadeshi movement of 1905-1907 gave rise to more insurance companies. The United India in Madras, National Indian and National Insurance in Calcutta and the Co-operative Assurance at Lahore were established in 1906. In 1907, Hindustan Co-operative Insurance Company took its birth in one of the rooms of the Jorasanko, house of the great poet Rabindranath Tagore, in Calcutta. The Indian Mercantile, General Assurance and Swadeshi Life (later Bombay Life) were some of the companies established during the same period. Prior to 1912 India had no legislation to regulate insurance business. In the year 1912, the Life Insurance Companies Act, and the Provident Fund Act were passed. The Life Insurance Companies Act 1912 made it necessary that the premium rate tables and periodical valuations of companies should be certified by an actuary. But the Act discriminated between foreign and Indian companies on many accounts, putting the Indian companies at a disadvantage. The first two decades of the twentieth century saw lot of growth in insurance business. From 44 companies with total business-in-force as Rs.22.44 Crore, it rose to 176 companies with total business-in-force as Rs.298 Crore in 1938. During the mushrooming of insurance companies many financially unsound concerns were also floated which failed miserably. The Insurance Act 1938 was the first legislation governing not only life insurance but also non-life insurance to provide strict state control over insurance business. The demand for nationalization of life insurance industry was made repeatedly in the past but it gathered momentum in 1944 when a bill to amend the Life Insurance Act 1938 was introduced in the Legislative Assembly. However, it was much later on the 19th of January 15
  16. 16. 1956 that life insurance in India was nationalized. About 154 Indian insurance companies, 16 non- Indian companies and 75 provident were operating in India at the time of nationalization. Nationalization was accomplished in two stages; initially the management of the companies was taken over by means of an Ordinance, and later, the ownership too by means of a comprehensive bill. The Parliament of India passed the Life Insurance Corporation Act on the 19th of June 1956, and the Life Insurance Corporation of India was created on 1st September, 1956, with the objective of spreading life insurance much more widely and in particular to the rural areas with a view to reach all insurable persons in the country, providing them adequate financial cover at a reasonable cost. LIC had 5 zonal offices, 33 divisional offices and 212 branch offices, apart from its corporate office in the year 1956. Since life insurance contracts are long-term contracts and during the currency of the policy it requires a variety of services need was felt in the later years to expand the operations and place a branch office at each district headquarter. Re-organization of LIC took place and large numbers of new branch offices were opened. As a result of re-organization servicing functions were transferred to the branches, and branches were made accounting units. It worked wonders with the performance of the corporation. It may be seen that from about 200.00 Crore of New Business in 1957 the corporation crossed 1000.00 Crore only in the year 1969-70, and it took another 10 years for LIC to cross 2000.00 Crore mark of new business. But with re-organization happening in the early eighties, by 1985-86 LIC had already crossed 7000.00 Crore Sum Assured on new policies. Today LIC functions with 2048 fully computerized branch offices, 100 divisional offices, 7 zonal offices and the corporate office. LIC’s Wide Area Network covers 100 divisional offices and connects all the branches through a Metro Area Network. LIC has tied up with some Banks and Service providers to offer on-line premium collection facility in selected cities. LIC’s ECS and ATM premium payment facility is an addition to customer convenience. Apart from on-line Kiosks and IVRS, Info Centers have been commissioned at Mumbai, Ahmadabad, Bangalore, Chennai, Hyderabad, Kolkata, New Delhi, Pune and many other cities. With a vision of providing easy access to its policyholders, 16
  17. 17. LIC has launched its SATELLITE SAMPARK offices. The satellite offices are smaller, leaner and closer to the customer. The digitalized records of the satellite offices will facilitate anywhere servicing and many other conveniences in the future. From then to now, LIC has crossed many milestones and has set unprecedented performance records in various aspects of life insurance business. The same motives which inspired our forefathers to bring insurance into existence in this country inspire us at LIC to take this message of protection to light the lamps of security in as many homes as possible and to help the people in providing security to their families. Some of the important milestones in the life insurance business in India are 1850 Non life insurance debuts with triton insurance company. 1870 Bombay mutual life assurance society is the first Indian owned life insurer 17
  18. 18. 1912 The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business. 1928 The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses. 1938 Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public. 1956 245 Indian and foreign insurers and provident societies taken over by the central government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 Crore from the Government of India. The General insurance business in India, on the other hand, can trace its roots to the Triton Insurance Company Ltd., the first general insurance company established in the year 1850 in Calcutta by the British. Some of the important milestones in the general insurance business in India are: 1907 The Indian Mercantile Insurance Ltd. set up, the first company to transact all classes of general insurance business. 1957 General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices. 1968 The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up. 1972 The General Insurance Business (Nationalization) Act, 1972 nationalized the genera insurance business in India with effect from 1st January 1973. 107 insurers amalgamated and grouped into four companies’ KINDS OF INSURANCE Insurance is divided in two basic zones:- 18
  19. 19. 1. General Insurance. 2. Life Insurance. General Insurance Insurance of the non life assets are called general insurance, this includes loss of asset against water, fire, earthquake etc. With the detarrification in the Indian Market in General Insurance the monopoly of the general Insurance public sector’s companies has been broken. With the entrance of the new private player market innovative technique has been introduced to capture the mark Non-life insurance companies have products that cover property against Fire and allied perils, flood storm and inundation, earthquake and so on. There are products that cover property against burglary, theft etc. The non- life companies also offer policies covering machinery against breakdown, there are policies that cover the hull of ships and so on. A Marine Cargo policy covers goods in transit including by sea, air and road. Further, insurance of motor vehicles against damages and theft forms a major chunk of non- life insurance business. In respect of insurance of property, it is important that the cover is taken for the actual value of the property to avoid being imposed a penalty should there be a claim. Where a property is undervalued for the purposes of insurance, the insured will have to bear a ratable proportion of the loss. For instance if the value of a property is Rs.100 and it is insured for Rs.50/-, in the event of a loss to the extent of say Rs.50/-, the maximum claim amount payable would be Rs.25/- (50% of the loss being borne by the insured for underinsuring the property by 50%). This concept is quite often not understood by most insured. Personal insurance covers include policies for Accident, Health etc. Products offering Personal Accident cover are benefit policies. Health insurance covers offered by non-life insurers are mainly hospitalization covers either on reimbursement or cashless basis. The cashless service is offered through Third Party Administrators who have arrangements with various service providers, i.e., 19
  20. 20. hospitals. The Third Party Administrators also provide service for reimbursement claims. Sometimes the insurers themselves process reimbursement claims. Accident and health insurance policies are available for individuals as well as groups. A group could be a group of employees of an organization or holders of credit cards or deposit holders in a bank etc. Normally when a group is covered, insurers offer group discounts. Liability insurance covers such as Motor Third Party Liability Insurance, Workmen’s Compensation Policy etc offer cover against legal liabilities that may arise under the respective statutes— Motor Vehicles Act, The Workmen’s Compensation Act etc. Some of the covers such as the foregoing (Motor Third Party and Workmen’s Compensation policy) are compulsory by statute. Liability Insurance not compulsory by statute is also gaining popularity these days. Many industries insure against Public liability. There are liability covers available for Products as well. There are general insurance products that are in the nature of package policies offering a combination of the covers mentioned above. For instance, there are package policies available for householders, shop keepers and also for professionals such as doctors, chartered accountants etc. Apart from offering standard covers, insurers also offer customized or tailor-made ones. Suitable general Insurance covers are necessary for every family. It is important to protect one’s property, which one might have acquired from one’s hard earned income. A loss or damage to one’s property can leave one shattered. Losses created by catastrophes such as the tsunami, earthquakes, cyclones etc have left many homeless and penniless. Such losses can be devastating but insurance could help mitigate them. Property can be covered, so also the people against Personal Accident. Life Insurance 20
  21. 21. What Is Life Insurance? Life insurance can be defined as “life insurance provides a sum of money if the person who is insured dies while the policy is in effect”. Life insurance provides protection against financial loss resulting from death. It is an insurance company's promise to pay a beneficiary a specific amount of money When an insured dies in exchange for timely payment of premiums. The primary Purpose of life insurance is therefore protection of the family in the event of death. Insurance is also seen as a tool to plan effectively for future years, your retirement, and for your children's future needs. Today, the market offers insurance plans that not just cover your life and but at the same time grow your wealth too. What Is It Intended To Do? Life insurance offers security in the event of the insured’s death. Life insurance Offers financial protection to survivors. It provides dependents with the necessary Funds to settle financial obligations and to cover the loss of income created by the Insured’s death. Life insurance policies are usually purchased with a specific Intention in mind - to protect a mortgage or an estate, to provide for educational Costs, for retirement or for charity, etc. Why is Life Insurance Necessary? People carry life insurance for many reasons. Among the most common are to pay Off a mortgage, or personal debts (car loan, credit cards…), educational costs for Young children, for beneficiaries to be able to maintain their current standard of living, for child care, for immediate financial needs, and medical or funeral costs. How Might Life Insurance Needs Change Over Time? If an individual has finished raising their family, has paid off their mortgage and No longer has major financial obligations, then their life insurance needs will be Lower than when they were younger. An 21
  22. 22. individual may choose to no longer carry their insurance or to reduce their coverage amount to a level just sufficient to ensure that their survivors have enough money to pay final expenses (burial, Medical, estate taxes…). How Does Life Insurance Work? All aspects of life involve risk, e.g., fire, theft, auto accidents, injury. Insurance provides a means of transferring the financial consequences of certain risks from the individual to an insurance company. When an individual buys life insurance, they are grouped together with other people who are similar in age, sex, and health. Actuaries calculate how many people in each group are likely to dyeing period of time. The more deaths there are in a group, the more money will be needed to pay death claims, and therefore, more money will have to be collected as premiums. Since younger people are less likely to die than older people, Insurance premiums are generally lower at younger ages. Each year, the insured Pays the insurance company for their insurance policy. This money is called a Premium. The insured also informs the insurance company who should get the Insurance money if they (the insured) die. This is a called designating a Beneficiary. If the insured dies while their policy is active, the insurance company will pay the beneficiaries the insurance money. Insurance companies can do this because only a small number of people die each year, while many more people pay those premiums. The “risk” of death is spread out among many people in order to prevent a financial loss to the beneficiaries of the few who will die. Insurance Sector Reforms: 22
  23. 23. In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor R. N. Malhotra, was formed to evaluate the Indian insurance industry and recommend its future direction. The Malhotra committee was set up with the objective of complementing the reforms initiated in the financial sector. The reforms were aimed at “creating a more efficient and competitive financial system suitable for the requirements of the economy keeping in mind the structural changes currently underway and recognizing that insurance is an important part of the overall financial system where it was necessary to address the need for similar reforms…”. In 1994, the committee submitted the report and some of the key recommendation included: i) Structure Government stake in the insurance Companies to be brought down to 50%. Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations. All the insurance companies should be given greater freedom to operate. ii) Competition Private Companies with a minimum paid up capital of Rs.1bn should be allowed to enter the industry No Company should deal in both Life and General Insurance through single entity foreign companies may be allowed to enter the industry in collaboration with the domestic companies. Postal Life Insurance should be allowed to operate in the rural market. Only one State Level Life Insurance Company should be allowed to operate in each state. iii) Regulatory Body The Insurance Act should be changed 23
  24. 24. An Insurance Regulatory body should be set up Controller of Insurance (Currently a part from the Finance Ministry) should be made independent. iv) Investments Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%.GIC and its subsidiaries are not to hold more than 5% in any company (There current holdings to be brought down to this level over a period of time). v) Customer Service LIC should pay interest on delays in payments beyond 30 days Insurance companies must be encouraged to set up unit linked pension plans Computerization of operations and updating of technology to be carried out in the insurance industry. The committee emphasized that in order to improve the customer services and increase the coverage of the insurance industry should be opened up to competition. But at the same time, the committee felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry. Hence, it was decided to allow competition in a limited way by stipulating the minimum capital requirement of Rs.100 Crores. The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory body. The Insurance Regulatory and Development Authority (IRDA): 24
  25. 25. Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in December 1999. The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the private sector insurance companies. The other decision taken simultaneously to provide the supporting systems to the insurance sector and in particular the life insurance companies was the launch of the IRDA’s online service for issue and renewal of licenses to agents. The approval of institutions for imparting training to agents has also ensured that the insurance companies would have a trained workforce of insurance agents in place to sell their products, which are expected to be introduced by early next year. Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations. In the private sector 12 life insurance and 6 general insurance companies have been registered. With the Insurance Regulatory and Development Act, the focus shifted to the following: * The Insurance Regulatory and Development Authority (IRDA) should give priority to health insurance while issuing certificates of registration; * Policyholders' funds will be invested in the social sector and infrastructure. The percentage may be specified by the IRDA and such regulations will apply to all insurers operating in the country; * Insurers will be expected to undertake a certain percentage of business in the rural or social sector and provide policies to persons residing in rural areas, workers in the unorganized and informal economically back In case the insurers fail to meet the social sector obligation a fine of Rs.2.5 mn.Would be imposed the first time. Subsequent failures would result in cancellation of licensees. ROLE OF IRDA Section 14 of IRFDA Act, 1999 lays down the duties, powers & functions of IRDA. 25
  26. 26. • Subject to the provisions of the Act & any other law for the time being in force, the Authority shall have the duty to regulate, promote & ensure orderly growth of the insurance business & re-insurance business. • The power & functions of the Authority shall include: 1. Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration. 2. Protection of the interests of the policy holders, insurable interest, settlement of insurance claim, surrender value of policy & other terms & conditions of contracts of insurance. 3. Specifying requisite qualifications, code of conduct, & practical training for intermediary or insurance intermediaries & agents; 4. Specifying the code of conduct for surveyors & loss assessors 5. Promoting & regulating organizations connected with the insurance & re-insurance business; 6. Calling for information from, undertaking inspection of, conducting enquiries & investigations including audit of the insurers, intermediaries, insurance intermediaries & other organizations connected with the insurance businnes; 7. Control & regulations of the rates, advantages, terms & conditions that may be offered by insurer in respect of general insurance business not so controlled & regulated by the Tariff Advisory Committee under the section 64U of the Insurance Act, 1938 (4 of 1938); 8. Specifying the firm & manner in which books of account shall be maintained & statement of accounts shall be rendered by insures & other insurance intermediaries; 9. Regulating maintenance of margin of solvency; 10. Adjudications of disputes between insurers & intermediaries or insurance intermediaries; ROLE OF LIFE INSURANCE: 26
  27. 27. ► Role 1: Life insurance as "Investment": Insurance is an attractive option for investment. While most people recognize the risk hedging and tax saving potential of insurance, many are not aware of its advantages as an investment option as well. Insurance products yield more compared to regular investment options, and this is besides the added incentives offered by insurers. You cannot compare an insurance product with other investment schemes for the simple reason that it offers financial protection from risks, something that is missing in non-insurance products. In fact, the premium you pay for an insurance policy is an investment against risk. Thus, before comparing with other schemes, you must accept that a part of the total amount invested in life insurance goes towards providing for the risk cover, while the rest is used for savings. In life insurance, unlike non-life products, you get maturity benefits on survival at the end of the term. In other words, if you take a life insurance policy for 20 years and survive the term, the amount invested as premium in the policy will come back to you with added returns. In the unfortunate event of death within the tenure of the policy, the family of the deceased will receive the sum assured. Thus insurance is a unique investment avenue that delivers sound returns in addition to protection. ► Role 2: Life insurance as "Risk cover”: First and foremost, insurance is about risk cover and protection - financial protection, to be more precise - to help outlast life's unpredictable losses. Designed to safeguard against losses suffered on account of any unforeseen event, insurance provides you with that unique sense of security that no other form of investment provides. By buying life insurance, you buy peace of mind and are prepared to face any financial demand that would hit the family in case of an untimely demise. Insurance also provides a safeguard in the case of accidents or a drop in income after retirement. An accident or disability can be devastating, and an insurance policy can lend timely support to the family 27
  28. 28. in such times. It also comes as a great help when you retire, in case no untoward incident happens during the term of the policy. With the entry of private sector players in insurance, you have a wide range of products and services to choose from. Further, many of these can be further customized to fit individual/group specific needs. Considering the amount you have to pay now, it's worth buying some extra sleep. ► Role 3: Life insurance as "Tax planning" Insurance serves as an excellent tax saving mechanism too. The Government of India has offered tax incentives to life insurance products in order to facilitate the flow of funds into productive assets. Under Section 88 of Income Tax Act 1961, an individual is entitled to a rebate of 20 per cent on the annual premium payable on his/her life and life of his/her children or adult children. The rebate is deductible from tax payable by the individual or a Hindu Undivided Family. This rebate is can be availed up to a maximum of Rs 12,000 on payment of yearly premium of Rs 60,000. By paying Rs 60,000 a year, you can buy anything upwards of Rs 10 lakh in sum assured. (Depending upon the age of the insured and term of the policy) This means that you get Rs 12,000 tax benefit. The rebate is deductible from the tax payable by an individual or a Hindu Undivided Family. Risks and uncertainties are part of life's great adventure -- accident, illness, theft, natural disaster - they're all built into the working of the Universe, waiting to happen. Turnover of Insurance Market :( 000’crores) Insurance Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2001-02 28
  29. 29. LIC 11422 11165 12282 12558 15003 27103 27144 Private 180 662 2085 4357 7500 15932 29268 Insurance company This data shows that when private company enter in this insurance sector more people trust on them year after year and previous year turnover of private company beats the turnover of L.I.C due to better dealing with customer and customer satisfy more for private insurance company. Market Share Insurance 01-02 02-03 03-04 04-05 05-06 06-07 07-08 LIC 98% 94% 85% 74% 66% 63% 48% Private 2% 6% 15% 26% 34% 37% 52% Life Insurance The data shows that how well the market share of private Life Insurance increases when entered into Insurance Market and rapidly captures the Insurance market of LIC; this is done because of certain reasons behind the growth of Private Insurance market like- • Better Products • Variety of Products • Transparency in Products • Better Funds • Better Performance • Flexibility in nature • Education for more educated persons. KOTAK GROUP Profile:  Stock broking businesses in the UK. Kotak Group was established in 1985. 29
  30. 30.  Kotak Mahindra group is one of India’s leading banking and financial services organizations, with offerings across personal financial services; commercial banking; corporate and investment banking and markets; stock broking; asset management and life insurance. The Kotak Group employs around 20,000 people and has over 1,350 offices across 370 cities and towns in India. Kotak also has offices in London, New York, San Francisco, Singapore, Dubai and Mauritius.  Kotak has a group net worth of around Rs.1, 400 Crore and currently employs over 2,000 dedicated employees in its various businesses. With a presence in about 50 locations in India and offices in New York, London, Dubai and Mauritius, the group currently services a customer base of over 5, 00,000.  The group has international partnerships with Goldman Sachs (one of the world's largest investment banks and brokerage firms), Ford Credit (one of the world's largest dedicated automobile financiers) and Old Mutual (a large insurance, banking and asset management conglomerate). 30
  31. 31. 31
  32. 32. 32
  33. 33.  Using Brand name KOTAK and its effect can be seen as previously Kotak Life Insurance needed a name Old Mutual with its name but now people Kotak by the name of Kotak only not by the name of OM Kotak. KOTAK MAHINDRA OLD MUTUAL LIFE INSURANCE LTD. Kotak Mahindra Old Mutual Life Insurance ltd is the SECOND LIFE INSURANCE Company who achieves its “BREAKEVEN POINT”. 33
  34. 34. KOTAK MAHINDRA OLD MUTAL PLC KOTAK LIFE BANK INSURANCE ( 74% ) ( 26% ) ( 100% )  OM Kotak Mahindra Life Insurance Company Limited (OMKM) is a joint venture between Kotak Mahindra Finance Ltd., and Old Mutual plc aims to help customers take important financial decisions at every stage in life by offering them a wide range of innovative life insurance products, to make them financially independent. Jeene Ki Azaadi.  Kotak Mahindra Bank is the parent company of the group.  Kotak Group entered into the life insurance business in 2001.  Kotak Mahindra Old Mutual Life Insurance Ltd. is a joint venture between Kotak Mahindra Bank Ltd. (76%) and Old Mutual plc. (24%)  Old Mutual plc.Is a world-Class international financial services company. It Was established in South Africa before 160 years.  OLD MUTUAL is the largest financial services business in South Africa, through its life insurance, asset management, banking and general insurance operations. The company serves 4 million life insurance policyholders and employs over 13 000 South Africans in its local operations.  In the USA, OLD MUTUAL is one of the top ten fixed annuity busineses offering an array of specialist asset management skills through its 23 asset management businesses. The company’s US Life business recorded sales of $4 billion at the end of 2002.  Operations in the United Kingdom are focused on wealth management,through Gerrard as one of the leading private client The OLD MUTUAL Group has the ability to cater for a variety of Consumer segments and offers a comprehensive and innovative range of Products for all income groups. 34
  35. 35.  TURNOVER OF KOTAK LIFE INSURANCE IN 2008-2009 is 1,400 Crores. In this TIDE CHANNEL contributes 500 Crores and ALTERNATE CHANNEL contributes 900 Crores. Old Mutual Plc:- Old Mutual was established more than 150 years ago. Old mutual plc, Is a world-class international financial service company. It owns the largest companies in the following areas in South Africa. They are: 1. Life Insurance Company 2. Asset Management Company 3. Bank 4. Non-life insurance company It has been developed into an International financial services group whose activities are focused on asset gathering and asset management. The Old Mutual Group offers a diverse range of financial services in three principal geographies: South Africa, the United States and the United Kingdom. The company is listed on the London Stock Exchange with a market capitalization of approximately $6 billion and is a member of the elite FTSE 100 index. In the 2003 rankings of the World's 500 largest corporations by Fortune magazine, Old Mutual climbed 87 places to position number 366 and was also listed as the 14th largest insurance company in the world. Old Mutual is the largest financial services business in South Africa, through its life insurance, asset management, banking and general insurance operations. The company serves 4 million life insurance policyholders and employs over 13 000 South Africans in its local operations. In the USA, Old Mutual is one of the top ten fixed annuity businesses offering an array of specialist asset management skills through its 23 asset management businesses. The company’s US Life business recorded sales of $4 billion at the end of 2002. 35
  36. 36. Operations in the United Kingdom are focused on wealth management, through Gerrard as one of the leading private client stock broking businesses in the UK. The Old Mutual Group has the ability to cater for a variety of consumer segments and offers a comprehensive and innovative range of products for all income groups. • A 26%-74% Joint venture between Old Mutual plc and KotaK Mahindra Bank Ltd. • Started operations May 2001 • 209% growth in premium income (year ending March 2005) • Presence in 55 cities across the country. • More than 1,60,000 policies issue (year ending March 2005) • More than 7000 Life Advisors ( year ending March 2005) • Over 1000 professional employees (year ending March 2005)  44 branches in 31 cities.  7500 life advisors.  1000employees of very good quality.  Ranks 2nd in terms of average premium per policy.  Ranks 4th in total advertising awareness. First year premium income 2001-02: 7Crores 2002-03: 35Crores 2003-04: 125Crores 2005-06: 373Crores 2006-07: 396Crores 36
  37. 37. 2007-08: 614 Crores Mission “At Kotak Life Insurance, we aim to help customers take important financial decisions at every stage in life by offering them a wide range of innovative life insurance products, to make them financially independent.” Vision & Values Our Vision:- Kotak Life Insurance has a deep rooted commitment to improve the quality of life of its customers, employees and stakeholders. We aim at improving the long term value in our relationship by continuous innovation and improvements. We do this by our three-prong effort which strives to make Kotak Life Insurance a corporate with values. Increase Customer Value: Kotak Life Insurance has gone to the heart of its customer's requirements and developed products which are unique and serve the customer needs perfectly. We built a relationship of mutual trust and benefit to serve the Indian customer. At Kotak Life Insurance the customer always comes first. Cohesive Work Environment: - 37
  38. 38. We form long-term partnership with our employees by offering them an invigorating work experience. We not only demand loyalty, sincerity and values but also give it back in equal measures. Kotak Life Insurance will like to offer its employees space to grow, innovate and build a long-term career. Work with Honor: - Kotak Life Insurance delivers everyday services in the marketplace with the high sense of duty and commitment. Our employees strive to build the long-term value for all those come in contact with Kotak Life Insurance. Our consumers, distributors, employees, shareholders and the nation have our commitment that we will uphold the values of trust, integrity and a Sense of Honor in every thought, act and deed in order to positively contribute to individual, society and nation growth. Our values:- Every member of the Kotak Group team is committed to 5 core values: Integrity, Customer First, Boundary less, Ownership, and Passion. These values shine forth in all we do, and have become the keystones of our success. 38
  40. 40. We at Kotak Life Insurance work as a team and have a flat management structure. Our top management has many years of experience which has helped guide the company into a position of leadership. 40
  41. 41. 41
  42. 42. CONCEPT OF HUMAN LIFE VALUES Generally speaking , one can estimate the extent of life insurance by calculating one’s “HUMAN LIFE VALUE” (HLV) .This is the net present value of one’s future earnings. Put simply,it is the amount that a person’s family would permanently lose,should anything unfortunate happen to that person. As a thumb rule, a 30 year old should insure oneself for about 8 ties his or her annual income. At 35,this is about 6 times.Of course,the exact amount must be adjusted acording to the number of dependents ,existing investments and one’s life stage. For instance,if at 30, a person has two children and parents to provide for, the amount of insurance should also be higher. You can calculate your Human life value by multiplying your current annual income with the number of years remaining for your retirement- Let’s assume that you are 30 years old and you earn Rs.4,00,000 per annnum.Now, if your retirement age is 55 you have 25 years to go before retirement. So your Human Life value is (25 X 4,00,000)= 100,00,000 (One crore Rupees) So, your Present Human Life Value is ONE CRORE RUPEES,provided you stay healthy. If you take factors like Inflation and Increase in Income over a eriod of time into Accont, your Human Life Value is a lot more. 42
  43. 43. INSURANCE SOLUTION FOR INDIVIDUALS Kotak Life Insurance offers a range of innovative, customer-centric products that meet the needs of customers at every life stage. Its products can be enhanced with up to 4 riders, to create a customized Solution for each policyholder. Protection Savings & Investments Helping you to grow and protect Manage today for a better your wealth. tomorrow. Retirement Child The road to retirement, Make it easy Plan a good future for your child. Protection Plans • Kotak Loan Protection Plan • Kotak Term/Preferred Term Plan • Kotak Eternal Life Plans Retirement Plans • Kotak Secure Retirement Plan • Kotak Retirement Income (Unit Linked) • Kotak Long Life Secure Plus • Kotak Long Life Wealth Plus • Kotak Retirement Income Plan 43
  44. 44. Savings & Investment Plans • Kotak Platinum Advantage Plus • Kotak Smart Advantage • Kotak Safe Investment Plan • Kotak Flexi Plan • Kotak Platinum Advantage Plan • Kotak Easy Growth Plan • Kotak Capital Multiplier Plan • Kotak Money Back Plan • Kotak Endowment Plan • Kotak Premium Return Plan • Kotak Sukhi Jeevan Plan Group Plans • Kotak Group Shield • Kotak Group Assure • Kotak Term Grouplan • Kotak Gratuity Grouplan • Kotak Superannuation Grouplan • Kotak Credit-Term Grouplan • Kotak Complete Cover Grouplan Rural Plans 44
  45. 45. • Kotak Gramin Bima Yojana Child Plans • Kotak Head start Child Plans • Kotak Child Advantage Plan In all these above product the Best product of Kotak life insurance is KOTAK SMART ADVANTAGE PLAN (KSAP) In our summer training program we found that there is positive response towards this product by the customers because this product has many beneficial features:- 45
  46. 46. KOTAK SMART ADVANTAGE PLAN (KSAP) Make every rupee work for your happiness Every step in your life brings with it new learnings. You are determined to make the best of it, so that you can look forward to a great future. How you shape your Tomorrow depends greatly on how you build on your today. Kotak Life Insurance introduces Kotak Smart Advantage offering you a smart solution to put your savings to work today for a brighter tomorrow. It is a market linked plan with 100%1 premium allocations helping you accumulate wealth systematically, over the long-term. Kotak Smart Advantage is a great combination of investment with insurance Designed to enable you to make the best use of your hard-earned money that puts you right ahead. KEY FEATURES:- • Guaranteed returns of up to 275% of your first year premium at maturity. • Assured bonus additions at regular intervals during the policy term to enhance your fund value. • 100% allocation of your premiums from second year onwards. • Unique fund offering you the maximum opportunity for growth and choice for your investment needs. • Maximum protection for your loved ones to choose from. 46
  47. 47. INSURANCE:- • Life Cover (Financial Protection for loved ones). • Tax Benefit under Sec 80(c) (total premium paid will be deducted from annual income for I.T.R). • Tax Benefit under sec 10 (10) d (100% tax free returns). The Assured Addition Advantage is a powerful combination of two benefits: A. Fixed Advantage Benefit (FAB):- The Fixed Advantage benefit is an assured value guaranteed at the end of your premium Payment term. This benefit is calculated as a percentage of your first year premium depending on the premium payment term chosen, provided your policy is in force and all premiums are fully paid up to date. Premium Payment Term3 Premium Payment Term 3 or 5 year 10 years 15 years 20 years 25 years 30 years FAB (as a percentage of First 100% 110% 135% 175% 225% 275% Year Premium) B. Dynamic Advantage Benefit (DAB):- 47
  48. 48. The Dynamic Advantage benefit is an assured bonus addition credited to your fund value at the end of every 10th, 15th, 20th, 25th and 30th policy year. This benefit will be calculated as a percentage of the average value of funds in the three years preceding the benefit allocation, provided your policy is in force and all premiums are fully paid up to date. At The End Of policy Year 10 yr 15 yr 29 yr 25 yr 30 yr DAB (as a percentage of average fund 1.10% 1.35% 1.75% 2.25% 2.75% value in the last three years) The Assured Addition Advantage lets you enjoy the benefits of a fixed assurance and a dynamic benefit directly linked to your fund value, to help you tread comfortably and swiftly towards your goals. Further, the plan makes your money work smarter for you through 100% premium allocation in each policy year from second year onwards, in the funds of your choice. On maturity of your policy, you will receive the Fund Value and the Fixed Advantage benefit, provided your premiums are always fully paid up to date. The Dynamic Advantage benefit would have already been credited in the Fund Value at the specified intervals to accumulate more for you at the end. Eligibility – A Ready Reckoner .  Entry Age: - Min – 0 years; Max – 65 years  Maturity Age: - Min – 18 years; Max – 75 years 48
  49. 49.  Policy Term: - Regular – 10 / 15 / 20 / 25 / 30 years For Minors, minimum term – 10 years  Premium Payment Term (PPT):- Regular – Full Policy Term Limited Premium Payment – 3 or 5 years  Minimum Premium: - Regular PPT – Rs.10,000 p.a. Limited PPT – Rs. 36,000 p.a.  Basic Sum Assured: - Min – 5 x Annual premium Max – Any multiple of premium DFF vs. NIFTY 49
  50. 50. MUTUAL FUND A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital 50
  51. 51. appreciations realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The Mutual Fund industry in India started in 1963 with the formation of Unit Trust of India, The flow chart below describes broadly the working of a Mutual Fund. A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI) that pools up the money from individual/corporate investors and invests the same on behalf of the investors/unit holders, in Equity shares, Government securities, Bonds, Call Money Markets etc, and distributes the profits. In the other words, a Mutual Fund allows investors to indirectly take a position in a basket of assets. Mutual Fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread among a wide cross-section of industries and sectors thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at same time. Investors of mutual funds are known as unit holders. 51
  52. 52. The investors in proportion to their investments share the profits or losses. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A Mutual Fund is required to be registered with Securities Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public. ORGANISATION OF A MUTUAL FUND: There are many entities involved and the diagram below illustrates the organizational set up of a Mutual Fund: Mutual Funds diversify their risk by holding a portfolio of instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced. Mutual Fund investments are not totally risk free. In fact, investing in Mutual Funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced. A very important risk involved in Mutual 52
  53. 53. Fund investments is the market risk. However, the company specific risks are largely eliminated due to professional fund management. IMPORTANT CHARACTERISTICS OF A MUTUAL FUND • A Mutual Fund actually belongs to the investors who have pooled their Funds. The ownership of the mutual fund is in the hands of the Investors. • A Mutual Fund is managed by investment professional and other Service providers, who earns a fee for their services, from the funds. • The pool of Funds is invested in a portfolio of marketable investments. • The value of the portfolio is updated every day. • The investor’s share in the fund is denominated by “units”. The value of the units changes with change in the portfolio value, every day. The value of one unit of investment is called net asset value (NAV). • The investment portfolio of the mutual fund is created according to The stated Investment objectives of the Fund. OBJECTIVES OF A MUTUAL FUND: • To provide an opportunity for lower income groups to acquire without much difficulty, property in the form of shares. 53
  54. 54. • To Cater mainly of the need of individual investors, whose means are small? • To manage investors portfolio that provides regular income, growth, Safety, liquidity, tax advantage, professional management and diversification. ADVANTAGES OF MUTUAL FUNDS: • Reduced Risk. • Diversified investment. • Botheration free investment. • Revolving type of investment (Reinvestment). • Selection and timings of investment. • Wide investment opportunities. • Investments care. • Tax benefits. TYPES OF MUTUAL FUNDS: 1. OPEN-ENDED MUTUAL FUNDS:- The holders of the shares in the Fund can resell them to the issuing Mutual Fund Company at the time. They receive in turn the net assets value (NAV) of the shares at the time of re-sale. Such Mutual Fund Companies place their funds in the secondary securities market. Open-end investment 54
  55. 55. companies can sell an unlimited number of Shares and thus keep going larger. The open-end Mutual Fund Company Buys or sells their shares. These companies sell new shares NAV plus a Loading or management fees and redeem shares at NAV.In other words, the target amount and the period both are indefinite in such funds 2. CLOSED-ENDED MUTUAL FUNDS:- A closed–end Fund is open for sale to investors for a specific period, after which further sales are closed. Any further transaction for buying the units or repurchasing them, Happen in the secondary markets, where closed end Funds are listed. Therefore new investors buy from the existing investors, and existing investors can liquidate their units by selling them to other willing buyers. In a closed end Funds, thus the pool of Funds can technically be kept constant. The asset management company (AMC) however, can buy out the units from the investors, in the secondary markets, thus reducing the amount of funds held by outside investors. The price at which units can be sold or redeemed Depends on the market prices, which are fundamentally linked to the NAV. Investors in closed end Funds receive either certificates or Depository receipts, for their holdings in a closed end mutual Fund. ORGANISATION AND MANAGEMENT OF MUTUAL FUNDS:- In India Mutual Fund usually formed as trusts, three parties are generally involved viz. • Settler of the trust or the sponsoring organization. • The trust formed under the Indian trust act, 1982 or the trust company registered under the Indian companies act, 1956 • Fund mangers or The merchant-banking unit 55
  56. 56. • Custodians. MUTUAL FUNDS TRUST:- Mutual fund trust is created by the sponsors under the Indian trust act, 1982 Which is the main body in the creation of Mutual Fund Trust? The main functions of Mutual Fund trust are as follows: ♦ Planning and formulating Mutual Funds schemes. ♦ Seeking SEBI’s approval and authorization to these schemes. ♦ Marketing the schemes for public subscription. ♦ Seeking RBI approval in case NRI’s subscription to Mutual Fund is Invited FUND MANAGERS (OR) THE ASSES MANAGEMENT COMPANY (AMC) AMC has to discharge mainly three functions as under: I. Taking investment decisions and making investments of the funds through market dealer/brokers in the secondary market securities or directly in the primary capital market or money market instruments II. Realize fund position by taking account of all receivables and realizations, moving corporate actions involving declaration of dividends,etc to compensate investors for their investments in units; and III. Maintaining proper accounting and information for pricing the units and arriving at net asset value (NAV), the information about the listed schemes and the transactions of units in the secondary market. AMC has to feed back the trustees about its fund management operations and has to maintain a perfect information system. 56
  57. 57. CUSTODIANS OF MUTUAL FUNDS:- Mutual funds run by the subsidiaries of the nationalized banks had their respective sponsor banks as custodians like canara bank, SBI, PNB, etc. Foreign banks with higher degree of automation in handling the securities have assumed the role of custodians for mutual funds. With the establishment of stock Holding Corporation of India the work of custodian for mutual funds is now being handled by it for various mutual funds. Besides, industrial investment trust company acts as sub-custodian for stock Holding Corporation of India for domestic schemes of UTI, BOI MF, LIC MF, etc Fee structure:- Custodian charges range between 0.15% to 0.20% on the net value of the customer’s holding for custodian services space is one important factor which has fixed cost element. RESPONSIBILITY OF CUSTODIANS:- ♦ Receipt and delivery of securities ♦ Holding of securities. ♦ Collecting income ♦ Holding and processing cost ♦ Corporate actions etc RATE OF RETURN ON MUTUAL FUNDS:- An investor in mutual fund earns return from two sources: ♦ Income from dividend paid by the mutual fund. ♦ Capital gains arising out of selling the units at a price higher than the acquisition price Formation and regulations: 57
  58. 58. 1. Mutual funds are to be established in the form of trusts under the Indian trusts act and are to be operated by separate asset management companies (AMC s) 2. AMC’s shall have a minimum Net worth of Rs. 5 Crores; 3. AMC’s and Trustees of Mutual Funds are to be two separate legal entities and that an AMC or its affiliate cannot act as a manager in any other fund; 4. Mutual funds dealing exclusively with money market instruments are to be regulated by the Reserve Bank Of India 5. Mutual fund dealing primarily in the capital market and also partly money market instruments are to be regulated by the Securities Exchange Board Of India (SEBI) 6. All schemes floated by Mutual funds are to be registered with SEBI MUTUAL FUND SCHEME TYPES: Equity Diversified Schemes These schemes mainly invest in equity. They seek to achieve long-term capital appreciation by responding to the dynamically changing Indian economy by moving across sectors such as Lifestyle, Pharma, Cyclical, Technology, etc. Sector Schemes These schemes focus on particular sector as IT, Banking, etc. They seek to generate long-term capital appreciation by investing in equity and related securities of companies in that particular sector. Index Schemes 58
  59. 59. These schemes aim to provide returns that closely correspond to the return of a particular stock market index such as BSE Sensex, NSE Nifty, etc. Such schemes invest in all the stocks comprising the index in approximately the same weightage as they are given in that index. Exchange Traded Funds (ETFs) ETFs invest in stocks underlying a particular stock index like NSE Nifty or BSE Sensex. They are similar to an index fund with one crucial difference. ETFs are listed and traded on a stock exchange. In contrast, an index fund is bought and sold by the fund and its distributors. Equity Tax Saving Schemes These work on similar lines as diversified equity funds and seek to achieve long-term capital appreciation by investing in the entire universe of stocks. The only difference between these funds and equity-diversified funds is that they demand a lock-in of 3 years to gain tax benefits. Dynamic Funds These schemes alter their exposure to different asset classes based on the market scenario. Such funds typically try to book profits when the markets are overvalued and remain fully invested in equities when the markets are undervalued. This is suitable for investors who find it difficult to decide when to quit from equity. Balanced Schemes These schemes seek to achieve long-term capital appreciation with stability of investment and current income from a balanced portfolio of high quality equity and fixed-income securities. Medium-Term Debt Schemes These schemes have a portfolio of debt and money market instruments where the average maturity of the underlying portfolio is in the range of five to seven years. 59
  60. 60. Short-Term Debt Schemes These schemes have a portfolio of debt and money market instruments where the average maturity of the underlying portfolio is in the range of one to two years. Money Market Debt Schemes These schemes invest in debt securities of a short-term nature, which generally means securities of less than one-year maturity. The typical short-term interest-bearing instruments these funds invest in Treasury Bills, Certificates of Deposit, Commercial Paper and Inter-Bank Call Money Market. Medium-Term Gilt Schemes These schemes invest in government securities. The average maturity of the securities in the scheme is over three years. Short-Term Gilt Schemes These schemes invest in government securities. The securities invested in are of short to medium term maturities. Floating Rate Funds They invest in debt securities with floating interest rates, which are generally linked to some benchmark rate like MIBOR. Floating rate funds have a high relevance when interest rates are on the rise helping investors to ride the interest rate rise. Monthly Income Plans (MIPS) These are basically debt schemes, which make marginal investments in the range of 10-25% in equity to boost the scheme’s returns. MIP schemes are ideal for investors who seek slightly higher return that pure long-term debt schemes at marginally higher risk. RISKS ASSOCIATED WITH MUTUAL FUNDS:- 60
  61. 61. Investing in Mutual Funds, as with any security, does not come without risk. One of the most basic economic principles is that risk and reward are directly correlated. In other words, the greater the potential risk the greater the potential return. The types of risk commonly associated with Mutual Funds are: 1) MARKET RISK Market risk relates to the market value of a security in the future. Market prices fluctuate and are susceptible to economic and financial trends, supply and demand, and many other factors that cannot be precisely predicted or controlled. 2) POLITICAL RISK Changes in the tax laws, trade regulations, administered prices, etc are some of the many political factors that create market risk. Although collectively, as citizens, we have indirect control through the power of our vote individually, as investors, we have virtually no control. 3) INFLATION RISK Interest rate risk relates to future changes in interest rates. For instance, if an investor invests in a long-term debt Mutual Fund scheme and interest rates increase, the NAV of the scheme will fall because the scheme will be end up holding debt offering lower interest rates. 4) BUSINESS RISK 61
  62. 62. Business risk is the uncertainty concerning the future existence, stability, and profitability of the issuer of the security. Business risk is inherent in all business ventures. The future financial stability of a company cannot be predicted or guaranteed, nor can the price of its securities. Adverse changes in business circumstances will reduce the market price of the company’s equity resulting in proportionate fall in the NAV of the Mutual Fund scheme, which has invested in the equity of such a company. 5) ECONOMIC RISK Economic risk involves uncertainty in the economy, which, in turn, can have an adverse effect on a company’s business. For instance, if monsoons fail in a year, equity stocks of agriculture-based companies will fall and NAVs of Mutual Funds, which have invested in such stocks, will fall proportionately. EQUITY MARKET Introduction 62
  63. 63. This publication reviews the reforms and other market developments in the securities market in India during April 2003 to June 2004. As a result of the reforms/initiatives taken by the Government and the Regulators, the market microstructure has been refined and modernized. The investment choices for the investors have also broadened. The securities market moved from T+3 settlement period to T+2 rolling settlement with effect from April 1, 2003. Further, straight through processing has been made mandatory for all institutional trades executed on the stock exchange. Real time gross settlement has also been introduced by RBI to settle inter-bank transactions online at real time mode. These reforms along with other market developments have been discussed in detail in the following chapters. This chapter, however, takes a general review of the stock market developments. These developments in the securities market provide the necessary impetus for growth and development, and thereby strengthen the emerging market economy in India. Products and Participants Mobilization of savings from surplus savers to deficit savers is most efficiently carried out by the securities market through a range of complex products called “securities”. The definition of securities as per the SCRA, 1956 includes shares, bonds, scripts, stocks or other marketable securities of like nature in or of any incorporate company or body corporate, government securities, derivatives of securities, units of collective investment scheme, interest and rights in securities, security receipt or any other instruments so declared by the central government. The securities market has essentially three categories of participants, viz., the issuer of securities, investors in securities and the intermediaries. The issuers are the borrowers or deficit savers, who issue securities to raise funds. The investors, who are surplus savers, deploy their savings by subscribing to these securities. The intermediaries are the agents who match the needs of users and suppliers of funds for a commission. These intermediaries pack and unpack securities to help both the issuers and 63
  64. 64. investors to achieve their respective goals. There are a large variety and number of intermediaries providing various services in the Indian securities market. This process of mobilization of resources is carried out under the supervision and overview of the regulators. The regulators develop fair market practices and regulate the conduct of issuers of securities and the intermediaries. They are also in charge of protecting the interests of the investors. The regulator ensures a high service standard from the intermediaries and supply of quality securities and non-manipulated demand for them in the market. Market Segments The securities market has two interdependent segments: the primary and the secondary market. The primary market is the channel for creation of new securities. These securities are issued by public limited companies or by government agencies. In the primary market the resources are mobilized either through the public issue or through private placement route. It is a public issue if anybody and everybody can subscribe for it, whereas if the issue is made available to a selected group of persons it is termed as private placement. There are two major types of issuers of securities, the corporate entities who issue mainly debt and equity instruments and the government (central as well as state) who issue debt securities. These new securities issued in the primary market are traded in the secondary market. The secondary market enables participants who hold securities to adjust their holdings in response to changes in their assessment of risks and returns. The secondary market operates through two mediums, namely, the over-the-counter (OTC) market and the exchange-traded. International Scenario 64
  65. 65. Following the implementation of reforms in the securities industry during the last decade, Indian stock markets have graduated to a better position vis-à-vis the securities market in developed and emerging markets. As may be seen from Table 1-2, India has a turnover ratio, which is comparable to the other developed market, and also one of the highest in the emerging markets. At the end of 2003, Standard and Poor’s (S&P) ranked India 17th in terms of market capitalization (19th in 2002), 16th in terms of total value traded in stock exchanges (17th in 2002) and 6th in terms of turnover ratio (7th in 2002). India has the number one ranking in terms of listed securities on the Exchanges followed by the USA. These data, though quite impressive, do not reflect the full Indian market, as S&P (even other international publications) does not cover the whole market. For example, India has more than 9000 listed companies at the end of March 2004, while S&P considers only 5,644 companies. If whole market were taken into consideration, India’s position vis-à-vis other countries would be much better. Dependence on Securities Market Corporate Sector 65
  66. 66. The 1990s witnessed the emergence of the securities market as a major source of finance for trade and industry in India. A growing number of companies have been accessing the securities market rather than depending on loans from financial institutions (FIs)/banks. The corporate sector is increasingly depending on external sources (domestic market borrowings and loans) for meeting its funding requirements. According to CMIE data (Table 1-5), the share of capital market based instruments in resources raised externally had been quite significant in the 1990s, however it declined to 21% in 2001-02. However, the year 2002-03 witnessed the erosion of the corporates to raise money from capital market, which was mainly because of the subdued conditions prevalent in the primary and secondary market Table 1-6 presents sector-wise shareholding pattern of companies listed on NSE. It is observed that on an average the promoters hold more than 55% of total shares. Though the non- promoter holding is about 44.9%, the public held only 17.7% and the institutional holdings (by FIIs, MFs, FIs) accounted for 16.4%. There is not much significant difference in the shareholding pattern of companies in different sectors. Governments Due to the increase in fiscal deficits of the Governments, their dependence on market borrowings to finance fiscal deficits has also increased over the years (Table 1-5). During the year 1990-91, Households According to the RBI data, household sector accounted for 85.6% of gross domestic savings during 2002-03. They invested 41.5% of financial savings in deposits, 29.8% in insurance provident funds, 14.3% on small savings, and 5.9% in securities (out of which the investment in Gilts has been 4.3%), 66
  67. 67. including government securities and units of mutual funds during 2002-03 (Table 1-7). Thus the fixed income bearing instruments are the most preferred assets of the Household sector. Functions of Securities Market Securities Markets is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc. Further, it performs an important role of enabling corporate, entrepreneurs to raise resources for their companies and business Ventures through public issues. Transfer of resources from those having idle resources (investors) to others who have a need for them (corporate) is most efficiently achieved through the securities market. Stated formally, securities markets provide channels for reallocation of savings to investments and entrepreneurship. Savings are linked to investments by a variety of intermediaries, Through a range of financial products, called ‘Securities’. The securities one can invest in. T Shares T Government Securities T Derivative products T Units of Mutual Funds etc., are some of the securities investors in the securities market can invest in. PRIMARY MARKET The primary market provides the channel for sale of new securities. Primary market provides opportunity to issuers of securities; Government as well as corporate, to raise resources to meet their 67
  68. 68. requirements of investment and/or discharge some obligation. They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc. They may issue the securities in domestic market and/or I international market. Issue of Shares Most companies are usually started privately by their promoter(s). However, the promoters’ capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. So companies invite the public to contribute towards the equity and issue shares to individual investors. The way to invite share capital from the public is through a ‘Public Issue’. Simply stated, a public issue is an offer to the public to subscribe to the share capital of a company. Once this is done, the company allots shares to the applicants as per the prescribed rules and regulations laid down by SEBI. Different kinds of issues Primarily, issues can be classified as a Public, Rights or Preferential Issues (also known as private placements). While public and rights issues involve a detailed procedure, private placements or preferential issues are relatively simpler. The classification of issues is illustrated below: Initial Public Offering (IPO) When an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities. A follow on public offering (Further Issue) 68
  69. 69. When an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. Rights Issue When a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders. Preferential issue An issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer company has to comply with the Companies Act and the requirements contained in the Chapter pertaining to preferential allotment in SEBI guidelines which inter-alia include pricing, disclosures in notice etc. SECONDARY MARKET Introduction Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets. 69
  70. 70. Role of the Secondary Market For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions. Difference between the Primary Market and the Secondary Market In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading venue in which already existing/pre-issued securities are traded among investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market. Stock Exchange Role of a Stock Exchange in buying and selling shares The stock exchanges in India, under the overall supervision of the regulatory authority, the Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and sellers can meet to transact in securities. The trading platform provided by NSE is an electronic one and there is no need for buyers and sellers to meet at a physical 70