“A Study on the Customer Satisfaction”

Dissertation submitted
In Partial fulfillment for the
Post Graduate Diploma in Business Management

By

ANSHUL SINGHAL
Roll No.: MDJA08113
Batch 2008-2010

Under the Guidance of

Reporting Boss
Designation
Company Name

NSB SCHOOL OF BUSINESS

B-II/1, MCIE, Delhi-Mathura Road, New Delhi

1
 CONTENTS.

• DECLARATION 3

• ACKNOWLEDGEMENT 4

• CERTIFICATE 5

• EXECUTIVE SUMMARY 6

PREFACE 8

• SECTION I
Introduction of financial products 9
a) Share & Commodity Treading
b) Insurance
c) Mutual Fund
SECTION II

Company Profile 65

• SECTION III

Research Methodology 76

• SECTION IV

Data Analysis and Interpretation 79

• SECTION V

Findings, Conclusion and Suggestions 93

• TERMINOLOGY 101

• BIBLIOGRAPHY 103

2
 DECLARATION

It is declared that I, ANSHUL SINGHAL from NSB School Of Business , New Delhi, 2nd
Semester, Regd. No.MDJA08113 , have completed the project report titled “ analysis of
financial product ”. It is the result of my hard work and kind help of the staffs of SMC
GLOBAL. This report is not taken from any other person or institute.

ANSHUL SINGHAL
Roll no.-MDJA08113

3
 ACKNOWLEDGEMENT

I have completed the project report titled “ANALYSIS OF FINANCIAL PRODUCT” on

the subject financial management under the sincere guidance of Mr. HARISH PUROHIT
(AREA MANAGER OF SMC GLOBAL, DELHI). This report would be incomplete with the
help of other staffs of SMC global. I remained indebted to him.

I am also thankful to Mr. Alok Satsangi (Head of corporate relation and Placement Cell)
who allowing me to under go Winter Internship Program in Reliance Money & guided me in
this project. His valuable guidance helps me to do a good project.

I also convey my thanks to Mr.Harish chander purohit (Area Manager) of SMC

Investment solution & services whose guidance & cooperation helped me a lot to complete this
report.

Anshul Singhal
ROLL NO: MDJA08113

4
 B-II/1, MCIE, Delhi-Mathura Road, New Delhi

CERTIFICATE

This is to certify that the summer project report title “A

study on Customer Satisfaction” is a bonafide work
done by Mr. Anshul Singhal, Roll No.: (MDJA08113)
of Batch 2008 – 2010, Submitted to NSB School of
Business, New Delhi in partial fulfillment of the
requirement for the award of Post Graduate Diploma In
Business Management, and that the report represents
independent and original work on the part of the
candidate.

Prof. Alok
Satsangi
Corporate Relations Cell

5
 EXECUTIVE SUMMARY

The On the Job Training is an integral part of MBA course, which gives the student a practical
experience as to how different organization works. I have been given the golden opportunity to
work in a prestigious and known organization i.e., SMC Investment solution & services, from
25th Oct to25th Dec. SMC Investment solution & services is the trading house and also
provide unit Linked plans. Unit Linked Plans brings a revolution in Insurance industry through
different investment policies. Their flexible characteristic attracts people towards insurance
industry. To be a market leader one company must know about its market penetration. For this
reason I have done a research entitled “penetration of unit linked plans in DELHI NCR market.
I adopted the descriptive research design for the above study because the descriptive research
gives a conclusive result. I collected the data from the secondary source for my initial research.
But it was not sufficient for me. So I go for the primary data. I collected the primary data
through survey with the help of a structured questionnaire. I have used simple random
sampling for this survey. A sample size of 150 respondents, those who are insured was taken
from various other companies’. I have critically analyzed each and every question in the
questionnaire and then this analyzed data was then converted into pie charts for convenience.
Some of the important findings are given below:
 88% respondents are insured by Life Insurance Corporation, India. Among this 88%,
20% respondents has policies of both LIC and other private insurer company.
 76% respondents are having the Traditional Plan.14% has both traditional and unit
linked plans.
 62% people are unaware about unit linked plans.
 38% people are having the endowment Plan and 35% having the money back plan.
 28% people say the “Tax free withdrawal system” feature of influence them to take the
policy. Where as 24% people say the “Loan against policy” feature influence them.
 50% people told that they have purchased an insurance product for Safety reason.
 Endowment Plan is the most popular plan where as children plan is the least popular
plan.
 58% respondents have their money in the bank and only 9% invested their money in
shares and securities.

 Only 47% people aware about SMC and its different products.

From the above findings I conclude that people prefer an Insurance product due to the safety
reason, which shows preference towards the Traditional Plans. People always want to take less
risk, so that they prefer LIC as the Insurance Company and Bank deposits as the other saving
instrument. There is a very less awareness about unit linked plans and its products. So
company should improve the awareness about the company as well as the Unit Linked Plans
through advertisement and different promotional campaign. This will make the general people
investment oriented and this will create an opportunity to penetrate into the market easily. This
will help SMC to generate more revenue and also increase its market penetration.

6
 PREFACE

The global life insurance market stands at $1,521.2 billion while the non-life insurance market
is placed at $922.4 billion. The United States itself accounts for about one-third of the $2443.6
billion global insurance market and Japan stands next with a20.62% share. India takes the 23rd
position with $993.3 billion annual premium collection with 0.41% share out of one billion
people in India; only 35 million people are covered by insurance. Indian insurance market is
set to touch $25 billion by 2010, on the assumption of a 7% real growth in GDP.

The Insurance Regulatory and Development Authority regulate this fast growing industry. At
present its main concern is rural insurance market which is a vast market with huge business
opportunity which always remained neglected from the beginning.

7
 PERPOSE OF STUDY

In India the history of Life Insurance dated back to 1818 when it was viewed as Widows
Money, and available only to the British people. The Indians get the flavor of Life insurance
after the establishment of Bombay Mutual Life Insurance Society in 1871, the first Indian
insurer to charge equal premium for British as well as Indian people. Prior to it Indian lives
were charged higher premium because of the inferior and riskier notion of British insurers.
After Life Insurance Companies Act 1912 and Insurance Act 1938, the Indian insurance
industry ran by the monopoly LIC in 1956, under LIC Act 1956. Since, things have changed
now drastically due to the establishment of IRDA in 1999 and liberalization of Indian
insurance market. The purpose of this project is to know about the penetration of unit linked
plans in DELHI NCR market. Here, I have also just attempted an effort to measure the
awareness of ULIP in Mandible, Sandspur, and Deogarh market by market survey.

Objective of the Study

• To know about the penetration of unit linked products in Delhi NCR market.
• To study the awareness about SMC and its different services...

WHY SMC?

• Large avenues of investment solutions and financial services under one roof
• Personalized solution and attention offered to each investor.
• Research support and timely advice by a high- tech research wing.
• Nationwide presence, through a wide network of more than 1250+ branches across
350+cities / towns.
• Honesty, transparency and fairness imbibed in all its dealings.

• A perfect blend of latest technology and rich experience of over 20 years.

8
 Section- I
Introduction of Financial Products

9
 DERIVATIVE

Introduction

Financial markets are, by nature, extremely volatile and hence the risk factor is an
important concern for financial agents. To reduce this risk, the concept of derivatives comes
into the picture. Derivatives are products whose values are derived from one or more basic
variables called bases. These bases can be underlying assets (for example forex, equity, etc),
bases or reference rates. For example, wheat farmers may wish to sell their harvest at a future
date to eliminate the risk of a change in prices by that date. The transaction in this case would
be the derivative, while the spot price of wheat would be the underlying asset.

The term "Derivative" indicates that it has no independent value, i.e. its value is entirely
"derived" from the value of the underlying asset. The underlying asset can be securities,
commodities, bullion, currency, live stock or anything else. In other words, Derivative means a
forward, future, option or any other hybrid contract of pre determined fixed duration, linked for
the purpose of contract fulfillment to the value of a specified real or financial asset or to an
index of securities.

With Securities Laws (Second Amendment) Act,1999, Derivatives has been included in the
definition of Securities. The term Derivative has been defined in Securities Contracts
(Regulations) Act, as:-
A Derivative includes:-
a security derived from a debt instrument, share, loan, whether secured or unsecured, risk
instrument or contract for differences or any other form of security;
a contract which derives its value from the prices, or index of prices, of underlying securities;

With the introduction of derivative market in India steps were taken to make our financial
markets strong, efficient, sound and stable. From 1995 onwards, a wide range of products or
instruments have been introduced in India on the subject of derivatives markets. The basket of
derivatives is expected to expand based on various instruments available globally. Such
instruments are intended to allow market traders to maximize returns which will
simultaneously enable them to limit losses.

Development of exchange-traded derivatives

Derivatives have probably been around for as long as people have been trading with one
another. Forward contracting dates back at least to the 12th century, and may well have been
around before then. Merchants entered into contracts with one another for future delivery of
specified amount of commodities at specified price. A primary motivation for pre-arranging a
buyer or seller for a stock of commodities in early forward contracts was to lessen the
possibility that large swings would inhibit marketing the commodity after a harvest .
BSE created history on June 9, 2000 by launching the first Exchange traded Index
Derivative Contract i.e. futures on the capital market benchmark index - the BSE Sensex. The
inauguration of trading was done by Prof. J.R. Varma, member of SEBI and chairman of the
committee responsible for formulation of risk containment measures for the Derivatives
market. The first historical trade of 5 contracts of June series was done on June 9, 2000 at
9:55:03 a.m. between M/s Kaji & Maulik Securities Pvt. Ltd. and M/s Emkay Share & Stock
Brokers Ltd. at the rate of 4755.

10
In the sequence of product innovation, the exchange commenced trading in Index Options on
Sensex on June 1, 2001. Stock options were introduced on 31 stocks on July 9, 2001 and single
stock futures were launched on November 9, 2002.

September 13, 2004 marked another milestone in the history of Indian Capital Markets,
the day on which the Bombay Stock Exchange launched Weekly Options, a unique product
unparallel in derivatives markets, both domestic and international. BSE permitted trading in
weekly contracts in options in the shares of four leading companies namely Reliance, Satyam,
State Bank of India, and Tisco in addition to the flagship index-Sensex.

The need for a derivatives market

The derivatives market performs a number of economic functions:

1. They help in transferring risks from risk averse people to risk oriented people

2. They help in the discovery of future as well as current prices

3. They catalyze entrepreneurial activity

4. They increase the volume traded in markets because of participation of risk averse people in
greater numbers

5. They increase savings and investment in the long run

Types of Derivatives

Forwards: A forward contract is a customized contract between two entities, where settlement
takes place on a specific date in the future at today’s pre-agreed price.

Futures: A futures contract is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. Futures contracts are special types of forward
contracts in the sense that the former are standardized exchange-traded
Contracts

A futures contract is a standardized contract, traded on a futures exchange, to buy or sell

a certain underlying instrument at a certain date in the future, at a specified price. The future
date is called the delivery date or final settlement date. The pre-set price is called the futures
price. The price of the underlying asset on the delivery date is called the settlement price.

A futures contract gives the holder the obligation to buy or sell, which differs from an
options contract, which gives the holder the right, but not the obligation. In other words, the
owner of an options contract may exercise the contract. Both parties of a "futures contract"
must fulfill the contract on the settlement date. The seller delivers the commodity to the buyer,
or, if it is a cash-settled future, then cash is transferred from the futures trader who sustained a
loss to the one who made a profit. To exit the commitment prior to the settlement date, the
holder of a futures position has to offset their position by either selling a long position or

11
buying back a short position, effectively closing out the futures position and its contract
obligations.Futures contracts, or simply futures, are exchange traded derivatives. The
exchange's clearinghouse acts as counterparty on all contracts, sets margin requirements, etc.

Options: Options are of two types - calls and puts. Calls give the buyer the right but not the
obligation to buy a given quantity of the underlying asset, at a given price on or before a given
future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the
underlying asset at a given price on or before a given date.
Options are financial instruments that convey the right, but not the obligation, to engage
in a transaction on some underlying security. For example, buying a call option provides the
right to buy a specified quantity of a security at a set strike price at some time on or before
expiration, while buying a put option provides the right to sell. Upon the option holder's choice
to exercise the option, the party who sold, or wrote, the option must fulfill the terms of the
contract.
The theoretical value of an option can be determined by a variety of techniques. These
models, which are developed by quantitative analysts, can also predict how the value of the
option will change in the face of changing conditions. Hence, the risks associated with trading
and owning options can be understood and managed with some degree of precision.
Exchange-traded options form an important class of options which have standardized
contract features and trade on public exchanges, facilitating trading among independent parties.
Over-the-counter options are traded between private parties, often well-capitalized institutions,
that have negotiated separate trading and clearing arrangements with each other. Another
important class of options, particularly in the U.S., are employee stock options, which are
awarded by a company to their employees as a form of incentive compensation.
Other types of options exist in many financial contracts, for example real estate options are
often used to assemble large parcels of land, and prepayment options are usually included in
mortgage loans. However, many of the valuation and risk management principles apply across
all financial options.

Types of options
 The primary types of financial options are:
 Exchange traded options (also called "listed options") are a class of exchange traded
derivatives. Exchange traded options have standardized contracts, and are settled
through a clearing house with fulfillment guaranteed by the credit of the exchange.
Since the contracts are standardized, accurate pricing models are often available.
Exchange traded options include:
 stock options,
 commodity options,
 bond options and other interest rate options
 index (equity) options, and
 options on futures contracts
 Over-the-counter options (OTC options, also called "dealer options") are traded
between two private parties, and are not listed on an exchange. The terms of an OTC
option are unrestricted and may be individually tailored to meet any business need. In
general, at least one of the counterparties to an OTC option is a well-capitalized
institution. Option types commonly traded over the counter include:
 interest rate options
 currency cross rate options, and
 Options on swaps or swaptions.

12
  Employee stock options are issued by a company to its employees as compensation.
Option styles

Naming conventions are used to help identify properties common to many different types of
options. These include:
• European option - an option that may only be exercised on expiration.
• American option - an option that may be exercised on any trading day on or before
expiration.

• Bermudan option - an option that may be exercised only on specified dates on or before
expiration.
• Barrier option - any option with the general characteristic that the underlying security's
price must reach some trigger level before the exercise can occur.

Options strategies

An option strategy is implemented by combining one or more option positions and possibly
an underlying stock position. Options are financial instruments which give the buyer the right
to buy (for a call option) or sell (for a put option) the underlying security at some specific point
of time in the future (European Option) or until some specific point of time in the future
(American Option) for a price (strike price) which is fixed in advance (when the option is
bought).
Calls increase in value as the underlying stock increases in value. Likewise puts increase in
value as the underlying stock decreases in value. Buying both a call and a put means that if the
underlying stock moves up the call increases in value and likewise if the underlying stock
moves down the put increases in value. The combined position can increase in value if the
stock moves in either direction. (The position loses money if the stock stays at the same price
or within a range of the price when the position was established.) This strategy is called a
straddle. It is one of many options strategies that investors can employ.
Options strategies can favor movements in the underlying stock that are bullish, bearish or
neutral. In the case of neutral strategies, they can be further classified into those that are bullish
on volatility and those that are bearish on volatility. The option positions used can be long
and/or short positions in calls and/or puts at various strikes.

Bullish strategies

Bullish options strategies are employed when the options trader expects the underlying stock
price to move upwards. It is necessary to assess how high the stock price can go and the
timeframe in which the rally will occur in order to select the optimum trading strategy.
The most bullish of options trading strategies is the simple call buying strategy used by most
novice options traders.

In most cases, stocks seldom go up by leaps and bounds. Moderately bullish options traders
usually set a target price for the bull run and utilize bull spreads to reduce risk. While
maximum profit is capped for these strategies, they usually cost less to employ. The bull call
spread and the bull put spread are common examples of moderately bullish strategies.
Mildly bullish trading strategies are options strategies that make money as long as the
underlying stock price do not go down on options expiration date. These strategies usually
provide a small downside protection as well. Writing out-of-the-money covered calls is a good
example of such a strategy.

13
Bearish strategies

Bearish options strategies are employed when the options trader expects the underlying stock
price to move downwards. It is necessary to assess how low the stock price can go and the
timeframe in which the decline will happen in order to select the optimum trading strategy.
The most bearish of options trading strategies is the simple put buying strategy utilised by most
novice options traders.
In most cases, stock price seldom make steep downward moves. Moderately bearish options
traders usually set a target price for the expected decline and utilise bear spreads to reduce risk.
While maximum profit is capped for these strategies, they usually cost less to employ. The
bear call spread and the bear put spread are common examples of moderately bearish
strategies.
Mildly bearish trading strategies are options strategies that make money as long as the
underlying stock price does not go up on options expiration date. These strategies usually
provide a small upside protection as well.

Neutral or non-directional strategies

Neutral strategies in options trading are employed when the options trader does not know
whether the underlying stock price will rise or fall. Also known as non-directional strategies,
they are so named because the potential to profit does not depend on whether the underlying
stock price will go upwards or downwards. Rather, the correct neutral strategy to employ
depends on the expected volatility of the underlying stock price.

Examples of neutral strategies are:

• Guts - sell in the money put and call
• Butterfly - buy at the money and out of the money call, sell two in the money puts, or
vice versa
• Condor - sell out of the money call and buy call with higher strike price, while
simultaneously selling out of the money put and buying put with lower strike price
• Straddle - buy put and call
• Strangle - buy out of money put and call. Strangle can be considered a special case of a
straddle
• Grasshopper - I've never used this either
• Risk Reversal
• Short Straddle
• Short Strangle

Swap
A swap is a derivative in which two counterparties agree to exchange one stream of cash
flows against another stream. These streams are called the legs of the swap.
Swaps are private agreements between two parties to exchange cash flows in the future
according to a prearranged formula. They can be regarded as portfolios of forward contracts.
The two commonly used swaps are :

• Interest rate swaps: These entail swapping only the interest related cash flows between the
parties in the same currency.

14
• Currency swaps: These entail swapping both principal and interest between the parties, with
the cash flows in one direction being in a different currency than those in the opposite
direction.

Swaptions: Swaptions are options to buy or sell a swap that will become operative at the
expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls
and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver
swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay
fixed and receive floating.

The cash flows are calculated over a notional principal amount, which is usually not
exchanged between counterparties. Consequently, swaps can be used to create unfunded
exposures to an underlying asset, since counterparties can earn the profit or loss from
movements in price without having to post the notional amount in cash or collateral.
Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on changes
in the underlying prices.

Warrants: Options generally have lives of upto one year, the majority of options traded on
options exchanges having a maximum maturity of nine months. Longer-dated options are
called warrants and are generally traded over-the-counter.

LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are
options having a maturity of upto three years.

Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is
usually a moving average or a basket of assets. Equity index options are a form of basket
options.

Factors driving the growth of financial derivatives:

1. Increased volatility in asset prices in financial markets,

2. Increased integration of national financial markets with the international markets,

3. Marked improvement in communication facilities and sharp decline in their costs,

4. Development of more sophisticated risk management tools, providing economic agents a

wider choice of risk management strategies, and

5. Innovations in the derivatives markets, which optimally combine the risks and returns over
a large number of financial assets leading to higher returns, reduced risk as well as
transactions costs as compared to individual financial assets.

Development of derivatives market in India

The first step towards introduction of derivatives trading in India was the promulgation of
the Securities Laws(Amendment) Ordinance, 1995, which withdrew the prohibition on options
in securities. The market for derivatives, however, did not take off, as there was no regulatory

15
framework to govern trading of derivatives. SEBI set up a 24–member committee under the
Chairmanship of Dr.L.C.Gupta on November 18, 1996 to develop
appropriate regulatory framework for derivatives trading in India. The committee submitted its
report on March 17, 1998 prescribing necessary pre–conditions for introduction of derivatives
trading in India. The committee recommended that derivatives should be declared as
‘securities’ so that regulatory framework applicable to trading of ‘securities’ could also govern
trading of securities. SEBI also set up a group in June 1998 under the Chairmanship of
Prof.J.R.Varma, to recommend measures for risk containment in derivatives market in India.
The report, which was submitted in October 1998, worked out the operational details of
margining system, methodology for charging initial margins, broker net worth, deposit
requirement and real–time monitoring requirements.

The Securities Contract Regulation Act (SCRA) was amended in December 1999 to
include derivatives within the ambit of ‘securities’ and the regulatory framework was
developed for governing derivatives trading. The act also made it clear that derivatives shall be
legal and valid only if such contracts are traded on a recognized stock exchange, thus
precluding OTC derivatives. The government also rescinded in March 2000, the three– decade
old notification, which prohibited forward trading in securities.

Derivatives trading commenced in India in June 2000 after SEBI granted the final
approval to this effect in May 2001. SEBI permitted the derivative segments of two stock
exchanges, NSE and BSE, and their clearing house/corporation to commence trading and
settlement in approved derivatives contracts. To begin with, SEBI approved trading in index
futures contracts based on S&P CNX Nifty and BSE–30(Sensex) index. This was
followed by approval for trading in options based on these two indexes and options on
individual securities.
The trading in BSE Sensex options commenced on June 4, 2001 and the trading in options
on individual securities commenced in July 2001. Futures contracts on individual stocks were
launched in November 2001. The derivatives trading on NSE commenced with S&P CNX
Nifty Index futures on June 12, 2000. The trading in index options commenced on June 4,
2001 and trading in options on individual securities commenced on July 2, 2001. Single stock
futures were launched on November 9, 2001. The index futures and options contract on NSE
are based on S&P CNX.

Trading and settlement in derivative contracts is done in accordance with the rules, byelaws,
and regulations of the respective exchanges and their clearing house/corporation duly approved
by SEBI and notified in the official gazette. Foreign Institutional Investors (FIIs) are permitted
to trade in all Exchange traded derivative products. The following are some observations based
on the trading statistics provided in the NSE
report on the futures and options (F&O):

• Single-stock futures continue to account for a sizable proportion of the F&O segment. It
constituted 70 per cent of the total turnover during June 2002. A primary reason attributed to
this phenomenon is that traders are comfortable with single-stock futures than equity options,
as the former closely resembles the erstwhile badla system.

•On relative terms, volumes in the index options segment continues to remain poor. This may
be due to the low volatility of the spot index. Typically, options are considered more valuable
when the volatility of the underlying (in this case, the index) is high. A related issue is that

16
brokers do not earn high commissions by recommending index options to their clients, because
low volatility leads to higher waiting time for round-trips.

• Put volumes in the index options and equity options segment have increased since January
2002. The call-put volumes in index options have decreased from 2.86 in January 2002 to 1.32
in June. The fall in call-put volumes ratio suggests that the traders are increasingly becoming
pessimistic on the market.

• Farther month futures contracts are still not actively traded. Trading in equity options on most
stocks for even the next month was non-existent.

• Daily option price variations suggest that traders use the F&O segment as a less risky
alternative (read substitute) to generate profits from the stock price movements. The fact that
the option premiums tail intra-day stock prices is evidence to this. Calls on Satyam fall, while
puts rise when Satyam falls intra-day.
If calls and puts are not looked as just substitutes for spot trading, the intra-day stock price
variations should not have a one-to-one impact on the option premiums.

Instruments available in India

Financial derivative instruments:

The National stock Exchange (NSE) has the following derivative products:
Products Index Futures Index Options Futures on Options on
Individual Individual
Securities Securities
Underlying S&P CNX Nifty S&P CNX Nifty 30 securities 30
Instrument stipulated by securities
SEBI stipulated
by
SEBI
Type European American
Trading Cycle maximum of 3- Same as index Same as index Same as
month trading cycle. futures futures index
At any point in time, futures
there will be 3
contracts available :
1) near month,
2) mid month &
3) far month duration
Expiry Day Last Thursday of the Same as index Same as index Same as
expiry month futures futures index
futures
Contract Size Permitted lot size is Same as index As stipulated by As
200 & multiples futures NSE (not less stipulated
thereof than Rs.2 lacs) by
NSE (not
less

17
 than Rs.2
lacs)

Base Price- previous day closing Theoretical value previous day Same as
First day of Nifty value of the options closing value of Index
trading contract arrived at underlying options
based on Black- security
Scholes model
Base Price- Daily settlement daily close price Daily settlement Same as
Subsequent price price Index
options
Price Bands Operating ranges are Operating ranges Operating Operating
kept at + 10 % for are kept at ranges are kept ranges for
99% of the base at + 20 % are
price kept at
99% of
the base
price
Quantity Freeze 20,000 units or 20,000 units or Lower of 1% of Same as
greater greater marketwide individual
position limit futures
stipulated for
open positions
or Rs.5 crores
Price Steps Re.0.05 Re.0.05

InsuINS
URANC
What is the regulatory framework of Derivatives markets in India?
E
With the amendment in the definition of 'securities' under SC(R)A (to include derivative
INDUST
contracts in the definition of securities), derivatives trading takes place under the provisions of
theRY: AN Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of
Securities
India Act, 1992.
OVERV
Dr. L.C Gupta Committee constituted by SEBI had laid down the regulatory framework for
IEW trading in India. SEBI has also framed suggestive bye-law for Derivative
derivative
Exchanges/Segments and their Clearing Corporation/House which lay's down the provisions
for trading and settlement of derivative contracts. The Rules, Bye-laws & Regulations of the
Derivative
There has Segment of the Exchanges and their Clearing Corporation/House have to be framed
inbeen
line with the suggestive Bye-laws. SEBI has also laid the eligibility conditions for
Derivative
insuranceExchange/Segment and its Clearing Corporation/House. The eligibility conditions
have been framed
business in to ensure that Derivative Exchange/Segment & Clearing Corporation/House
provide a
India since transparent trading environment, safety & integrity and provide facilities for
redressal of investor grievances. Some of the important eligibility conditions are- Derivative
1818. Prior
trading
to to take place through an on-line screen based Trading System.
1912,
the Indian
The Derivatives Exchange/Segment shall have on-line surveillance capability to monitor
Companie
positions,
s prices,
Act and volumes on a real time basis so as to deter market manipulation.
governed
insurance
companies
18
. In 1912,
the
insurance
 passed
which sets
down the
rules and
regulations
specified
The Derivatives Exchange/ Segment should have arrangements for dissemination of
informationtheabout trades, quantities and quotes on a real time basis through atleast two
to
insurance vending networks, which are easily accessible to investors across the country.
information
industry.
Amendme
The Derivatives Exchange/Segment should have arbitration and investor grievances redressal
nts
mechanismto the operative from all the four areas / regions of the country.
act Derivatives
The were Exchange/Segment should have satisfactory system of monitoring investor
made
complaints in preventing irregularities in trading.
and
1919 and
1928 but
theDerivative
The most Segment of the Exchange would have a separate Investor Protection Fund.
fundament
al Clearing
The shake Corporation/House shall perform full novation, i.e., the Clearing
up came
Corporation/Housein shall interpose itself between both legs of every trade, becoming the legal
the year
counterparty to both or alternatively should provide an unconditional guarantee for settlement
of1938 and
all trades.
many out
of the
The rules Corporation/House shall have the capacity to monitor the overall position of
Clearing
introduced
Members across both derivatives market and the underlying securities market for those
are
Members still are participating in both.
who
valid
today.
The level of initial margin on Index Futures Contracts shall be related to the risk of loss on the
Till 1956,
position. The concept of value-at-risk shall be used in calculating required level of initial
the
margins. The initial margins should be large enough to cover the one-day loss that can be
insurance on the position on 99% of the days.
encountered
business
wasClearing
The mixed Corporation/House shall establish facilities for electronic funds transfer (EFT)
and
for swift movement of margin payments.
decentraliz
Ined. Thereof a Member defaulting in meeting its liabilities, the Clearing Corporation/House
the event
are transfer
shall a large client positions and assets to another solvent Member or close-out all open
positions. of
number
companies
(245
The Clearing onCorporation/House should have capabilities to segregate initial margins deposited
by ClearingofMembers for trades on their own account and on account of his client. The
the eve
nationaliza
Clearing Corporation/House shall hold the clients’ margin money in trust for the client
tion)
purposes only of and should not allow its diversion for any other purpose.
different
ages,
The sizes Corporation/House shall have a separate Trade Guarantee Fund for the trades
Clearing
and
executed on Derivative Exchange / Segment.
patterns SEBI
Presently, of has permitted Derivative Trading on the Derivative Segment of BSE and the
organizatio
F&O Segment of NSE.
n, which
conducted
only are the
What life various membership categories in the derivatives market?
insurance
business
The various types of membership in the derivatives market are as follows:
and there Member (TM) – A TM is a member of the derivatives exchange and can trade
• Trading
were on somehis own behalf and on behalf of his clients.
companies
whose
main
business
19
was
general
insurance
 did life
insurance
also.
In 1956,
the life
insurance
• Clearing Member (CM) –These members are permitted to settle their own trades as
business
well as the trades of the other non-clearing members known as Trading Members who
of all
have agreed to settle the trades through them.
companies
was
• Self-clearing Member (SCM) – A SCM are those clearing members who can clear and
nationalize
settle their own trades only.
d and a
single
monopolist
What are the requirements to be a member of the derivatives exchange/ clearing
ic
corporation?
organizatio
n, LIC was
set• up Balance
by Sheet Networth Requirements: SEBI has prescribed a networth requirement of
an act Rs. 3ofcrores for clearing members. The clearing members are required to furnish an
auditor's certificate for the networth every 6 months to the exchange. The networth
parliament,
with requirementa is Rs. 1 crore for a self-clearing member. SEBI has not specified any
capitalnetworth requirement for a trading member.
contributio
n •of Liquid
Rs. 5 Networth Requirements: Every clearing member (both clearing members and
croresself-clearing members) has to maintain atleast Rs. 50 lakhs as Liquid Networth with the
form exchange / clearing corporation.
governmen
t of• India.
Certification requirements: The Members are required to pass the certification
programme approved by SEBI. Further, every trading member is required to appoint
THE atleast two approved users who have passed the certification programme. Only the
ROLEapprovedOF users are permitted to operate the derivatives trading terminal.
LIFE
What
INSURANare requirements for a Member with regard to the conduct of his business?
CE IN
The
YOUR derivatives member is required to adhere to the code of conduct specified under the SEBI
Broker
LIFE Sub-Broker regulations. The following conditions stipulations have been laid by SEBI
on the regulation of sales practices:
Sales
Life Personnel: The derivatives exchange recognizes the persons recommended by the
Trading
insurance Member and only such persons are authorized to act as sales personnel of the TM.
These persons who represent the TM are known as Authorised Persons.
is a unique
financial
Know-your-client:
product. In The member is required to get the Know-your-client form filled by every
one
someof client.
respect, it
Risk
is disclosure an document: The derivatives member must educate his client on the risks of
derivatives
oxymoronby providing a copy of the Risk disclosure document to the client.
in that it
Member-client
deals agreement: The Member is also required to enter into the Member-client
agreement
scientificallwith all his clients.
y and
What derivative contracts are permitted by SEBI?
precisely
with
Derivative
variables products have been introduced in a phased manner starting with Index Futures
Contracts
that in June 2000. Index Options and Stock Options were introduced in June 2001 and
are
July 2001
emotional followed by Stock Futures in November 2001. Sectoral indices were permitted for
derivatives
and, within trading in December 2002. Interest Rate Futures on a notional bond and T-bill
the context
of our own
20
individual
lives,
completely
 ble.

Perhaps
the most
important
factoroff ZCYC have been introduced in June 2003 and exchange traded interest rate futures
priced
onabout
a notionallifebond priced off a basket of Government Securities were permitted for trading in
insurance
January 2004.
is simply
that is the eligibility
What it criteria for stocks on which derivatives trading may be permitted?
works.
ASince
stock onthe which stock option and single stock future contracts are proposed to be introduced
1850s,
is required to fulfill the following broad eligibility criteria:-
when
The stock the
shall be chosen from amongst the top 500 stock in terms of average daily market
modern lifeand average daily traded value in the previous six month on a rolling basis.
capitalisation
insurance
policy
The stock’s wasmedian quarter-sigma order size over the last six months shall be not less than Rs.1
created,
Lakh. A stock’s quarter-sigma order size is the mean order size (in value terms) required to
insurance
cause a change in the stock price equal to one-quarter of a standard deviation.
companies
have
The market wide position limit in the stock shall not be less than Rs.50 crores.
consistentl
A stock can be included for derivatives trading as soon as it becomes eligible. However, if the
y kept
stock doestheir
not fulfill the eligibility criteria for 3 consecutive months after being admitted to
contractual
derivatives trading, then derivative contracts on such a stock would be discontinued.
“promise to
pay”.is minimum
What This contract size?
in turn has
made
The Standing it Committee on Finance, a Parliamentary Committee, at the time of
possible
recommending amendment to Securities Contract (Regulation) Act, 1956 had recommended
for the
that millions
minimum contract size of derivative contracts traded in the Indian Markets should be
of men
pegged not and below Rs. 2 Lakhs. Based on this recommendation SEBI has specified that the
women
value in
of a derivative contract should not be less than Rs. 2 Lakh at the time of introducing the
this in the market. In February 2004, the Exchanges were advised to re-align the contracts
contract
country
sizes to
of existing derivative contracts to Rs. 2 Lakhs. Subsequently, the Exchanges were
keep their
authorized to align the contracts sizes as and when required in line with the methodology
promisesby SEBI.
prescribed
to their
families,
building
What a size of a contract?
is the lot
plan of
financial
Lot size refers to number of underlying securities in one contract. The lot size is determined
keeping inon
security mind the minimum contract size requirement at the time of introduction of
the
derivative contracts on a particular underlying.
foundation
For example, if shares of XYZ Ltd are quoted at Rs.1000 each and the minimum contract size
of
is Rs.2 lacs, lifethen the lot size for that particular scrips stands to be 200000/1000 = 200 shares
insurance
i.e. one contract in XYZ Ltd. covers 200 shares.
protection.
What is corporate adjustment?

The basis for any adjustment for corporate action is such that the value of the position of the
INSURAN
market participant on cum and ex-date for corporate action continues to remain the same as far
asCE
possible.AS
This will facilitate in retaining the relative status of positions viz. in-the-money, at-
INVESTMand out-of-the-money. Any adjustment for corporate actions is carried out on the
the-money
ENT
last day on which a security is traded on a cum basis in the underlying cash market.
Adjustments mean modifications to positions and/or contract specifications as listed below:
Agreed,
insurance
may not be
the best 21
place to
invest your
 earned
money.
But there
are
sufficient
reasons for
one to
Strike price
believe
Position
that it can
Market/Lot/ Multiplier
be highly
lucrative
The adjustments are carried out on any or all of the above based on the nature of the corporate
avenue to
action. The adjustments for corporate action are carried out on all open, exercised as well as
facilitate
assigned positions.
savings.
The corporate actions are broadly classified under stock benefits and cash benefits. The various
People
stock benefits declared by the issuer of capital are:
often talk
• Bonus
about yield
on• Rights
• Merger/ demerger
investment
and • tendAmalgamation
to
•
compare Splits
• Consolidations
their
• Hive-off
values with
those
• Warrants, and
available
• Secured Premium Notes (SPNs) among others
on• various
The cash benefit declared by the issuer of capital is cash dividend.
insurance
schemes.
What is the margining system in the derivative markets?
This is
particularly
Two type of margins have been specified -
typical
1. Initial Margin - Based on 99% VaR and worst case loss over a specified horizon, which
withindepends the on the time in which Mark to Market margin is collected.
Indian sub-
continent
2. Mark to Market Margin (MTM) - collected in cash for all Futures contracts and
whereadjustedone against the available Liquid Networth for option positions. In the case of
convenientFutures Contracts MTM may be considered as Mark to Market Settlement.
ly forgets
Dr. L.C Gupta Committee had recommended that the level of initial margin required on a
the
position should be related to the risk of loss on the position. The concept of value-at-risk
element
should be used of in calculating required level of initial margins. The initial margins should be
risk
large enough to cover the one day loss that can be encountered on the position on 99% of the
covered
days. by
The recommendations of the Dr. L.C Gupta Committee have been a guiding principle for
life
SEBI in prescribing the margin computation & collection methodology to the Exchanges. With
insurance.
the introduction of various derivative products in the Indian securities Markets, the margin
computation methodology, especially for initial margin, has been modified to address the
It
specific riskischaracteristics of the product. The margining methodology specified is consistent
extremely
with the margining system used in developed financial & commodity derivative markets
unfair
worldwide. toThe exchanges were given the freedom to either develop their own margin
compare
computation system or adapt the systems available internationally to the requirements of SEBI.
Atheportfolio based margining approach which takes an integrated view of the risk involved in
performan
the portfolio of each individual client comprising of his positions in all Derivative Contracts
ceIndex Futures,
i.e. of Index Option, Stock Options and Single Stock Futures, has been prescribed.
insurance
The initial margin requirements are required to be based on the worst case loss of a portfolio of
anagainst
individual client to cover 99% VaR over a specified time horizon.
other
investment
The Initial Margin is Higher of (Worst Scenario Loss +Calendar Spread Charges)
s without
considerin
g the core
feature of 22
insurance.
The very
 insurance
is to
protect
your family
from the
uncertainty
Or
of your life.
Short Option Minimum Charge
Hence it
The worst scenario loss are required to be computed for a portfolio of a client and is calculated
proves
by valuing the portfolio under 16 scenarios of probable changes in the value and the volatility
very logical
of the Index/ Individual Stocks. The options and futures positions in a client’s portfolio are
to evaluate
required to be valued by predicting the price and the volatility of the underlying over a
the costs
specified horizon so that 99% of times the price and volatility so predicted does not exceed the
involved
maximum and minimum price or volatility scenario. In this manner initial margin of 99% VaR
towards
is achieved. The specified horizon is dependent on the time of collection of mark to market
this
margin by the exchange.
feature.
The probable change in the price of the underlying over the specified horizon i.e. ‘price scan
Ask
range’, in the case of Index futures and Index option contracts are based on three standard
yourself
deviation (3σ ) where ‘σ ’ is the volatility estimate of the Index. The volatility estimate ‘σ ’, is
this
computed as per the Exponentially Weighted Moving Average methodology. This
question.
methodology has been prescribed by SEBI. In case of option and futures on individual stocks
the price scan range is based on three and a half standard deviation (3.5 σ) where ‘σ’ is the
When you
daily volatility estimate of individual stock.
pay
If the mean value (taking order book snapshots for past six months) of the impact cost, for an
insurance
order size of Rs. 0.5 million, exceeds 1%, the price scan range would be scaled up by square
premium
root three times to cover the close out risk. This means that stocks with impact cost greater
for your
than 1% would now have a price scan range of - Sqrt (3) * 3.5σ or approx. 6.06σ. For stocks
car, do you
with impact cost of 1% or less, the price scan range would remain at 3.5σ.
get
For Index Futures and Stock futures it is specified that a minimum margin of 5% and 7.5%
anything if
would be charged. This means if for stock futures the 3.5 σ value falls below 7.5% then a
fortunately
minimum of 7.5% should be charged. This could be achieved by adjusting the price scan range.
no mishap
The probable change in the volatility of the underlying i.e. ‘volatility scan range’ is fixed at 4%
happens?
for Index options and is fixed at 10% for options on Individual stocks. The volatility scan
This
range is applicable only for option products.
means that
Calendar spreads are offsetting positions in two contracts in the same underlying across
you spent
different expiry. In a portfolio based margining approach all calendar-spread positions
the amount
automatically get a margin offset. However, risk arising due to difference in cost of carry or the
to secure a
‘basis risk’ needs to be addressed. It is therefore specified that a calendar spread charge would
valuable
be added to the worst scenario loss for arriving at the initial margin. For computing calendar
property.
spread charge, the system first identifies spread positions and then the spread charge which is
Hence you
0.5% per month on the far leg of the spread with a minimum of 1% and maximum of 3%.
must
Further, in the last three days of the expiry of the near leg of spread, both the legs of the
accept that
calendar spread would be treated as separate individual positions.
out of total
In a portfolio of futures and options, the non-linear nature of options make short option
amount
positions most risky. Especially, short deep out of the money options, which are highly
paid by
susceptible to, changes in prices of the underlying. Therefore a short option minimum charge
you for
has been specified. The short option minimum charge is 3% and 7.5 % of the notional value of
your life
all short Index option and stock option contracts respectively. The short option minimum
insurance,
charge is the initial margin if the sum of the worst –scenario loss and calendar spread charge is
a certain
lower than the short option minimum charge.
amount is
To calculate volatility estimates the exchange are required to uses the methodology specified in
used for
the Prof J.R Varma Committee Report on Risk Containment Measures for Index Futures.
providing
Further, to calculate the option value the exchanges can use standard option pricing models -
the risk
Black-Scholes, Binomial, Merton, Adesi-Whaley.
cover and
The initial margin is required to be computed on a real time basis and has two components:-
the
balance
can be
utilized as
savings. 23
In other
words, the
 premium
you pay
minus the
amount
evaluated,
as the cost
of • The first is creation of risk arrays taking prices at discreet times taking latest prices and
volatility estimates at the discreet times, which have been specified.
insurance
• Thebe
must second is the application of the risk arrays on the actual portfolio positions to
considered the portfolio values and the initial margin on a real time basis.
compute
The
as initial the
margin so computed is deducted from the available Liquid Networth on a real time
basis.
amount
invested to
What
get are thetheexposure limits in Derivative Products?
maturity
Itamount.
has been prescribed
If that the notional value of gross open positions at any point in time in the
case
you of Index Futures and all Short Index Option Contracts shall not exceed 33 1/3 (thirty three
one by three) times the available liquid networth of a member, and in the case of Stock Option
calculate
and
theStock Futures Contracts, the exposure limit shall be higher of 5% or 1.5 sigma of the
yield
notional
from value of gross open position.
Inreturns,
the case of interest rate futures, the following exposure limit is specified:
The
younotional
will be value of gross open positions at any point in time in futures contracts on the
notional
in for10 yeara bond should not exceed 100 times the available liquid networth of a member.
surprise.
The notional value of gross open positions at any point in time in futures contracts on the
notional
Secondly,T-Bill should not exceed 1000 times the available liquid networth of a member.
we tend to
think very
What measures have been specified by SEBI to protect the rights of investor in
unrealistic
Derivatives
ally about Market?
our life.
The
Wemeasures
often specified by SEBI include:
Investor's
comparemoney has to be kept separate at all levels and is permitted to be used only against
the
theliability
results of the Investor and is not available to the trading member or clearing member or
even
after say investor.
any other
10 years
The
fromTrading anMember is required to provide every investor with a risk disclosure document
which will disclose the risks associated with the derivatives trading so that investors can take a
investment
conscious
scheme,decision to trade in derivatives.
for
Investor
instance would get the contract note duly time stamped for receipt of the order and execution
ofPPF.
the order.
AndThe order will be executed with the identity of the client and without client ID
order will
then we try not be accepted by the system. The investor could also demand the trade
confirmation
to slip with his ID in support of the contract note. This will protect him from the risk
ofconvince
price favour, if any, extended by the Member.
ourselves
that PPF is
Inproviding
the derivative
a markets all money paid by the Investor towards margins on all open positions
isbetter
kept inyield
trust with the Clearing House/Clearing corporation and in the event of default of the
Trading
than or Clearing Member the amounts paid by the client towards margins are segregated
an
and not utilised towards the default of the member. However, in the event of a default of a
insurance
member,
policy. losses suffered by the Investor, if any, on settled / closed out position are
compensated from the Investor Protection Fund, as per the rules, bye-laws and regulations of
the
Forderivative segment of the exchanges.
The Exchanges
instance, if are required to set up arbitration and investor grievances redressal mechanism
operative
you investfrom all the four areas / regions of the country.
Rs.
10,000/- in
PPF and 24
after one
year your
 grows to
Rs.11,100/
- accruing
a return of
11 percent.
But what if
your death
occurs in
the first
year itself?
Whereas
Risk Management at Indian Exchanges
Rs.
10,000/-
In the recent times, there have been quite a few advances in the study of financial
can give
markets especially with respect to risk. A new philosophy of risk containment has emerged as a
you
felt need in almost all the financial markets in the world . Indian markets too caught up with it
insurance
by introducing several changes in the trading system with a view to risk containment, and
cover up to
there is a comparative study of various models done using the S&P Nifty index data. One of
an
the tools employed is the so called Value at Risk (VaR).
approximat
e sum of
THE Securities and Exchange Board of India (SEBI) wants to introduce a margin system based
Rs. 12
on value-at-risk (VaR) model. What is VaR ?
lakhs
VaR is the maximum loss you are likely to incur on your portfolio during a certain period.
(depending
Suppose your model throws up a one-day VaR of Rs 10,000 on your portfolio of Rs 5 lakh at a
upon the
95 per cent confidence level. This means your one-day loss will be not more than Rs 10,000 in
plan, age,
95 out of 100 trading days.
etc.) and
VaR is only an estimate. This means there is a likelihood or probability of you losing not more
this
than the VaR on most days. In the above example, we are 95 per cent likely to lose not more
amount
than Rs 10,000. This also means we are 5 per cent likely to lose more than Rs 10,000 on
shall
certain days. VaR, thus, depends on the confidence level.
become
If you want to be more conservative in knowing your likely losses, you have to increase the
available
confidence level to, say, 99 per cent. Suppose, the daily VaR at a 99 per cent confidence level
to the
is Rs 20,000 on the above portfolio, it means you are likely to lose not more than Rs 20,000 in
nominee of
99 out of 100 trading days. Notice that VaR increases as you increase the confidence level.
the
You decide on the confidence interval depending on what you want to measure. Suppose you
policyholde
want to measure your portfolio risk, a 95 per cent confidence level will suffice. Banks, on the
r as
other hand, will want to use a 99 per cent confidence level even for their investment portfolio
against the
because they need to adhere to the capital adequacy norms.
mere paltry
Rs.
How derivatives helps in reducing risk
11,100/-
that PPF
Option is a product which offers non-linear payoff to the buyer and seller of the option
shall pay.
contract. The buyer has only right and no obligation in addition to limited loss and unlimited
profit potential, whereas the exact opposite scenario is true for the seller of an option. So it
Now how
seems that rules of the game are tiled in favour of the buyer and not the seller. But the odds of
do you
wining are heavily in favour of the sellers and that makes the game equally attractive for
compare
buyers as well as sellers. Option is the only product which allows the trader to make profit by
the yield in
just taking a view on volatility of the market regardless of knowing anything about the
such a
direction. The most famous strategy to play with volatility is a Straddle.
situation?
Is it 100%
or 1000%
Straddle
or more?
Buying/Selling one call option and one put option of same strike price and same expiry.

1. Long Straddle
THINK OF
INSURAN
CE AS A
SAFETY
NET 25

The
 insurance
is to
protect you
against
losses you
can’t
Aafford.
trader expects the market to be extremely volatile in the near future with equal probability,
will go and buy call and put option of the underlying asset with same strike price and expiry.
Insurance
transfers
the risks of
Payoff
person,
business,
Inorcase if the market goes up in a big way, the call option will give profit and if the market
goes down the put option will give profit. The maximum loss would be restricted to the total
organizatio
premium
n paid
(the to buy both the options.
insured) to
an
insurance
2.company
Short Straddle
(the
Ainsurer).
trader with range bound expectation about the market will go for a short straddle. In this case
ifThe
the market remains at the same level at expiry, the trader gets a maximum profit equal to the
total premium received but if the market turns extremely volatile he may suffer unlimited loss.
insurer
than
Inreimburses
case of straddle we assume equal probability of the market to rise and fall in big way from
our
thechosen
insuredstrike price level. But a trader may have a biased view towards the market. For such
traders
for two famous variants of straddle strategy have been created which have become very
popular.
“covered”Let us understand both of them.
losses i.e.
I.those
Long Strap
losses it
Apays
Strap is buying
for two call options and buying one put option of the same strike price.
Itunder
is equivalent
the of buying one straddle and one extra call option. This extra call option shows
traders
policy bias towards upward movement in underlying. The bias in favour of upward market
movement
terms. is 2/3rd compared to market moving downward is 1/3rd.
Illustration1
As the
insurance
This strategy is formulated by using the last traded price of IDBI on 25th April 2007 option
consumer,
contracts
you paywith an expiry on 31st May 2007. May Future Contract closed at Rs.89.50 on 25th
April,
amount2007.of
money,
Tocalled
create a Long
a Strap:
premium,
Buy
to 2 call the
options with strike price of Rs.90 @ Rs.5.10
Buy 1 put option
insurer to with strike price of Rs.90 @ Rs.5.40
transfer
Buy
the2 callrisk.
options 2 * 5.10 =10.20
Buy
The 1 put option 1 * 5.40 = 5.40
insurer
InitialCashFlow(CF0)
pools all its =15.60
premiums
High
into Risk
a large– High Return with Substantial Upward Bias From the above table we can see that
a fund,
trader will
andincur loss, if price stays anywhere between 74.40 and 97.80. Thus a trader should
enter
when strategy
this a if he expects the stock price to make wild moves (rises more than 9% from
current level, 89.5 to 97.8) by the end of May, to make the trade profitable. It’s a very high-risk
policyholde
r has a
loss, the
insurer 26
draws fund
from the
 for the
loss. Life is
full of
unexpecte
d events
that can
strategy,
create but if price goes beyond 97.80 profit will shoot up as the profit earned will be from
two call options.
large
financial
losses. For
example,
whenever
you drive,
it is
possible
that you
may have
a costly
accident.
Risk
affects you
by causing
worry
about
potential
loss and
how to
deal with
the
consequen
ces.
Insurance
II.reduces
Long Strip
Strip buying two put options and buying one call option of the same strike price. It is an
anxiety
equivalent
over ofabuying one straddle and one extra put option. This extra put option shows traders
bias
possible downward movement in underlying. The bias in favour of downward market
towards
movement
loss is 2/3rd compared to market moving upward is 1/3rd.
and
absorbs
the
Illustration
financial 2
The strategy
burnt of itsis formulated using last traded price of IDBI on 25th April 2007 option contracts
with expiry
consequen on 31st May 2007. May future contract closed at Rs.89.50 on 25th April, 2007.
Toces.
create a Long Strip:
Buy 2 put option with strike price of Rs.90 @ Rs.5.40
However,
Buy
while1 call option with strike price of Rs.90 @ Rs.5.10
Ininsurance
Rs
Buy2 put options
coverage 2 * 5.40 = 10.80
is
Buy 1 call option
essential, 1 * 5.10 = 5.10
how much
Initial
and Cash whatFlow (CF0) =15.90
type of
insurance
High
peopleRisk – High Return with Substantial Downward Bias
From
needthe above table we can see that a trader will incur loss, if price stays anywhere between
82.50 andwith
differs 105.90. Thus a trader should enter this strategy if he expects the stock price to make
each
individual.
You must 27
decide
how much
 are willing
to tolerate
without
insurance.
For
example,
wild moves of
benefit (falls more than 7% from current level, 89.50 to 82.00) by the end of May, to make
the trade profitable. It’s a very high riskstrategy, but if price goes below 82.95, profit will shoot
disability
uppolicies
as the profit earned will be from two put options.
typically
begins
after a
waiting
period of
one to six
months.
Therefore,
you should
ensure that
you have
some form
of
coverage
or financial
resources
before the
policy
period
begin.

INSURAN
Synthetic Bull Spread: An Innovation in Option Trading Strategies
CE
Synthetic Bull Spread
INDUSTR
Synthetic bull spread can be crated by buying one future contract/having long position in stock,
Y IN INDIA
buying one at-the-money put option and one deep out-of-money call option.

WhoEnsconced
should use and why to use?
in a
monopoly
An investor having a long position in a stock and feel that prices have already reached near to
itsrun from
peak but may still have some momentum to play in near term, at the same time he is afraid
the
of some event in near future which may hit the stock badly and leads to erosion of wealth.
nationaliza
tion days
beginning
in 1956,
the
insurance
industry
has indeed
awakened
to a
deregulate
d
environme
nt in which
several 28
private
players
 partnered
with
multination
al
insurance
giants. A
successful
passage of
the IRDA
Bill have
INSURANCE INDUSTRY: AN OVERVIEW
cleared the
way of
private
sector
There has been insurance business in India since 1818. Prior to 1912, the Indian Companies
operators
Act governed insurance companies. In 1912, the insurance Act was passed which sets down the
in and regulations specified to the insurance industry. Amendments to the act were made in
rules
collaborati
1919 and 1928 but the most fundamental shake up came in the year 1938 and many out of the
on introduced
rules with are still valid today.
their
Till 1956, the insurance business was mixed and decentralized. There are a large number of
overseas
companies (245 on the eve of nationalization) of different ages, sizes and patterns of
partner.
organization, which conducted only life insurance business and there were some companies
With about
whose main business was general insurance but which did life insurance also.
Ina 1956,dozenthe life insurance business of all companies was nationalized and a single
monopolisticinorganization, LIC was set up by an act of parliament, with a capital contribution
players
ofthe
Rs. 5 crores form government of India.
General
Insurance
THE ROLE OF LIFE INSURANCE IN YOUR LIFE
Industry in
India,
Life the is a unique financial product. In some respect, it is an oxymoron in that it deals
insurance
industry isand precisely with variables that are emotional and, within the context of our own
scientifically
gearing lives,
individual up completely unpredictable.
for a
period of
Perhaps the most important factor about life insurance is simply that it works. Since the 1850s,
rapidthe modern life insurance policy was created, insurance companies have consistently
when
expansion
kept their contractual “promise to pay”. This in turn has made it possible for millions of men
and
and women in this country to keep their promises to their families, building a plan of financial
change.
security on the foundation of life insurance protection.
For a long
time, the
industry
has been AS INVESTMENT
INSURANCE
locked in
an Ice insurance
Agreed, Age may not be the best place to invest your hard earned money. But there are
when the
sufficient reasons for one to believe that it can be highly lucrative avenue to facilitate savings.
basic often talk about yield on investment and tend to compare their values with those
People
industryon various insurance schemes. This is particularly typical within the Indian sub-
available
structure
continent where one conveniently forgets the element of risk covered by life insurance.
has
Itremained
is extremely unfair to compare the performance of insurance against other investments
more considering
without or the core feature of insurance. The very essence of insurance is to protect
less fixed.
your family from the uncertainty of your life. Hence it proves very logical to evaluate the costs
The glacier
involved towards this feature. Ask yourself this question.
is now
melting,
When you pay insurance premium for your car, do you get anything if fortunately no mishap
revealing
happens? This means that you spent the amount to secure a valuable property.
new
challenges
as
traditional 29
distribution
and
 manageme
nt
processes
are not
proving to
be
Hence
adequate you must accept that out of total amount paid by you for your life insurance, a certain
amount
for theisnew used for providing the risk cover and the balance can be utilized as savings.
Inage.
other words, the total premium you pay minus the amount evaluated, as the cost of insurance
must
Thebeshape considered as the amount invested to get the maturity amount. If you calculate the
yield
of from returns, you will be in for a surprise.
the
insurance
Secondly,
industry we is tend to think very unrealistically about our life. We often compare the results
after
being say 10 years from an investment scheme, for instance PPF. And then we try to convince
ourselves
changedthat PPF is providing a better yield than an insurance policy.
by
For instance, if you invest Rs. 10,000/- in PPF and after one year your money grows to
developme
Rs.11,100/-
nts accruing a return of 11 percent. But what if your death occurs in the first year
in
itself? Whereas Rs. 10,000/- can give you insurance cover up to an approximate sum of Rs. 12
distribution
lakhs (depending
. The main upon the plan, age, etc.) and this amount shall become available to the
nominee
driver of the is policyholder as against the mere paltry Rs. 11,100/- that PPF shall pay.
the
Now how do you compare the yield in such a situation? Is it 100% or 1000% or more?
lowering
cost of
THINK
increasingl OF INSURANCE AS A SAFETY NET
y
The function of insurance is to protect you against losses you can’t afford. Insurance transfers
sophisticat
the
edrisks of person, business, or organization (the insured) to an insurance company (the
insurer).
technology The insurer than reimburses the insured for “covered” losses i.e. those losses it pays
for
, under
enabling the policy terms.
new
As the insurance consumer, you pay an amount of money, called a premium, to the insurer to
economics
transfer
of the risk. The insurer pools all its premiums into a large fund, and when a policyholder
scale
has a loss,
and scope, the insurer draws fund from the pool to pay for the loss. Life is full of unexpected
events
whichthat can create large financial losses. For example, whenever you drive, it is possible
that you may have a costly accident. Risk affects you by causing worry about potential loss and
extend
how
beyondto deal with the consequences. Insurance reduces anxiety over a possible loss and absorbs
the
national burnt of its consequences. However, while insurance coverage is essential, how
financial
much and what type of insurance people need differs with each individual. You must decide
boundaries
how
. much risk you are willing to tolerate without insurance. For example, benefit of disability
policies
It is likelytypically begins after a waiting period of one to six months. Therefore, you should
ensure that
to bring in you have some form of coverage or financial resources before the policy period
begin.
a more
profession
al and
focused
approach.
Moreover
the foreign
players
would
bring
sophisticat
ed
actuarial
techniques
with them,
which
would 30
facilitate
the insurer
 effectively
price the
product.
The touch
point with
the
ultimate
customer
INSURANCE
is the INDUSTRY IN INDIA
distributor
and Ensconced
the in a monopoly run from the nationalization days beginning in 1956, the
insurance
role played industry has indeed awakened to a deregulated environment in which several private
players
by them inpartnered with multinational insurance giants. A successful passage of the IRDA
have
Bill have cleared the way of private sector operators in collaboration with their overseas
insurance
partner.
markets With is about a dozen players in the General Insurance Industry in India, the industry is
gearing
critical. It is a period of rapid expansion and change.
up for
For
thea long time, the industry has been locked in an Ice Age when the basic industry structure
has remained more or less fixed. The glacier is now melting, revealing new challenges as
distributor
traditional
who distribution and customer management processes are not proving to be adequate for
the new
makes the age.
The shape of the insurance industry is being changed by developments in distribution. The
difference
main driverofis the lowering cost of increasingly sophisticated technology, enabling new
in terms
economics
the quality of scale and scope, which extend beyond national boundaries.
Itof
is likely
advicebring in a more professional and focused approach. Moreover the foreign players
to
would bring sophisticated actuarial techniques with them, which would facilitate the insurer to
for choice
effectively
of product, price the product.
The touch
servicing point with the ultimate customer is the distributor and the role played by them in
insurance
of markets is critical. It is the distributor who makes the difference in terms of the
policy
quality
post saleof advice for choice of product, servicing of policy post sale and settlement of claims.
Inand
the Asian markets, with their distinct cultural and social ethos, these conditions will play a
major role in shaping the distribution channels and their effectiveness.
settlement
The
of new companies have attempted appealing only to the middle, upper middle and elite
claims.
classes
In in the major cities. Contrasted with Public sector insurance companies, with their
the
offices
Asian across the country, the new companies have miles to go before they reach anywhere.
They must overcome the mindset of the customer that life insurance is life Insurance
markets,
Corporation
with theirof India (LIC) and general insurance in General Insurance Corporation of India
(GIC) if they hope to grow in the market. Meanwhile, the public sector companies are going to
distinct
great lengths
cultural to revamp their image to look and feel more contemporary.
Both
and the public and new private sector companies are fighting their own battles from the
social
perspective
ethos, of customer perception management, In today’s scenario, Insurance companies
must
these move from selling insurance to marketing an essential financial product. The distributors
have become trusted financial advisors for the clients and trusted business associates for the
conditions
insurance
will playcompanies
a so this calls for leveraging multiple distribution channels in a cost
effective
major role and customer friendly manner.
in shaping
the
PERFORMANCE
distribution OF THE INDIAN INSURANCE MARKET:-
channels
The
andIndia Insurance Market despite having a highly elaborate history spanning almost two
their
centuries,
effectivene has come of age only in the last 50 years after the formation of the Life Insurance
Corporation
ss. (LIC) of India in 1956 and the entry of private companies into the market in
2000.
The new
companies
Traditionally
have the Indian Insurance Market had centered on the life insurance until recently, a
host
attempted insurance policies covering a diverse range of issues and objects like medical
of other
insurance,
appealingaccident insurance, fire insurance, automobile insurance and other policies
only to the
middle,
upper 31
middle and
elite
 the major
cities.
Contrasted
with Public
sector
insurance
which fall under the category of general insurance are being provided by various private
companies
insurance
, with their companies.
offices
The following
across the points will provide you an insight into the insurance market of India and its fast
expanding
country, prospects. The report is well supported by data based on detailed analysis that
would
the help new investors, financial service providers and global banking players to venture
into
companies insurance market.
the Indian
have miles
Taking
to intogoaccount the changing socio-economic demographics, rate of GDP growth,
behavior
before they of consumers, and occurrences of natural calamities at regular intervals the market of
Life
reachInsurance in India is expected grow to the value of around US $ 41.44 billion by the year
2009. The Market is expected to grow at a compounded annual growth rate (CAGR) of more
anywhere.
than
They 200must% year over year (YOY) from year 2006 onwards.
overcome
the• 65 % of the general insurance market is controlled by private houses that already
mindset existofin the market.
the• However in automobile insurance, public sector covers a substantial 68 % of the total
customer market value.
• Among
that life individual companies that are worthy of mentioning, ICICI Lombard enjoys a
insurancewhopping 53 % market share in Accident Insurance while the remaining 47 % is
is shared
life by New India Assurance and United India Insurance , both belonging to the
Insurancepublic sector .
• The other key players of the market include:
Corporatio
n of India
(LIC) and
general
In Public Sector:
insurance
in General
• Life Insurance Corporation (LIC) of India, National Insurance Company Limited,
Insurance
Oriental Insurance Limited, New India Assurance Company Limited and United India
Corporatio
n of Insurance
India Company Limited.
(GIC) if
they hope
to grow in
theInmarket.
Private Sector:
Meanwhile
Bajaj Allianz, ING Vysya, SBI Life, Tata AIG Life, HDFC Standard, ICICI Prudential
• public
, the
sectorLife Insurance, Birla Sunlife, Aviva Life Insurance, Kotak Mahindra Old Mutual, Max
companiesNew York Life and Met Life
are going
to great
FINANCIAL
lengths to CONDITION OF THE INDIAN INSURANCE MARKET
revamp
The gains
their imageare obvious for anyone who has been closely monitoring the Indian insurance scene.
The total premium
to look and collected by the insurers both life and non-life in the year 2007-2008 is near
about
feel $41.44
more billion, in 2003-2004 is Rs.82, 415 crores (Rs.66, 288 crores in life and Rs.
16,127
contemporcrores in non-life) compared to Rs. 44, 985 crores (Rs.34, 898 crores in life and Rs.
10,087
ary. crores in non-life) during the year 2000-2001. This represents an 83% increase in the
last
Boththree years
the over the base year 2000-01. This is what we have witnessed after the opening
uppublic
of the sector.
and If we take the three year block prior to the opening of the sector, we find that
new
private
sector 32
companies
are fighting
 battles
from the
perspectiv
e of
customer
perception
the total premium collected in 1997-98 was Rs.27, 089 crores (life Rs.19354 crores; non-life
manageme
Rs.7735
nt, crores:)
In which has grown to Rs.44, 985 by 2000-2001 representing an increase of
66%.
today’sInsurance sector has obviously started growing at a rapid pace after the sector was
opened
scenario,up. The private sector accounts for nearly 13% of the first year premium market. The
market
Insurance of the private players has to be seen in the context of this enlarged market. There
share
iscompanies
also evidence to show that the rate of growth of public sector undertakings had not shown
any
must decline
move after the entry of the private sector companies. All of them are obviously having a
share
from of a larger market. The Credit for enlarging the market should however, go to the private
sector
sellingas they came up with an aggressive marketing strategy to establish their presence.
insurance
to • The total premium underwritten by life insurance companies in the country during
FY2004 was Rs 18, 66,939.69 lakh ($4 billion) towards 286.26 lakh policies,
marketing
an recording a growth in premium and policies underwritten of 10.24 per cent and 12.83
per cent, respectively over the previous year.
essential
• The non life insurance market grew by about Rs 1,820 crore ($392.8 million) (13 per
financial
product.cent) to record a premium of Rs 16,130 crore ($3.4 billion), a lot of which was
The because of the Rs 1,700 crore ($367 million) (17 per cent) growth in the
miscellaneous business such as motor, health, liability and aviation.
distributors
have The spectacular premium driver, motor grew by Rs 1,020 crore ($220 million) (20 per
•
become cent); health by Rs 270 crore ($58.3 million) (27 per cent); liability by Rs 165 crore
trusted ($35.6 million) (100 per cent); aviation by Rs 90 crore ($19.4 million) (25 per cent).
• The traditional fire business grew by Rs 195 crore ($42 million) (6.5 per cent) and
financial
advisorsengineering grew by Rs 36 crore ($7.7 million) (5 per cent).
for the
Insurance
clients and distribution channels
trusted
Atbusiness
present the distribution channels that are being utilized are:
 Direct selling
associates
for Corporate
the agents i.e. pushing the insurance product through the directors or partners of
insurance
a company
companies
 Group selling
so Worksitethis marketing
calls
 Brokers for and cooperative societies
leveraging
Tomultiple
this list can be added the number of alternate delivery channels –
distribution
channels
Bancassurance: Bancassurance can be a sure fire way to reach a wider customer base,
in a cost
provided it is made use of sensibly. In India there is an extensive bank network established
effective
over the years. Insurance companies will have to take advantage of the customers' long-
and trust and relationships with banks. This is a mutually beneficial situation as banks can
standing
customer
expand their range of products on offer to customers and earn more, while the insurance
friendly profits from the exposure at the bank branches, and the security of receiving timely
company
manner. The products that are likely to sell well through bancassurance are commoditized
payments.
term and annuity products. Also, those products that combine insurance and banking needs
help to create demand - such as loan cover, term assurance and simple products that can be
sold over-the-counter at banks. Another advantage is that banks, with their network in rural
areas, help to fulfill rural and social obligations stipulated by the Insurance Regulatory and
Development Authority (IRDA).
PERFORM
ANCE OF
THE
INDIAN
INSURAN 33
CE
MARKET:-
 The India
Insurance
Market
despite
having a
highly
Selling
elaboratethrough employees or authorized officials of a corporate: Selling through
employees
history can also be a lucrative prospect. But the full potential of this channel has not yet
been utilized since selling is now permitted only through directors or partners of the company.
spanning
Worksite
almost marketing
two is inexpensive and provides the opportunity to market products to large
groups of
centuries, people simultaneously.
has come
Call centres:
of age only Call centres can be utilized for generating leads. As the market keeps expanding,
call centres
in the last have the potential of becoming an important medium for customer relationship
management
50 years(CRM) and up selling to the customers.
after the
Cooperative
formation societies and Brokers: Cooperative societies and brokers offer immense support to
insurance
of the Life companies to widen their reach. Private companies that are already appointing
corporate
Insurance agents, and non-banking financial corporations (NBFCs) with a sound retail network
are in demand.
Corporatio
n (LIC) of
Marketing
India through mailers etc: Direct marketing through mailers, pamphlets etc. require
in
customised
1956 and simple products that can be purchased through such mediums, or through the
Internet.
the entry of the unavailability of good databases in India, and the high expenses to reach
Though
the target audience through direct mailers is a cause for concern, it is definitely a problem that
private
can be solved through better management of resources, data collection etc.
companies
Tointo up,the
sum it is apparent that multiple distribution channels will help an insurance company to
offer
marketa range in of contact points to the customer, thereby increasing the chances of success.
However,
2000. along with these distribution channels comes the challenge of 'relationship
management'. Since most of the new channels involve collaboration with various entities
whose demands and powers of negotiation are varied, it requires delicate skills on the part of
Traditionall
the
y insurance the company to manage these relationships. Effective management of channel
conflict,
Indian and curtailing the costs of distribution will be of utmost
importance.
Insurance
Market had
centered
on the life Agent
insurance
until
Insurance
recently, a Agent Agent C
Company
host of U
other S
Agent
insurance T
policies O
covering a M
diverse Broker E
range of R
issues and S
objects
Insurance like Bank
medical
Company
insurance,
accident
insurance,
fire
insurance,
automobile
insurance
and other
policies 34
which fall
under the
 general
insurance
are being
provided
by various
private
insurance
companies
.
THE ROLE OF INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY
The
 Protection of consumer interest,
following
points will
provide
 To ensure financial soundness of the insurance industry and
you an
insight
 Tointo ensure healthy growth of the insurance market.
the
insurance
These objectives must be achieved with minimum government involvement and cost. IRDA’s
functioning of
market can be financed by levying a small fee on the premium income of the insurers thus
India zero
putting and cost on the government and giving itself autonomy.
its fast
expanding
Protection of Customer Interest
prospects.
The report
IRDA’s first brief is to protect consumer interests. This means ensuring proper disclosure,
is
keeping well affordable but also insisting on some mandatory products, and most importantly
prices
supported
making sure that the insurers pay consumers.
by data
based
Ensuring properon disclosure is called Disclosure Regulation. Insurance contracts are basically
detailed agreements. They can be full of inscrutable jargon and escape clauses. An average
contingency
analysisis likely to be confused by them. IRDA had instructed insurers to frame transparent
consumer
that would
contracts. Consumers should not have to wake up to unpleasant surprises, finding that certain
help
contingencies are not covered.
investors,
financial
The IRDA also has to ensure that prices of the products stay reasonable and certain mandatory
service are sold. The job of keeping prices reasonable is relatively easy, since competition
products
providers
among insurers will not allow any one company to charge exorbitant rates. The danger often is
and global
that prices may be too low and might take the insurer dangerously close to bankruptcy. As for
banking products, those that involve common and well known risks, certain standardization
mandatory
players
has to
been enforced. Furthermore, IRDA had insisted that for such products the prices also be
venture
standardized.
into the
Indian
From the consumer point of view the most important function of IRDA is ensuring claim
insuranceQuick settlement without necessary litigation was the norm. LIC in India has a
settlement.
market.
claim settlement ratio of 97%, an impressive number by any standards.

IfTaking intohave a complaint against an insurer they can go to a body formed by association
consumers
ofaccount
the insurers. The decision of such a body would be binding on the insurers, but not on the
the
complainant. If the complainants are not satisfied they can go to court. Some countries such as
changinghave such a system in place. This system offers a first and quicker choice of settling
Singapore
socio-
out of court. IRDA can encourage the insurers to have such a grievances reprisal mechanism.
economic
This system can serve the function of adjudication, arbitration and conciliation.
demograp
hics,
The secondrate
area of IRDA’s activity concerns monitoring insurer behavior to ensure fairness. It
isofespecially
GDPhere that IRDA’s choice of being a bloodhound or a watchdog would have
growth, implications. We think that an initial tough stance should give way to a more
different
behaviorand
forbearing of prudential approach in regulating insurance firms. When the industry has a few
consumers
, and
occurrence 35
s of natural
calamities
 intervals
the market
of Life
Insurance
in India is
expected
firms
growthereto theis some chance of collusion. IRDA has to be alert to the collusive tendencies and
make
valuesure that of the prices charged remains reasonable. However, some cooperation among the
insurance
around US companies could be considered desirable. This is especially in lines where claim
experience
$ 41.44 of any one company is not sufficient to make accurate forecasts. Collusion among
companies
billion by information sharing and rate setting is considered “fair”.
on
the year
IRDA must
2009. The have severe penalties in case of fraud or mismanagement. Since insurance business
involves
Market is managing trust money, in some countries the appointment of senior managers and
“key personnel” has to be approved by the insurance regulatory agency.
expected
to grow at
CURRENT
a SCENARIO OF THE INDUSTRY
compound
India
ed withannual about 200 million middle class household shows a huge untapped potential for
players
growth rate insurance industry. Saturation of the markets in many developed economies has
in the
made
(CAGR) the Indian
of market even more attractive for the global insurance majors. The insurance
sector
more than has come to a position of very high potential and competitiveness in the market.
in India
200 %
Innovative
year over products and aggressive distribution have become the say of the day. Indians, have
always seen
year (YOY) life insurance as a tax saving device, BSLI can do much better by providing them
newfromproductsyearand variety for their choice.
2006
Life insurance industry is waiting for a big growth as many Indians and foreign companies are
onwards.
waiting in the line for the green signal to start their operations. The Indian consumers should
be65ready % byofnow because the market is going to give them an array of products, different in
price,
the general and benefits. How the customer is going to make his choice will determine the
features
future of the industry.
insurance
market is
CUSTOMER
controlled SERVICE
Customers
by private remain the most important centre of the insurance sector. After the entry of the
foreign
houses players the industry is seeing a lot of competition and thus improvement of the
customer
that service in industry. Computerization of operations and updating of technology has
become
already imperative in the current scenario. Foreign players are bringing in international best
practices
exist ininthe the service through use of latest technologies. The one time monopoly of LIC and
itsmarket.
agents are now going through a thorough revision and training programme to catch up with
the other players. Though lot is being done for the increased customer service and adding
technology
However to in it but there is a long way to go and various customer surveys indicate that the
standards
automobile are still below customer expectation levels.
insurance,
public
NEED
sectorFOR INS. POLICY
covers a
Uncertainty
substantialis the only certainty in life. The instinct and need for security against such
uncertainty
68 % of (risks) is the motivating force for human behavior and action. The need for life
insurance
the vary according to the contingencies provided according to the age, family size etc.
total
market
value.
POLICY CLASSIFICATIONS
Among
The need of people for life insurance can be classified as :
individual
companies
that are
worthy of
mentioning 36
, ICICI
Lombard
 whopping
53 %
market
share in
Accident
Insurance
 Family
while the : Protection of the interest of the family against loss of income due to the death
of the breadwinner.
remaining
47 % is
shared by Provision for education, marriages and start-in life.
 Children:
New India
Assurance
 Old-age: Post-retirement income for self and family/dependants.
and United
India
 Special needs: Disability, accidents, expenses for treatment of diseases, loss of income
Insurance
due to, sickness etc.
both
belonging
BASIC ELEMENTS IN A LIFE INSURANCE PRODUCT
to the
public
A life insurance product has, essentially two basic elements.
sector
Risk . Benefit payable in the event of death, also called Term Insurance Plans.
cover:

The The
Saving: otherbenefit payable in the event of survival, also called pure Endowment plans.
key
All plans of the life insurance are combination of both term insurance element and pure
players of
endowment element in different proportions.
the market
No policy can be said to be the best policy for all the policy holders de to the variance in the
include:
cost , elements of investments and protection, requirement of the policyholders.

In
DIFFERENT TYPES OF POLICIES
Public
1.Sector:
Term Life Insurance
2. Whole Life Insurance
3.Life
Endowment Type Plans,
4.Insuran
Combination of Whole Life and Endowment type Plans, and
ce
5. Annuity and Pension Plans
Corpor
Termation
Life Insurance
(LIC) of
India,
In Term Life Insurance contract, the sum assured is payable only in the event of death during
Nationa
the term. In case of survival, the contract comes to an end at the end of the term. There is no
refundl of the premium. Here the premium is low and contract is simple.
Insuran
Termce Life Insurance Types
Compa
ny
Straight-Term (Temporary) Insurance
Limited,
Here Oriental
the sum assured is payable only in the event of life assured’s death occurring within the
Insuran
insured period from the commencement of the policy. A single premium is required to be paid.
ce
The proposer is required to pay the medical examination fee. It does not have any surrender
value.Limited,
This plan cannot be converted into other plans.
New
TermIndia
Life Insurance Types
Assura
nce Term Policies
Renewable
Compa
ny
Limited
and 37
United
India
 ce
Compa
ny
Limited.

The policies are renewable at the expiry of the term for an additional period without medical
examination, but the premium rate will be altered according to the age attained at the time of
renewal
In
TermPrivate
Life Insurance Types
Sector:
Convertible Term Policies
Bajaj
Here Allianz,
option to convert it into whole life or endowment policy is available provided it is in full
force,ING
into either a limited payment life policy or endowment assurance policy, without having
to undergo
Vysya, fresh medical examination, at any time during the specified term except the last two
years.SBI
Life,
TermTataAssurance Plans from LIC
AIG
Two Year
Life, Temporary Assurance Policy
The Convertible
HDFC Term Assurance Policy
Anmol Jeevan-I
Standar
Amulya Jeevan-I
d, ICICI
Mortgage
PrudentRedemption Assurance policy
ial Life
Here Insuran
the risk is covered for the entire life of the policyholder. The policy money and the bonus
are payable
ce, only to the nominee or the beneficiary upon the death of the policyholder. The
policyholder
Birla is not entitled to any money during his/her own life. Thus there is no survival
benefit.
Sunlife,
Aviva
Important
Life Whole Life Policies
Insuran
Whole life policy (with profit)
ce,
Whole life limited payment plan
Kotak
Whole life single Premium plan
Mahind
Convertible
ra Old whole life plan
Mutual,
Whole Maxlife policy (with profit)
New
This is a policy at lower rates of premium. The premiums are payable through out the life time
York
of theLife
assured and sum assured becomes payable on the death of the life assured or attaining an
age ofand80 years whichever earlier. Bonus addition is at a higher rate compared to endowment
policies.
Met
Life
Whole life limited payment plan

The payment of premium is limited to a certain period, although the amount secured until this
plan is payable on the death of the policyholder. The amount of premium depends upon the
FINANCIA
number of annual premiums stipulated since premiums are payable for the selected period of
L
years or until death if it occurs within this period.
IfCONDITIO
the life assured survives the premium-paying period, the policy continues, provided all
N OF THE
premiums have been paid, but not further premiums are required to be paid.
INDIAN
Whole life single premium plan
INSURAN
CE
MARKET
38
The gains
are
 obvious for
anyone
who has
been
closely
monitoring
the plan
This Indian
is not very common. In this plan single premium needs to be paid at the start of the
policy. The policy is available both with and without profit.
insurance
Convertible
scene. Thewhole life plan
total
The object of this plan is to provide maximum protection at minimum cost. It’s a whole life
premium
without profit plan, premiums payable up to age of 70 years of the assured. The premium
collected
charged is for the whole life hence it is low.
by
After 5 years,the the life assured has an option to convert it into an endowment with or without
insurers
profit choosing the term without having to go for medical examination.
both life
Whole
and non-life plans from LIC
life in the
The Whole Life Policy
year 2007-
The Whole Life Policy- Limited Payment
2008
The WholeisLife Policy- Single Premium
near about
Jeevan Anand
$41.44Tarang
Jeevan
billion, in
Endowment
2003-2004 type plan
is Rs.82,
Endowment policies cover the risk for a specified period, at the end of which SA (sum assured)
is415
paidcrores
back to the policyholder, along with all the bonus accumulated during the term of the
(Rs.66,
policy.
288 crores
Endowment
in life and policies types
Rs. 16,127
Pure Endowment
crores in Policy
Ordinary Endowment Assurance Policy
non-life)
Double endowment Policy
compared
Joint Life Endowment Policy
to Rs. Endowment
Marriage 44, Plan
985 crores
Pure endowment policies
(Rs.34,
898 crores
The
in sum
life assured
and is payable on the life assured’s surviving the endowment term. Paid-up and
surrender values are allowed on this policy. It is a sort of compulsory saving for old age
Rs. 10,087
crores endowment
Ordinary in assurance policy
non-life)
during
The premiumsthe under this plan are paid for a fixed term. In case the death takes place during the
term,
yearthe sum assured along with accumulated bonus is paid to the policyholder. The plan
2000-
offers the
2001. This advantage of making a provision for the family of the life assured in case of his
early death and also assures a lump sum money at any desired age.
represents
The plan is available with-profit and without-profit
an 83%
increase endinary
Ordinary in endowment assurance policy
the last
With-Profit-
three yearsCarries bonus
Without-profit
over the – Does not carry bonus.
base year
2000-01.
This is 39
what we
have
 witnessed
after the
opening up
of the
sector. If
we
Premium take
will be higher of “with-profit: as compared with “Without profit”. The premium
the three
paying term for without-profit plan is restricted to 25 years
year block
Double endowment
prior to the policy
opening of
In this case, if the life assured dies during the endowment period, the basic sum assured is
the sector,
payable and if he survives to the end of the term, double of sum assured is paid. Premiums are
we throughout
payable find the endowment terms or till the death of the life insured
that the
total
Joint life endowment plan
premium
collected
Under this plan, two lives can be insured under one contract. The sum assured is payable at the
in 1997-98
end of the endowment term on survival of both the lives insured, or on the earlier death of
was
either of the two Married couples can take such policy covering the risk on both the lives,
Rs.27,
when both089are having the income of their own. Partners in business can also do the same.
crores (life
Rs.19354
ENDOWMENT POLICIES FROM LIC
crores;
Endowment
non-life Assurance Plans
The Endowment Assurance Policy
Rs.7735
The Endowment Assurance Policy-Limited Payment
crores:)
Jeevan Mitra(Double Cover Endowment Plan)
which has
Jeevan Mitra(Triple Cover Endowment Plan)
grownAnand
Jeevan to
New Janaraksha
Rs.44, 985 Plan
Jeevan
by 2000-Amrit
2001
representin
ENDOWMENT POLICIES FROM LIC
g an
increase
Children Plans of
66%. Anurag
Jeevan
Komal Jeevan
Insurance
CDA Endowment
sector has Vesting At 21
CDA Endowment
obviously Vesting At 18
Jeevan Kishore
started
Child Career Plan
growingEndowment
Marriage at Or Educational Annuity Plan
a rapid
Jeevan Chhaya
paceFuture
Child afterPlan
the sector
was
COMBINATION
opened up. OF WHOLE LIFE AND ENDOWMENT TYPE PLANS
The private
In this plan a part of S.A (sum assured) is made payable periodically during the term of the
sectorNotwithstanding the payments at periodic intervals, the S.A at risk (payable at death),
policy.
accounts
continues to be the same till the end of the term.
for policy
This nearlyhelps those who may need a lump sum amount even before the expiry of the term
of13%
the policy.
of the
first year
premium
market. 40
The
market
 share of
the private
players
has to be
seen in the
context
Money Backof(with Profits) Scheme
this are fixed term policies. The premium are paid till the end of the term or till the death of
These
the policyholder whichever earlier. The risk cover continues for the full sum assured even the
enlarged
payment
market.of installments to the policyholder. The bonus also is payable for the full term.
The money is
There back policy s useful for those who, besides desiring to provide for their own old
age and family, feel the need for lump sum benefits at periodical intervals.
also
Example for a money back policy for 20 years.
evidence
to show
that the
5 rate
years of 20% of sum assured.
10growth
years of 20% of sum assured.
15public
years 20% of sum assured.
sector
20 years 40% of sum assured + bonus
undertakin
Minimum age at entry 13 years and 14 years where return of payment is after
gs had not 4 years.
shown any
Maximum age at entry 50 years
decline sum assured Rs. 40,000
Minimum
after termthe
Policy 20 years fixed
entry of the
Maximum sumNo limit (linked with income)
private
assured
sector
Maximum maturity70 years
companies
age
. All
Policy loan of Nil
them loan
Housing are Would depend upon the requirement and entitlement
obviously worked on the basis of income, age and repayment
having a capacity.
share of a
larger
market.
Benefits
The Credit
Onformaturity Balance survival benefit + bonus for 20 years
enlarging
the market
Natural death Sum assured + bonus accrued
should
however,death
Accidental Double of sum assured + bonus accrued
go to the
private disability Treated as death and claim accordingly amounting to
Permanent
sector as incapacitating the insured.
they came
up with an
aggressive
marketing
strategy to
establish
Example for a money back policy for 25 years
their
presence.
41
The total
premium
 n by life
insurance
companies
in the
country
during
FY2004
5 was
yearsRs 18, 15% of sum assured.
1066,939.69
years 15% of sum assured.
15lakh
years ($4 15% of sum assured.
billion)
20 years 15% of sum assured
towards
25286.26
years 40% of sum assured + bonus
Minimum
lakh age at entry 13 years and 14 years where return of payment is after
policies, 4 years
recordingage
Maximum a at entry 45 years
growth in
Minimum sum assured Rs. 40,000
premium
Policy term 25 years fixed
and
Maximum
policies sumNo limit (linked with income)
assured
underwritte
Maximum
n of 10.24 maturity70 years
age
per cent
Policy
and loan
12.83 Nil
per cent,
Housing loan Would depend upon the requirement and entitlement
respectivel worked on the basis of income, age and repayment
y over the capacity.
previous
year.

Benefits.

On maturity Balance survival benefit + bonus for 20 years

Natural
Thedeath Sum assured + bonus accrued
non life
Accidental
insurandeath Double of sum assured + bonus accrued
ce
market
Permanent disability Treated as death and claim accordingly amounting to
grew by incapacitating the insured.
about
Rs
1,820
Common plans of LIC which comes under the above mentioned plans are:
Moneycrore
Back Plans
($392.8
The Money Back Policy-20 Years
millionBack Policy-25 Years
The Money
) Surabhi-15
Jeevan (13 Years
per
Jeevan Surabhi-20 Years
cent)
Jeevan to
Surabhi-25 Years
record
Bima Bachat
a
CHILDREN’S ASSURANCE PLANS
premiu
m of Rs
16,130
crore
($3.4
billion) 42
, a lot
of
 was
becaus
e of the
Rs
1,700
crore
Since last few years, LIC started offering risk cover plans like limited payment whole life and
($367
an endowment assurance plan from the age of 12 years and money back plan from the age of
million
thirteen years (completed).
) (17
These new plans have been designed for children where the risk of the child starts much earlier
per
say 7 years. Risk cover may not begin when the policy is issued. The date on which the risk
cent)
may begin is called “deferred date” and the period between the deferred date and the date of
growth
commencement of policy is called “deferred period”.
in the
As children cannot enter into contract, policies on the lives of children are taken out by the
miscell
elders. When the child becomes major and is competent to contract, the child may assume the
aneous
ownership of the policy, either by specific action of doing so or automatically by virtue of the
busines
provisions of the policy.
s such
The policy is then said to “vest” in the child. The date on which this happens is called “testing
as
date”. On the testing date, the life insured must have completed 18 years of age.
motor,
This plan enables a parent or a legal guardian or a relative of the child to provide a sum for the
health,
child by way of a very low premium. It is an endowment assurance plan with profits the risk
liability
for which commences at a selected age.
and
The policy is in two stages One covering the period from the date of the commencement of the
aviation
policy to the deferred date (the date of commencement of risk on the child’s life) and other
.
covering the period from the deferred date to the date on which policy emerges as a claim
either by death or on the maturity of the policy.
The
spectacula
r premium
driver,
ANNUITIES AND PENSION PLANS
motor grew
by Rs
a Annuity contract.:A contract providing for periodic payment during specified period is an
1,020
Annuity contract.
crore
Annuity certain – when the period specified is fixed irrespective of the duration of life
($220
Life Annuity: When the period is fixed, related to life.
million)
A pension is also an annuity.
(20 per
When annuity is provided by an employer to the employees or their dependant in consideration
cent);
of the service rendered, it is generally called pension.
health by
Rs 270
If a person buys an annuity contract he pays the insurer a specified capital sum (Purchase
crore
Price), may be in installment and lump sum and in return the insurer promises to make a series
($58.3
of payments to him as long as he survives
million)
Reasons for necessity for pension
(27 per
cent);
liability by
Rs 165
Improvement in longevity
crore
($35.6
The average longevity of an individual is improving and at the same time the capacity to earn a
million)
living is limited beyond a certain age called superannuation age. However income is necessary
(100 per
even after superannuation to pursue a normal life and at the same time provide for additional
cent);
medical expenses at an old age.
aviation by
Rs 90
crore
Break-up of joint family system
($19.4
million)
(25 per
cent).
43
 traditio
nal fire
busines
s grew
by Rs
195
Joint family system in India is breaking up very fast and in big cities it has been eliminated to a
crore
great extent. As such the individual cannot expect much from children and other relations and
($42
he has to depend on his own.
million
Employees of the state or private/public sector organizations may find that the pension
) (6.5
provided by the employer is not sufficient. To supplement that they may like to have individual
per
pension plans. Others who are not employees or whose employers do not have pension plans
cent)
may also arrange for pensions on their own.
and
engine
TYPES OF ANNUITIES
ering
grew by
The types of annuities are broadly available in the following two categories.
Rs 36
Immediate annuity
 crore
Deferred annuity.
 ($7.7
million
) (5 per
cent).

Insurance
distributio
n
channels

At present
the
distribution
channels
that are
being
utilized
are:
Direct
selling
Corporate
agents i.e.
pushing
the
insurance
product
through
the
directors or
partners of
a company
Group
selling
Worksite
marketing
Brokers UNIT LINK INSURANCE PLAN (ULIP)
and
cooperativ
e societies
44
To this
list can
 added
the
number
of
alternat
e
1. Understand the concept of ULIPs:
delivery
channel
Try to do as much homework as possible before investing in an ULIP. This way you will know
s–
what you are getting into and won’t be faced with unpleasant surprises at a later stage. Our
experience suggests that many a time people do not realize what they are getting into (in fact
Bancassu
we have been approached by several people who wanted to cancel the ULIPs they had been
rance:
coerced into taking by unscrupulous agents). Gather information on ULIPs, the various options
Bancassur
available and understand their working. Read the literature available on ULIPs on the websites
ance can
and brochures circulated by insurance companies.
be a sure
fire way to
2. Focus on your requirement and risk profile:
reach a
\
wider
Identify a plan that is best suited for you (in terms of allocation of money between equity and
customer
debt instruments). Your risk appetite should play an important role in the plan you choose. So
base,
if you have a high risk appetite, go in for a more aggressive investment option and vice-a-
provided it
versa. Opting for a plan that is lop-sided in favors of equities when you are a risk-averse
is made
individual might spell disaster for you (this is true in most cases currently).
use of
sensibly. In
3. Compare ULIPs of different insurance companies:
India there
is an
Compare products of the leading insurance companies. Enquire about the premium payments
extensive
as ULIPs work on minimum premium basis as opposed to sum assured in the case of
bank
conventional insurance policies. Check the fund’s performance over the past six months. Find
network
out how the debt and equity schemes are performing and how steady the performance has been.
establishe
Enquire about the charges you will have to pay. In ULIPs the costs involved are a big deciding
d over the
factor.
years.
Insurance
Ask about the top-up facility offered by ULIPs i.e. additional lump sum investments you can
companies
make to increase the savings portion of your policy. The companies give you the option to
will have to
increase the
take
premium amounts, thereby providing you with the opportunity to gainfully utilise surplus
advantage
funds at your disposal.
of the
Enquire about the number of times you can make free switches (i.e. change the asset allocation
customers'
of the money in your ULIP account) from one investment plan to another. Some insurance
long-
companies offer you free switches for a 2-Yr period while others do so only for 1 year.
standing
trust and
4. Go for a experience Insurance advisors
relationshi
ps with
Select an advisor who is not only professional and informed, but also independent and
banks.
unbiased. Also enquire whether he has serviced clients like you. When your agent recommends
This is a
a ULIP of X company ask him a few product-related questions to test him and also ask him
mutually
why the other products should not be considered.
beneficial
Insurance advice at all times must be unbiased and independent and your agent must be willing
situation
to inform you about the pros and cons of buying a particular plan. His job should not just begin
as banks
by filling the form and end after he deposits the cheque and gives you the receipt. He should
can
keep a track of your plan and inform you on a regular basis. The key is to go for an advisor
expand
who will offer you value-added products.
their range
of products
5. Does your ULIP offer minimum guarantee?
on offer to
customers
and earn
more,
while the 45
insurance
company
 the
exposure
at the bank
branches,
and the
security of
receiving
Intimely
market linked product if your investment’s downside can be protected, it would be a huge
advantage.
payments. Find out if the ULIP you are considering offers a minimum guarantee and what
costs
Thehave to be borne for the same. This will enable you to make an informed choice.
products
Unit
thatLinked areInsurance Plan (ULIP) is a life insurance solution that Provide the Client with the
benefit
likely of protection
to and flexibility in the investment. It is a solution which provide for life
insurance
sell where
well the policy value at any time varies according to the value of the underlying
assets at the time.
through
bancassur
The
anceinvestment
are is denoted as units and is represented by the value that it has attained called as
net
commoditi (NAV).
Asset Value
zed term
and
annuity
Unit Linked
products.
Also, those
Insurance
products Units in Underlying
Policies Funds Investment
that
combine
insurance
and
banking
into play in the 1960s and became very popular in Western Europe and America .The reason
needs help
that is attributed to the wide spread popularity of ULIP is because of the transparency and the
to create
flexibility which it offer to the clients.
demand -
As times progressed the plans were also successfully mapped along with life insurance need to
such as
retirement planning.
loan cover,
term
In today’s times ULIP provides solution for all needs of clients like insurance planning,
assurance
financial needs, financial planning for children’s future and retirement planning.
and simple
products
that can be
ULIP provides multiple benefits to the consumer. The benefits include:
sold over-
the-
 Life protection
counter at
 Investment and Savings
banks.
 Flexibility
Another
 Adjustable Life Cover
advantage
is  Investment
that Options
 Transparency
banks, with
their
 Options to take additional cover against
network
 Death indue to accident
rural
 Disability
areas, help Illness
 Critical
to  Surgeries
fulfill
rural and
 Liquidity
social
 Tax planning
obligations
stipulated
by the
Insurance
Regulatory 46
and
Developm
 Authority
(IRDA).

T h e Va r i o u s K i n d O f E x p e n s e s A r e D e t a i l e d B e l o w :

1 Selling
. Contributed Related Charges
2 through
. Administrative Charges
3 employee
. Funds Management Fee
4 s. M o r t aor
lity Charges
5 authorize
. Rider Charges
6 . Sofficials
d urrender Charges
7 . B i d O faf e r C h a r g e s
of
8 corporate:
. Transact ion Specif ic charg es
Selling
through
Cemployees
ontributed Related Charges:
can also
be
These are the a charges that are represented as the percentage of the regular or single
lucrative paid. In case of a regular contribution plan, it is usually high in the first year to
contribution
prospect.
pay for the distribution cost. This charge pays for the issuance and for distribution commission.
Butisthe
This full to cover the running expenses of the policy. For single contribution plan this is
a charge
levied once of
potential at the start of the policy. For regular Contribution plan s this will be charged on a
this uniform basis depending upon the frequency of payment.
regular
channel
has not yet
Normally these charges are shown as percentage of the contribution. Allocation is another
been
terminology used by the company in actually representing costs.
utilized Allocations are mathematically reverse of the charges. Thus mathematically;
since
Allocation=1-Charges. Thus for example if the product has a 70% allocation in the first year, it
selling is
means 1-.7=.3 or 30% charge.
now
permitted
only
Administrative Charges:
through
directors or
These are charges that are levied for the administration of the policy and the related cost of
partners of
administration of the insurance company, itself. These costs are different from the issuance and
the
the distribution related cost of the product. They are more related to the cost like the IT,
company.
operation, etc cost of continuing the policy.
Worksite
marketing
There are a few prominent ways in which these cost are levied:
is
inexpensiv
They can be levied as the percentage of the value of the investment (funds) in the account of
e and
the policyholder. These kinds of charges get adjusted in the Unit Value (NAV), as the NAV is
provides
declared
the after adjusting these costs.
They can be levied as a flat charge with an option of increasing it by a certain percentage over
opportunity
the
to year.
market
products to
large
Fgroups
u n d s mof anagement Fee:
people
simultaneo
usly.

Call
centres: 47
Call
centres
 utilized for
generating
leads. As
the market
keeps
expanding,
All
callunit linked plans have underlying funds, which the policyholder chooses for their
investments.
centres These funds constitute of various financial instrument such as equity, bonds,
money
have the instrument.
market
potential of
The funds management fee is levied to pay for the charges of managing the investment, which
becoming
basically
an involve the cost of buying and selling the various financial instrument for the various
funds
important
medium for
These charges are expressed as the percentage of the Asset under Management of the insurance
customer
company.
relationshi Interesting thing to know here is the factor on which the charges depend. The main
factor
p being the fund composition.
manageme
For
nt example,
(CRM) the cost of managing a bond is lesser than the cost of managing equity. Thus
normally,
and the
upfund option which has a higher percentage of equity would have higher charges
comparatively
selling to to other funds.
the
customers.
Mortality Charges:
Cooperativ
This covers the cost of providing life protection for the insured and may be paid once at the
e societies
start
andof the policy or a recurrent manner (for example). This charge is levied to provide the
insurance
Brokers:cover under the plan. Normally these charges are 1-year charge and keep changing as
per the age of the policyholder.
Cooperativ
e societies These are normally expressed as per thousand of the sum assured and depend on the
age
and of the policyholder. So, for example one would have the mortality charges as Rs1.50 per
thousand
brokersof SA for a 30 year-old and Rs 1.55 for the age of 35 year. This means that the cost of
insurance
offer of Rs 1,000 at the age of 30 is 1.50, where the same insurance cover costs Rs 1.55 at
the age of 35years.
immense
support to
insurance
companies
Rtoi d e rwiden
Charges:
their reach.
Rider
Privatecharges are similar in nature to the mortality charges as they levied to pay for the other
protection
companies benefit that the
policyholder
that arehas chosen for-like the critical illness benefit or the accident benefit,etc.
already
appointing
S corporate
urrender Charges:
agents,
When
and thenon- policyholder decides to surrender the policy or partially withdraw some of the units
for cash, a surrender charge may be apply. Usually the surrender charges only apply in the first
banking
few years after the units are invested and are usually on a decreasing scale. Surrender charges
financial
are used to cover initial expenses that have been incurred by the company but not yet recovered
corporation
from the policyholder yet.
s (NBFCs)
These
with charges a can either be expressed as a percentage of the value of the investments or as a
fixed
sound flat charge, depending on the structure of the product.
retail
network
are in
demand.

Marketing 48
through
mailers
 marketing
through
mailers,
pamphlets
etc. require
customise
So,
d thesimple
policyholder may have charge of 2% of the unit value as the surrender charge or Rs
1,000 as the surrender penalty. Surrender charges usually apply to policies with high allocation,
products
especially
that can in bethe first few years.
purchased
through
such
Bmediums,
id Offer charges:
or through
IntheULIP especially certain insurer might create a difference in the price at which they sell the
unit and the price at which they buy the units.
Internet.
Though Investor’s contribution are used to buy units in the investment fund at the offer
price
the and are sold when benefit are required at the bid price. The difference between the offer
and the bid prices is known as the “bid-offer spread”, this is used to cover expenses when
unavailabili
setting
ty of up the policy. Bid-offer spread is expressed as a percentage of the NAV’s and hence
good
also become a percentage of the value of units.
databases
in India, So for example a company has a bid-offer spread of 5%and has a offer
price
and of Rsthe 10 per unit. This means that the bid price would be 5% less and hence 95% of the
offer
high pricei.e95%*10=Rs 9.50. Hence, a policyholder having 100 units in his investment would
get R s 9.5*100= Rs 950 as his value and if he t o b u t another 100 units he will have to pay
expenses
Rsto10*100=Rs
reach 1,000. This Rs 50 difference is the bid -offer spread. Any fund which has a bid-
offer
the spread
targetwould have 2NAV’s-buying and selling, where as a fund which does not have bid-
offer
audience a 1NAV fund-same for buying and selling.
spread is
through
Tr ansactional Specific charges:
direct
mailers is
These
a causecharges
for are levied when the client does some specifics transaction like changing funds,
topping
concern, up the
it investment component or withdrawals.
is definitely
a problem
that can be
solved
through
better
manageme
nt of
resources,
data
collection
etc.
To sum up,
it is
apparent
that
multiple
distribution
channels
will help an
insurance
company
to offer a
range of
contact
points to 49
the
customer,
 increasing
the
chances of
success.
However,
along with
these
distribution
channels
comes the
challenge
of GENERAL INSURANCE
'relationshi
What
p is General Insurance?
manageme
Insurance
nt'. Since other than ‘Life Insurance’ falls under the category of General Insurance. General
Insurance
most of comprises
the of insurance of property against fire, burglary etc, personal insurance such
asnew
Accident and Health Insurance, and liability insurance which covers legal liabilities. There
are also other covers such as Errors and Omissions insurance for professionals, credit insurance
channels
etc.
involve
collaborati
Non-life
on insurance
with 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
various
against
entitiesburglary, theft etc. The non-life companies also offer policies covering machinery
against
whosebreakdown,there are policies that cover the hull of ships and so on. A Marine Cargo
policy
demands covers goods in transit including by sea, air and road. Further, insurance of motor
vehicles
and against damages and theft forms a major chunk of non-life insurance business.
powers of
Innegotiation
respect of insurance of property, it is important that the cover is taken for the actual value of
the
areproperty
varied,to avoid being imposed a penalty should there be a claim. Where a property is
undervalued
it requiresfor the purposes of insurance, the insured will have to bear a rateable proportion
ofdelicate
the loss. For instance if the value of a property is Rs.100 and it is insured for Rs.50/-, in the
event
skillsof a onloss to the extent of say Rs.50/-, the maximum claim amount payable would be
Rs.25/-
the part of of the loss being borne by the insured for underinsuring the property by 50% ).
( 50%
This
the concept is quite often not understood by most insureds.
insurance
Personal
company insurance covers include policies for Accident, Health etc. Products offering Personal
Accident
to manage cover are benefit policies. Health insurance covers offered by non-life insurers are
mainly
these hospitalization covers either on reimbursement or cashless basis. The cashless service
isrelationshi
offered through Third Party Administrators who have arrangements with various service
providers,
ps. i.e., hospitals. The Third Party Administrators also provide service for
reimbursement
Effective claims. Sometimes the insurers themselves process reimbursement claims.
manageme
Accident
nt andofhealth insurance policies are available for individuals as well as groups. A group
could be
channel a group of employees of an organization or holders of credit cards or deposit holders
inconflict,
a bank etc. Normally when a group is covered, insurers offer group discounts.
and
Liability
curtailinginsurance covers such as Motor Third Party Liability Insurance, Workmen’s
Compensation
the costs Policy etc offer cover against legal liabilities that may arise under the respective
statutes—
of Motor Vehicles Act, The Workmen’s Compensation Act etc. Some of the covers
such
distribution foregoing (Motor Third Party and Workmen’s Compensation policy ) are
as the
compulsory
will be of by statute. Liability Insurance not compulsory by statute is also gaining popularity
these days.
utmost Many industries insure against Public liability. There are liability covers available
for Products
importance as well.
rance
Company

50
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. A Health Insurance policy can provide financial relief to a person
undergoing medical treatment whether due to a disease or an injury.

Industries also need to protect themselves by obtaining insurance covers to protect their
building, machinery, stocks etc. They need to cover their liabilities as well. Financiers insist on
insurance. So, most industries or businesses that are financed by banks and other institutions do
obtain covers. But are they obtaining the right covers? And are they insuring adequately are
questions that need to be given some thought. Also organizations or industries that are self-
financed should ensure that they are protected by insurance.

Most general insurance covers are annual contracts. However, there are few products that are
long-term.

It is important for proposers to read and understand the terms and conditions of a policy before
they enter into an insurance contract. The proposal form needs to be filled in completely and
correctly by a proposer to ensure that the cover is adequate and the right one.

General Insurance, India

Major insurance policies that are covered under General Insurance are:

1-HomeInsurance
2-HealthInsurance
3-MotorInsurance
4-Travel Insurance

51
 Home Insurance, India
Every man has a dream to own a house one day. For an ordinary person it takes a whole
lifetime of savings to build a house. And one cannot predict a natural calamity like earthquake.
In recent times we have seen what havoc an earthquake or any other natural calamity such as
floods, landslides and torrential rains can wreck. Hence home insurance is very important.

Home insurance policy also protects against other hazards like gas cylinder explosion, fire due
to electric short circuit as well as man-made disaster like burglary.

Home insurance policy available in the market covers broadly two things:
Building structure
Contents inside the home
Insurance Covers for a Building Structure are:

1. The Fire and Special Perils Cover

This is a comprehensive packaged cover that covers damages to the structure of home due to
 Fire
 Storm, tempest, flood & inundation
 Riot, strike & malicious damage
 Lightning
 Explosion & implosion
 Aircraft damage
 Damage due to impact by vehicles
 Subsidence, landslides and rockslides
 Bursting and/or overflowing of water tanks, apparatus and pipes
 Missile testing operation
 Leakage from automatic Sprinkler installations
 Bush fire

2.Earthquake Cover: Covers damages to the structure of your house due to earthquake

3. Terrorism Cover: Covers damages to the structure of your house due to acts of
terrorism

A home insurance does not cover the market value of the home. The price of the home
includes the cost of the land and the cost of constructing the building structure on this land
and the land cannot be insured. The insurance cover is only for the cost of constructing the
building. The sum insured is calculated by multiplying your home area by the construction
rate per sq. feet.

Insurance Cover for Contents Inside the Home

52
 This cover is only for damages or loss of the contents inside the home -electronic and
electrical goods, furniture and fixtures, clothing, jewelry and any other contents inside the
home.

The covers that can be taken for the contents are as follows:

 The Fire and Specials Perils Cover

 Earthquake Cover
 Burglary
 Loss / damage to contents due to burglary or an attempted burglary
 Loss of jewelry, gold ornaments, silver articles and precious stones kept under lock &
key
All the contents are covered on the market value of the items. This means that if there is a loss,
the claim would be paid on the value of purchasing a similar new item, minus depreciation

Health Insurance, India

It is said that a healthy mind resides in a healthy body. Hence it is very important to stay
healthy. These days life is very fast and stressful. No matter how much you care one can
always fall ill.

Health treatment nowadays is very costly. More than the disease it is the cost of treatment that
takes its toll. To get rid of health worries health / medical insurance is the answer. Health
insurance policy not only covers expenses incurred during hospitalization but also during the
pre as well as post hospitalization stages like money spent for conducting medical tests and
buying medicines. The cover will be to the extent of the sum insured.

An added attraction of Mediclaim policies is the tax benefits which they attract under Section
80D. The maximum amount of deduction available under this section is Rs 10,000. In case of
senior citizens, the maximum limit is Rs 15,000.

Individuals also have the option of covering themselves for medical expenses by opting for the
'Critical Illness (CI)' rider available with life insurance policies. Life insurance companies have
their own list of critical illnesses as defined by them. In case of a CI rider, on the occurrence of
a 'critical illness' during the policy tenure, an amount as proposed in the policy will be paid out
to the individual. This is irrespective of the expenses incurred by the individual on
hospitalization, medicines and other such costs.

Health insurance companies are offering innovative products to their customers these days.
The latest product in this line is 'cashless hospitalization'. Here individuals do not have to pay
for their hospital bills in case of hospitalization; the insurance company settles the bill directly.

53
But certain conditions like the hospital needs to have a tie-up with the insurance company, the
documents need to be in order etc. Have to be met.

Motor Insurance, India

Legally, no motor vehicle is allowed to be driven on the road without valid insurance. Hence, it
is obligatory to get the vehicle insured.
Motor insurance policies cover against any loss or damage caused to the vehicle or its
accessories due to the following natural and man made calamities.
Natural Calamities: Fire, explosion, self-ignition or lightning, earthquake, flood,
typhoon, hurricane, storm, tempest, inundation, cyclone, hailstorm, frost, landslide, rockslide.

Man made Calamities: Burglary, theft, riot, strike, malicious act, and accident by external
means, terrorist activity, and any damage in transit by road, rail, inland waterway, lift, elevator
or air.

Motor insurance provides compulsory personal accident cover for individual owners of the
vehicle while driving. One can also opt for a personal accident cover for passengers and third
party legal liability.

Third party legal liability protects against legal liability arising due to accidental
damages. It includes any permanent injury / death of a person and damage caused to the
property.

Travel Insurance, India

Travel and tourism is one of the most fast growing sectors around the world. With rise in
standards of living, more and more people are embarking on journeys and exploring new
places. Before going on a trip you need to address all your travel worries.

Travel insurance policy takes care of all your travel worries. It secures you and
your loved ones in their sojourn abroad. Travel insurance plans offer host of benefits such as
medical expenses, loss or delay of baggage or passport, personal accident, financial emergency
assistance and hijack distress allowance.

Travel insurance plans cover expenses incurred due to delayed flight, cancellation of
trip, and also take care of valued assets left at home

54
 GENERAL INSURANCE: QUESTIONS AND ANSWERS

1. Can I take two policies and get claims under both of them?

In case of an indemnity cover (one that seeks to compensate the actual loss)--for instance, a
policy that covers property, if there are two policies in vogue, the loss shall be shared by both
the policies. In no case can an insured get more than the actual pecuniary loss he or she has
incurred. On the other hand, in respect of benefit policies like the Personal Accident policy,
where a fixed compensation is paid, no matter what the actual loss is, one may obtain more
than one policy.

2. On what basis is claim paid?

In indemnity policies, the upper limit of a claim is the sum assured and this usually applies for
the period of the policy. Certain policies, however, allow for reinstatement of the Sum Insured
by payment of proportionate premium for the remaining period of the policy. The actual claim
will be the actual extent of financial loss as validated by documents like bills. If the property is
underinsured, the insured shall bear a rate able proportion of the loss. There can be more than
one claim in the policy period but the sum assured is usually the limit for the policy period
unless reinstated.
Nowadays health insurance policies – which cover hospitalization costs – have
also a cashless settlement of claims. That is, you don’t have to pay for the treatment at the
hospital and then make a claim for reimbursement of the expenses. The insurance company has
a service provider called the third party administrator (TPA) health services, who liaises with
the hospitals and directly makes the payment for your treatment as per the terms of your policy
and coverage.

3. What is the periodicity of premium payments?

Most general insurance policies are annual and the premium payment is in advance. No risk
commences unless you have paid the premium. In some long term policies companies have the
facility of collecting premiums periodically.

4. Why do different people have different premiums?

The premium is calculated on the extent and nature of the cover you want. A higher sum
insured means a higher rate of premium. Similarly a higher risk will be charged a higher
premium. An example of this is that an older person will have to pay a higher premium for
health insurance for the same sum insured. Sometimes the risk is higher depending on the
location of risks – for example in motor insurance in areas where accidents are higher. So the
premium will vary according to the nature and severity of the risk.

55
5. If I buy a policy and don’t make a claim, it is a loss. So, why should I buy insurance?

General insurance is not meant to be for savings or investment returns. It is meant for
protection. What you pay for is the protection against a risk. To approach it as something from
which returns should be obtained is not the correct approach as there is a price to pay for
protecting a property worth lakhs for a few hundred rupees.

6. If there are problems with claims what can I do?

First you should write to the company and give them sufficient time to respond suitably. If they
don’t respond, or it is not a response satisfactory to you, then you can approach the appropriate
judicial channel. For complaints relating to personal insurance covers upto a value of Rs.20
lakh, you may approach the Insurance Ombudsman in your area.

MUTUAL FUND

HISTORY OF MUTUAL FUND:-

The mutual fund industry started in 1963 with the formation of UTI(unit trust of India ) at the
initiative of the RBI and government of india. The history of mutual funds in India can be
divided into four distinct phases:-

PHASE 1: - 1964-1987 (UTI Era)

 1963- UTI Was established by an act of parliament.

 The first and still one of the largest scheme launched by the UTI was unit scheme 1964
(US-64)
 US-64 is open-ended scheme.
 Unit linked insurance plan (ULIP)was launched in 1971.
 Six new scheme were introduce between 1981-1984.
 1994-87 children gift fund
 91986)and master share(1987).the first diversified equty scheme was launched .
 India fund (first Indian offshore fund) was launched in 1986.

PHASE 2: - 1987-1993 (entry of public sector funds)

 1987 marked the entry of non-UTI public sector mutual funds.

 First non-UTI mutual fund was SBI mutual fund in November 1987.
 Then the following comes canbank mutual fund (9dec.),LIC mutual fund(1989),Indian
bank mutual fund (1990), and bank of India mutual fund, and GIC mutual fund, PNB
mutual fund.
 In this phase, the mutual fund industry expanded nearly 7times in term of asset under
management.
 Investor started shifted shifting away from bank deposits to mutual fund
 Market share of UTI was 80% and public sector fund was20%

56
PHASE 3: - 1993-1996

 In 1993, private players were granted permission to enter the mutual fund market.
 They introduced largest product innovation, investment management technique, and
investor servicing technology.
 During 1993-94, five private sector mutual funds launched their schemes, followed by
6 other private sector mutual funds in the year 1994-95.

PHASE 4: - 1996,(SEBI regulation for mutual funds)

 Comprehensive set of regulation for all mutual funds in India was introduced with
SEBI Mutual fund regulation Act 1996.
 1999- union government budget exempted all mutual fund dividends from income tax.
 1999- beginning of anew phase in the history of mutual fund industry in India in term
of both amount mobilized from investor and asset under management.
 From 1999-2000, there has been a growth of 60%in asset under management

Concept of mutual fund

A mutual fund is a common pool of money into which investor place their contribution to
be invested in accordance with a stated objective. A mutual fund uses the investor money
to buy those assets that are specifically permitted by its stated investment objective. E.g.: -
an equity fund would buy mainly equity assets, ordinary shares, preference shares, warrants
etc. the mutual fund investor are like the shareholder and they own the fund. Net asset
value (NAV) is the value of the total assets of the fund divided by total outstanding units.
The NAV fluctuates with the market price movement. Mutual fund investor is not the
lender or deposit holder in a mutual fund.

Advantages of Mutual Funds

1. Portfolio Diversification: - Enables the investor to hold a diversified investment

portfolio even with a small amount of investment that would otherwise require big
capital.
2. Professional Management:- An investor is benefited from the professional
management skill brought in by the fund in the management of the investor portfolio,
which along with the needed research into available investment option; ensure a much
better return than what an investor can manage on his own.
3. Reduction / Diversification of Risks: - An investor in a mutual fund acquire a
diversified portfolio, no matter how small his investment, which reduces the risk of
loss.
4. Reduction of Transaction Cost: - When going through a fund, an investor has the
benefit of economies of scale; the fund pays lesser costs because of large volume.

57
 5. Liquidity:- An investor can liquidate the investment by selling the units to the fund if
open-end, or selling them in the market, if the fund is close-ended and collect funds at
the end of a period specified by the mutual fund or the stock market.

6. Convenience and Flexibility:- Mutual fund companies offer many investor services
that a direct market investor can’t get. Investor can easily transfer their holding from
one scheme to another; get updated market information and so on.
Disadvantages of Mutual Funds

1. No Control over Cost: - An investor pays investment management fees as long as he

remains with the fund in return for the professional management and research, he also
pays fund distribution costs, which he would not, incurs in direct investing.

2. No Tailor made Portfolio: - Investors who invest on their own can build own portfolio
of shares, bonds and other securities, investing through fund means he delegates their
decision to the fund manager, which is a constraint for very high net worth individuals
or large corporate.

3. Managing a Portfolio of Funds: - Availability of large number of funds can actually

mean too many advices for investor, he may again need advice on how to select a fund
to achieve his objective.

Types of Mutual Funds

Open-Ended Funds: - An open-ended fund is one that has units available for sale and
repurchase at all times. The ‘unit capital’ of an open-ended mutual fund is not fixed but
variable. Its main advantage is liquidity for the investors. They don’t have to be listed on stock
exchange.

Close –Ended Funds: - Can’t sell share units after its initial offering, its growth in terms of
the number of shares is limited. Shares are issued like the new issue of any other company,
listed and quoted on a stock exchange. Shares of this fund are not redeemable. Objective of
close-ended fund may differ from open-ended. Close-ended funds are channelized into
secondary market for the acquisition of corporate sector.

Load and NO Load

58
 Charges made by the fund manager to the investor to cover the distribution/sales/marketing
expensed are called as “load”
 Load charged to the investor at the time of his entry into a scheme is called a Front-
end or Entry Load.

 Load amount charged to the scheme over a period is called a “Deferred load”

 Load that the investor pays at the time of his exit is called a” Back end or Exit load”
Funds charging Front-end, Back-end or Deferred load are called Load Fund. Funds that make
no such charges or load for sale expenses are called No-load fund.
Some fund charges only entry load, and some charges only exit load they are called Partial
Load Funds.

No Load: - it means a fund that does not charge sales expenses. All funds still charges the
scheme for management fees and other recurring expense.

Tax – exempt Vs Non-Tax Exempt

When a fund invests in tax-exempt securities, it is called a tax-exempt. In India after 1999,
Union government budget, all the dividend income received form any of the mutual fund is tax
free in the hands of the investor. Funds other than equity funds have to pay a distribution tax,
before distributing income to investors. Equity mutual fund schemes are tax-exempt
investment avenue while other funds are taxable for distribution income.
Indian mutual funds currently offer tax-free income, any capital gain arising out of the
sale of fund unit are taxable. All these tax consideration are important in the decision on where
to invest as the tax exemption or concession alter the return obtained from these investments.

Specific Types of Mutual Funds

Funds are generally distinguished from each other by their investment objectives and type of
Securities they invest in.

1. Board Fund Types by Nature of Investment: - Mutual funds may invest in equities,
bonds or other fixed income securities, or short-term money market securities. Thus,
we have Equity, Bond and Money market funds, which invest in financial assets.
However , there are funds that invest in physical assets, e.g. Premium Metal Fund or
Real Estate Funds.

2. Board Fund Type by Investment Objective:- Growth funds invest for medium to
long-term capital appreciation. Income funds invest to generate regular income and less
for capital appreciation. Value fund invest inequities that are considered under-value
today and whose value will be unlooked in the future.

59
 3. Board Fund Type by Risk Profile:- Nature of fund portfolio and its investment
objective imply different levels of risk undertaken. So funds are grouped in order of
risk. So equity funds have greater risk of capital loss then a debt fund that seeks to
protect the capital while looking for income. Money market funds are exposed to less
risk that even the bond funds, since they invest in short-term fixed income securities as
compared to longer-term portfolio of bond funds.\

Money Market Funds

It is the lowest rung in the order of risk level: they invest in securities of a short-term nature,
which include T-Bills, Certificate of Deposits, Commercial papers etc. in India these funds also
invest in inter-bank call money market. Major strength of money market fund is the liquidity
and safety of principal.

(A) Gilt Funds:- Gifts are government securities with medium to long-term
maturities, typically of over one year, they invest in government paper called Dated
securities.

(B) Debt Funds(Income Funds):- Debt funds is next in the order of risk. These
funds invest in debt instrument issued not only by government but also by private
companies, bankers and financial institutions and other entities such as
infrastructure companies. They are considered to be income funds as they don’t
target capital appreciation look for high current income, and so distribution to
investor.

 Diversified Debt fund

 Focused Debt Funds.

 High yield Funds.

 Assured return Fund.

 Fixed term plan series.

 Diversified Debt Fund:- These funds invest in all available type of debt
securities, issued by entities across all industries and sector. They offer high
income and less risk than equity funds. These funds have the benefit of risk

60
 reduction through diversified and sharing of any default related losses by a
large number of investor.

 Focused Debt Funds:- These funds have a narrower focus, e.g. sect oral,
specialized and offshore debt funds. They are different from those in the
equity category as they have a substantial part of their portfolio invested in
debt instruments. So more income oriented and inherently less risky than
equity funds. All these funds have greater risky than diversified fund.

 High Yield Debt Funds:- These funds seek to obtain higher interest return
by investing in debt instruments that are considered “Below investment
grade”. These funds tend to be more volatile than other debt funds, although
they may earn higher return because of the higher risk taken.

 Assured return funds(an Indian variant):- Assured return or guaranteed

monthly income plans are essentially Debt/Income funds. They reduce the
risk level considerably as compared to all other debt or equity funds but
only to the extent that the guaranteed has the required financial strength.

 Fixed Term plan Series:- This series is a combination of open and close
ended funds, as a series of plans are offered and units are issued at frequent
intervals for short plan durations.

EQUITY FUNDS

As investors more from debt funds category to equity funds, they face increased risk level.
Equity funds invest a major portion of the corpus in equity shares issued by companies
acquired directly in IPO or through the secondary market. These funds would be exposed to the
equity price fluctuation, risk at the market level, at the industry or sector level and at the
company specific level. Their NAV fluctuates with all these price movement. These price
movements are caused by all kinds of external factors, political or social as well as economical.
These funds offer the greatest potentials for growth in capital
A. Aggressive growth funds:-These funds target maximum capital appreciation,
invest in less researched or speculative shares and may adopt speculative
investment strategies to attend there objective of high return for the investor.
Consequently, they tend to be more volatile and riskier than other funds

61
 .
B. Growth Funds:- These funds invest in companies whose earning is expected to
rise at an above average rate. These companies may be operating in sectors as if
technology considered having a growth potential, but not entirely unproven and
speculative. Their primary objective is capital appreciation over 3-5 years of span.
So they are less volatile than funds that target aggressive growth
.
C. Specially Funds:- They have a narrow portfolio orientation and invest in only
companies that meet pre defined criteria. Most specialty funds tend to be
concentrated funds.

 Sector Funds :- Consists of the investment only in industry or sector of

the market. Such as IT, Pharmaceutical or FMCG. They carry a higher
level of sector and company specific risk than diversified equity funds.

 Offshore Funds:- Invest in equity in one or more foreign countries

thereby achieving diversification across the country borders. Therefore,
they also have additional risk such as foreign exchange rate risk or many
countries.

 Small Cap Equity Funds:- Invest in shares of companies with relatively

lower market capital then that of big blue chip companies. They may then
be more volatile, than other funds as smaller companies share aren’t very
liquid in the market. In terms of investment style some of these funds may
also be “value investment”.

Diversified Equity Funds:- These funds seek to invest only in equity except from very small
portion in liquid money market. Securities but are not focused on any one or few sector or
shares. These have mainly market risks exposure

 Equity linked Saving Scheme(ELSS):- In India , the investor have been giving
tax concession to encourage them to invest inequity market through these
special schemes. Investment in these schemes entitle the investor to clam an
income tax rebate, but usually have a lock-in-period before the end of which
fund can’t be withdrawn.

 Equity Index Fund:- Tracks the performances of a specific market index. The
objective is to match the performance of the stock market by tracking an index

62
 that represents the overall market. This fund takes only the overall market risks
which reducing the sector and stock specific risk through diversification.

 Value Funds:- Try to seek out fundamentally sound companies whose shares
are currently undervalued in the market. Value funds will add only those shares
to their portfolio that are selling at a low price earnings ratio, low market to
book value ratio and are undervalued by other yardsticks. They have an equity
market price fluctuation risk but stand often at a lower end of the risk spectrum.
These funds are diversified. These stocks often come from cyclical industries
e.g. .Templeton fund, which has in its portfolio, shares of cement, aluminum,
and other cyclic industries.

 Equity Income Fund:- Are in the debt funds category, as they target fixed
income investments. But they can be designed to give the investor a high level
of current income along with some steady capital appreciation, investing mainly
in shares of companies with high dividend yield.
Hybrid Funds-Quasi Equity/Quasi Debt:-

They are the funds that seek to hold relatively balanced holding of and equity securities in their
portfolio.

 Balance Funds: - Has a portfolio comprising debt instruments,

convertible bonds/securities, and equity shares. By investing in a mix of
this nature these funds seeks to attain the objective of income, moderate
capital appreciation, and preservation of capital and are idea for
investors with a conservative and long term orientation.

 Growth and Income Funds:- Seeks to strike a balance between capital

appreciation and income for the investor. Their portfolios are a mix
between companies with good dividend paying record and those with
potential of capital appreciation.

 Asset Allocation Fund:- Follows variable asset allocation policies and

more in an out of an asset class depending upon their outlook specific
market. Their objective is similar to balanced fund and real estate
securities in addition to debt instruments, convertible securities, and
preference and equity shares.

63
Commodity Funds:- Specialize in investing in different commodities directly or through
shares of commodity companies or through commodity future control. A very common
example is the so-called “Precious Metal Funds” such as platinum or silver etc. In India these
funds have not yet developed.

Real Estate Funds:- Invest in real estate directly or may real estate developments or lend to
them or buy shares of housing finance companies or may even buy their securities assets.

Tax Aspects: -

1. What is the tax status of a mutual fund?

A mutual fund is exempt from paying taxes on its income, by virtue of exemption
granted under the Income Tax Act. The income earned by the fund is on its
investments, and these incomes are passed on to the investors. Therefore the mutual
fund is merely a “pass-through “entity, which does not generate any income on its own.
It is therefore exempt from paying taxes on its income – dividends, interest and capital
gains – both long term and short term.

2. What is the nature of income earned by an investor in a mutual fund?

An investor can earn his income from mutual fund investments, in two different forms:
Dividends and capital gains.
Dividends again are or two types – regular periodic dividend, as
indicated in the scheme (daily, monthly, quarterly and the like) or ad-hoc dividend (can
be announced any time) as approved by the trustees. Capital gain (or loss) accrues to
the investor, when the investor makes the decision to redeem the units. If he redeems
the units at a price that is higher than his cost of purchase, there is a capital gain.

3. What are the tax implications of the options chosen by the investor?

An investor can choose the form in which he likes to earn his income form the mutual
fund. If an investor chooses the growth option, he does not earn a dividend income. To
realize his returns, he has to redeem the units, such redemption is subject to the
applicable capital gains tax. If he chooses a dividend option, he earns dividend income
that is subject to tax as such. If he chooses a dividend re-investment option, he is
deemed to have received the dividend and subsequently re-invest the same, therefore
the same tax provisions that apply to dividends will apply in this case.

64
 4. What is short term and long term capital gains from mutual fund investments and
how are they taxed?

If an investor redeems his investments in a mutual fund after a period of 12 months

from the date of buying the units, he is said to have held the units for the long term. The
capital gains are taxed as long-term capital gains (LTCG). Any redemption of units
before a period of 12 months is over is treated short term capital gains (STCG). The
rates of taxation for the two are different. Long term capital gains are also subject to
indexation. This means, an investor can claim that since he held the investment for
more than a year, due to inflation, the value of his investments has gone up. The CBDT
therefore publishes a Cost of Inflation index, and allows the investor to adjust his cost
to the inflation index, before computing the capital gains. This process is called
indexation (Indexed cost = cost of acquisition X Index in the year of sale/Index in the
year of purchase). The tax rates are different depending on whether the capital gains are
indexed or not.

Section 2: Tax Provision as amended by Finance Act (No. 2) 200

1. What is the tax status of mutual fund dividends?

Dividends from mutual funds are exempt from tax. However, in the case of all other
funds, except equity and equity oriented funds, the mutual funds will have to deduct a
dividend distribution tax at 12.5% + applicable surcharge (2.5%) and cess (2%), before
paying out the dividend to the investor.

An equity-oriented fund is one that invests al least 50% of its assets in equity shares of
domestic companies. The monthly opening and closing holdings in equity should be
computed, and the annual average of this number should be at least 50%, for the fund to
be classified as an equity-oriented fund, and be exempt from the provision of the
dividend distribution tax.
The exemption for equity-oriented funds had expired on March 31, 2004. The Finance
Act (No 2) 2004 has extended this benefit unconditionally for equity oriented funds. It
has also made a distinction between individuals and HUFs and others. The dividend
distribution tax applicable to all assesses, other than individuals and HUFs, has been
increased to 20% (plus surcharge and cess).

2. What is the tax status of capital gains?

Long term capital gains from equity-oriented funds, is fully exempt from tax. Long
term capital gains from all other funds, is subject to taxation. The applicable rates are

65
 10% (without indexation) or 20% (with indexation). Surcharge and cess apply. NRIs
are not eligible for indexation benefits, since they can avail currency value adjustment
for computing capital gains.
Short term capital gains from equity-oriented funds, is taxable at 10% (plus SC and
cess).
In the cases of all other funds, the short-term capital gains will be taxed as normal
income, at the marginal rates of taxation applicable to the investor. Income tax rates
apply in slabs, specified for each level of income. The marginal rate is the highest rate
an assesses pays, given his level of taxable income.

3. What is the securities transaction tax (STT) applicable to the mutual fund
investor?

A 0.15% STT to be paid by the seller, on all transactions in equity oriented funds,
where the units are sold to a mutual fund. This means, no STT applies on purchase of
units from the fund. Only on redemption, in an equity-oriented fund, the investor is
required to pay 0.15% of the transaction value as STT. In the case of all other funds,
that are not equity-oriented, there is no STT for the investor’s transactions with the
mutual fund.

4. When do the new rates of capital gains tax become applicable?

The capital gains tax and the securities transaction tax, go together. The new capital
gains tax rates will become applicable form the date the CBDT notifies the STT.

5. Can the STT be reduced from value of units before computing capital gains?
Section 48 has been amended to provide that no deduction shall be allowed in respect
of STT paid, for the purpose of computing capital gains.

66
 SECTION- II

Company profile

67
 THE STRENGTH OF A TREE IS IN DIRECT
PROPORTION TO THE STRENGTH OF ITS ROOTS"

Mr. Subhash Chand Aggarwal Mr. Mahesh Chand Gupta

Mr. Subhash Chand Aggarwal and Mr. Mahesh Chand Gupta are the visionaries who planted
the sapling of the “Kalpavriksha” called SMC. To shape their vision into a reality they watered
the sapling with their principles of transparency, honesty & integrity and nourished it with their
rock solid commitment for excellence.
Professionally both are chartered accountants, with a rich experience of more than 20 years in
the capital market. Their exceptional leadership skills, outstanding commitment and disciplined
style of working have fostered SMC into a financial hub, justifying the words that “the future
belongs to those who believe in the beauty of their dreams”.

CORE VALUES

68
 VISION

To be a global major in providing complete investment solutions, with relentless focus on

investor care, through superior efficiency and complete transparency.

PRODUCTS & SERVICES

69
 Equity , Derivatives and Commodities Trading.
 Commodities Trading in International Markets through DGCX
 Online Internet Trading.
 Online Commodity Trading.
 Online IPO and Mutual Fund.
 Depository Services for both Shares and Commodities (ISO 9001:2000).
 IPO and Mutual Fund Distribution.
 Clearing Services in NSE F&O, BSE F&O and DGCX.
 Dedicated NRI & Institutional Desk.
 Investment Banking Services.
 Insurance Broking Services for Life and Non-Life products.
 Wealth Advisory Services
 Research support to the clients through Intraday SMS and E-mails.
 Investment and Arbitrage Advisory Services for HNIs and Corporates.
 Weekly Magazine WISE MONEY on Equity, Derivatives, Commodities, IPOs and
Mutual Funds.
 Investor Education Programs through Regular Seminars & Conferences.
 Web based Accounting.

MEMBERSHIPS & REGISTRATIONS

 Member of NSE, BSE, F&O, NCDEX, MCX & DGCX

 Clearing Member in NSE F&O, BSE F&O and DGCX
 Depository Participant for both shares & Commodities
 Category 1 SEBI approved Merchant Banker
 Insurance Broker (Life & Non-Life)
 Distributors of IPO’s, Mutual Funds and various other 3rd party products

FACTS & FIGURES

70
 Commanding the faith of over 4,50,000 satisfied investors
 More than 4400 trading terminals of NSE, BSE, F&O, NCDEX and MCX installed
 Highly dedicated workforce of 1800+ employees, 6000+ financial advisors in SMC
network
 Trading Valume crossed of $175 billion in the first 9 months of FY 2007-2008 as
against $105 billion in the FY 2006-2007 (full year)

 Strong presence in the business with a rich experience of over 20 years

 Commanding more than 3% of the total market share in the Indian equities and
derivatives market, over 4% in the Indian commodities market and more than 10% in
Dubai gold and commodities exchange
 Handling more than 2,50,000 trades per day
 Taking care of over 1,50,000 DP clients
 Dedicated arbitrage wing of more than 300 arbitragers, doing risk-free arbitrage
between capital market & futures in both equity and commodity markets
 Equipped with hi-tech in-house Research wing and technological resources providing
complete research solution
 Fast, Transparent and easy to use Online Internet Trading Platform .Special advisory
services to HNIs and Corporates
 Clearing member to 68 trading members in NSE F&O, BSE F&O and DGCX i.e. 28 in
NSE, 38 in BSE and 2 in DGCX

ACHIEVEMENT

“AN ACHIEVEMENT IS BONDAGE. IT OBLIGES ONE TO A HIGHER

ACHIEVEMENT"

71
 ISO 9001:2000 certified DP for both shares and commodities
 4th largest broking house of India in terms of trading terminals (Source: Dun and
Bradstreet, 2008
 5th largest sub-broker network in the country (Source: Dun and Bradstreet, 2007)
 5th largest distributors of IPO in Retail. (Source: Prime Data Rankings)
 Awarded the Fastest Growing Retail Distribution Network (Source: Business Sphere,
2008)

 Nominated among the top 3, in the CNBC Optimix Financial Services Award 2008
under the "National Level Retail Category".

 One of the first financial firms in India to expand operations in the lucrative gulf
market, by acquiring valuable license for trading and clearing with Dubai gold and
commodities exchange (DGCX)
 Amongst a Elite group of brokers having proprietary desk for doing risk-free arbitrage
in commodities
 First trade on DGCX for silver and First currency trade for rupee-dollar
 Awarded the Major Volume Driver by BSE for the Third year in a row i.e. 2006-07,
2005-06 and 2004-05 (Awarded to top 10 Brokers)

THE GROWTH STORY

72
 Fast growing company with 90% growth in revenue from $18.38 million in 2005-06 to
$34.33 million in 2006-07.
 Dedicated and highly motivated workforce of more than 1500 professionals and over
6000 financial advisors.

73
74
 BOARD OF DIRECTORS MEMBER- SMC

Mr. S.C. AGGARWAL : Chairman & Managing Director

• Mrs. Sushma Gupta : whole time Director
• Mr. Rakesh Gupta : Director
• Mr. Pradeep Aggarwal : Director

SMC Insurance Brokerage (P) Ltd.

Mr. Mahesh C Gupta : Chairman

Mr. Ajay Garg :Director
Mrs. Anuradha Goel : Director

LIST OF COMPANY UNDER SHEAD OF SMC:-

 SMC Global Securities Ltd.

 SAM Global Securities Ltd.
 SMC Comtrade Ltd.
 SMC Comex International DMCC.
 SMC Insurance Brokerage (P) Ltd.
 . SMC Capital Pvt. Ltd

INVESTMENT & SERVICES:-

Equity & Derivative Trading

SMC Trading Platform offers online equity & derivative trading facilities for investors who are
looking for the ease and convenience and hassle free trading experience. We provide ODIN
Application, which is a high -end, integrated trading application for fast, efficient and reliable
execution of trades. You can now trade in the NSE and BSE simultaneously from any
destination at your convenience. You can access a multitude of resources like live quotes,
charts, research, advice, and online assistance helps you to take informed decisions. You can
also trade through our branch network by registering with us as our client. You can also trade
through us on phone by calling our designated representatives in the branches where you are
registered as a client.

Clearing Services

Being a clearing member in NSE (derivative) segment we are clearing massive volumes of
trades of our trading members in this segment.

75
Commodity Trading

SMC is a member of two major national level commodity exchanges, i.e National Commodity
and Derivative Exchange and Multi Commodity Exchange and offers you trading platform of
NCDEX and MCX. You can get Real-Time streaming quotes, place orders and watch the
confirmation, all on a single screen. We use technology using ODIN application to provide you
with live Trading Terminals. In this segment, we have spread our wings globally by acquiring
Membership of Dubai Gold and Commodities Exchange. We provide trading platform to trade
in DGCX and also clear trades of trading members being a clearing member.

Distribution of Mutual Funds & IPOs

SMC offers distribution and collection services of various schemes of all Major Fund houses
and IPOs through its mammoth network of branches across India . We are registered with
AMFI as an approved distributor of Mutual Funds. We assure you a hassle free and pleasant
transaction experience when you invest in mutual funds and IPOs through us. We are
registered with all major Fund Houses including Fidelity, Franklyn Templeton etc. We have a
distinction of being leading distributors of IPOs. Shortly we will be providing the facility of
online investment in Mutual Funds and IPOs

Online back office support

To provide robust back office support backed by excellent accounting standards to our
branches we have ensured connectivity through FTP and Dot net based Application. To ensure
easy accessibility to back office accounting reports to our clients, we have offered facilities to
view various user-friendly, easily comprehendible back office reports using the link My SMC
Account.

Insurance broking services

Provide Insurance Broking Services through our subsidiary SMC Insurance Brokers Pvt.Ltd
as aDirect broker for both Life and General Insurance. We are registered as a Direct Insurance
Broker with IRDA (Insurance Regulatory &Development Authority) providing a wide array of
Insurance services. As the world average of insurance premium is about 8%of the GDP and
Insurance business in India is growing at a rate of 15-20% annually, so there is great potential
for Insurance sector throw in India. We are authorized to provide services to our clients for all
types of insurance products, Insurance consultancy besides Risk assessment for Life and
General Insurance. Currently we are focused on Mediclaim Policies, Life Insurance, Tax-
saving Insurance Policies, Broker Indemnity Insurance, Motor vehicles etc.
We have tie-ups with the following companies in Life & General Insurance:

76
LIFE INSURANCES GENERAL INSURANCE

 Bajaj-Allianz Bajaj-Allianz
 HDFC Standard Life Oriental Insurance
 Birla Sun Life IFFCO-TOKIO
 TATA –AIG TATA-AIG
 Max New York National Insurance
 AVIVA Life Reliance General Insurance
 Met Life India Chola Mandlam
 ING-Vysya Life United India Insurance
 SBI Life Royal Sundram
 OM-Kotak Mahindra Life HDFC-Chubb
 Reliance Life ICICI Lombard
 ICICI Prudential
 Bharati-AXA

ARBITRAGE

SMC is a major player in arbitrage business with experience of more than 15 years. The
Company has a separate arbitrage wing with dedicated expert team of arbitrageurs doing
arbitrage in commodities, equities and derivatives

77
 Section III

Research Methodology

78
 RESEARCH DESIGN OR METHODOLOGY

In present fast track market businees environment marked by Cutthroat competition in

insurance industry, many organizations rely on business research to gain a competitive
advantage and greater market share. A good research design helps organizations understand
processes, products, customers, markets and competition, to develop policies, strategies and
tactics that most likely to succeed in SMC.

Research designing is a essential because it facilitates the smooth flow of various research
processes. A good research design means that good research results with minimum utilization
of time, money and time.

An ideal design deign should have some factors:

A. Identifying the problems of SMC.
B. The process of obtaining information or data.

Sources and method of Data collection

I. Primary data
II. Secondary Data
III. Survey Research
IV. Questionnaires design

Primary Data : primary data are collected from customers to know the perceptions about the
products of SMC
Secondary Data : secondary data is the data that already exists which has been collected by
some other person or organization for their use, and is generally made available to other
researchers free or at concession rate. Sources of secondary data include websites, journals,
trade association, books etc.

Survey Research : survey method can provide valuable information of peoples opinions and
perceptions about various which bearing on the research problems.

Surveys are conducted through interviews and are generally classified based on the method of
communication used in interviews.

o Personal Interview
o Telephonic Interview
o Mail Survey

.Questionnaires Design : a questionnaire is a set of questions to be asked from respondents

in an interview, with appropriate instructions indicating which question to be asked, and what
order. A questionnaire serves four functions – enables data collections from respondents, lends
a structure to interviews, provides a standard means of writing down answers and help in
processing collected data.

79
Research Instruments:

The questionnaires were prepared keeping in mind the objectives. There were close-end and
open-end questions, to know the customers views, preferences and opinion about different
Insurance products and its benefits. I used the structured questionnaire through out the survey.

Sampling Techniques:

Sample unit: Collection of data was done from respondents of Noida U P, and some of the
rural areas of Laxmi nagar district.
Sample size: The sample size chosen was 150 units.100 units for noida, and laxminagar city
and 50 samples for some of the rural areas of mandavali &. Sangam vihar.

Sample Method: Simple Random sampling was used in study to get an unbiased result and
clear view of market.
Contact Methods: Among various contact methods I chose personal interviewing method and
In-depth interviewing method as it was beneficial in extracting additional information about
the respondents.

Data Collection & Analysis:

The information collected through personal interview on the basis of the questionnaires used
during survey ,were tabulated and plotted through graphs to represents the findings in a better
way. The analysis was done by calculating the percentage for each questionnaire out of 150.
Then the result was plotted through graphs i.e. pie charts were prepared. I entered the variables
into the excel sheet for my convenience. As I am doing my survey for unit linked products so
in rural areas I had taken samples from some of the business man and some person who has life
insurance policies.

Limitation during Survey:

It was quite unbalancing for me when I interviewed people. The difficulties I faced in
doing so are –

 Most respondents were didn’t like to spent time in filling the questionnaire as it was
immaterial to them.
 Many people I approached refused to waste their valuable time.
 Some Insured didn’t know the policy they had, though a few recalled the name of the
Insurers especially in rural areas.
 A few people know in detail about the private insurers.
 The ratings given by the respondent didn’t base on their knowledge but their feelings
towards the Companies as they are not very much aware of all the attributes for the
given insurers.
 Most of the people in rural areas can not understand English so I had design my
questionnaires in a way that was suitable for both urban and rural respondents. Some
times I had translated my questionnaires in local languages for extract information from
them.

80
 Section- IV

Data Analysis and Interpretation

81
 Data Analysis and Interpretation

1. What is your opinion about insurance?

22%
Inves tm ent
Tax W aiver
57% E x penditure
17%
S avings
4%

57% respondents said that it is a saving instrument. We can say they still ignore about the
features or benefits of unit linked plans.17% respondents said it is a tax waiver. These people
are mostly cautious about income tax. Most of the business man said insurance is not only for
risk coverage but also for saving of tax. 22 % people said that other than saving they can invest
their money in different funds and get maximum return.
Only 4%respondents told that it is expenditure. They have taken fully traditional plans and no
idea about unit linked products.

82
 ra n k in g o f in s u re rs

4% 5% 7% B S LI
1% IC IC I
B A JA J
HDFC
83% LIC

83% respondents ranked LIC as ranked one. The existence of LIC from 1956 as monopoly in
the insurance market till the liberalization in 1999-2000 made people not to think of any other
insurer. This helped it to have a strong penetration in insurance market.
The insurer has to do a lot for its penetration both in rural and urban sector.

3-Are you insured?

If yes then which is/are your insured company?

people insured

4%

Yes
No

96%

83
 % OF INSURED RESPONDENTS

5% 3% 2%1% LIC
9% IPLIC
BALIC
HSLIC
12% BSLIC
68% TALIC
MNLIC

96% respondents are insured and 4% people are not insured. Among the insured respondents
68% has only LIC policies and out of rest 32%,12% respondents has policies of only private
companies and 20% respondents policies of both LIC and other private companies.
Out of insured persons there might be under insured people who can be perspective customers.
A large share of LIC is due to the only means of insurance before the entry of private player in
2000-01 and being a Govt. regulated firm its penetration is high in insurance sector.

4-Are you aware about unit linked plans?

AWARENESS OF ULIPS

38%

yes
no

62%

Only 38% respondents aware about unit linked plans. Still 62% people unaware about unit
linked policies. During my survey I found many of respondents have unit linked plans but they
unaware about unit linked policies. Advisors should make aware about ULIPS and its benefits.
Sothat people can know more about the features of ULIPS which will result increase in
penetration of ULIPS in insurance sectors.

84
5- Which type of insurance plan you have taken?

8% 16%

ULIP
TRADITIONAL
BOTH

76%

Above graph shows 76% people have traditional policies. Only 16% respondents have unit
linked policies and 8% people have both ULIP and traditional plans. This unit linked insurance
plans has yet to dominate the market. Though it gives high return and more flexibility but due
to lack of proper awareness, the traditional plans are more in number.

TYPES INSURANCE POLICIES

4% 6% 6% TERM
11%
ENDOWMENT
MONEY BACK

38% WHOLE LIFE

CHILDREN
35% PENSION

The above chat shows the penetration of endowment plans with 38% is better than other
policies followed by money back plan with 35%, whole life plan with 11%, pension and term
plan with 6% and children plan with 4% respectively. Respondents also have taken one or two
policies for them and other policies in the name of their family members.The penetration of
children plan, term plan, and pension plan is very poor in these markets. So insurer should give
more emphasis on the penetration of these products into market.

85
6-Which of the following features have influenced you to take this plan?

features influenced the most

efficient earnings

different investment fund

option
12% 4% 13% tax free withdrawal
10%
9%
loan against policy

flexible withdrawal system

24% 28%
availability of different rider

all the feature

The above chart shows that 28% of the respondents said that the tax free withdrawal feature of
the insurance policy influenced them to take the policies, 24% said they liked the loan against
policy feature of the policy, 8% of them went for flexible withdrawal system, 11% of them
went for availability of different rider option and 9% for flexible premium payment option.
Only 9% & 12% of the respondents said that they liked the different investment fund options
and efficient earnings features of the insurance policy respectively. People preferred the tax
free withdrawal and loan against policy the most which is the feature of both the traditional as
well as unit linked insurance plans but the percentage of respondents were less for different
investment fund options and efficient earnings which are the core features of the investment
plans. Only 4% respondents told they influenced by all the features. We can say that this can
be due to the lack of awareness of the unit linked investment plans. So it’s the job of the
insurers to make the people aware about all the important features of the unit linked policies
for increase its penetration in market.

86
7-What type of other benefits are you getting from your insurance policy?

IN S U R AN C E POLIC IES OFFER S TH E M

High return
15%

S afety
50% S avings
29%
Flex ibility
6%

The above figure shows that 50% of the respondents are enjoying safety from their policy, 29%
said that they are saving from their policy, 15% said that their policy is giving them high return
and 6% of them said that it is offering flexibility to them. Again we see that the percentage of
high return which is the unique feature of the unit linked insurance plan is merely 15%.

respondents form of savings

9% 5%
bank deposits
10%
post office deposits
mutual fund
58% shares and securities
18%
others

87
The above chart again shows an abysmal picture as we see that 58% of the respondents deposit
their savings in banks and 18% keep it in the form of post office deposits. Only a mere 9% and
10% of the respondents said that they invest the money in shares & securities and mutual
funds. 5% of the respondents said that they had deposits in other financial institutions like
Sahara, Peerless, etc. Thus we see that people are very much reluctant towards investment in
the money and capital market. Still now, the risk taking appetite of the people has not
developed to that extent and the unit linked plans are investment oriented only.

8-Are you aware about SMC?

AWARENESS OF SMC

47%

YES
53 NO
%

The above figure shows that 47% of the respondents out of the surveyed were aware of the
presence of SMC as one of the private distributor of investment product in the market.
However 53% of the respondents surveyed were still not aware of the company. In spite of the
presence of these area 53% of the people are left unaware. This has to be take care by the
company.

88
 AGE

11% 0%

36%
22%
Under18
18-30
31-40
41-50
31% 51&Above

From the above chart I found that 36% of respondents belong to 18-30 age category, 31%
belong to 31 to 40 age category and 22% respondents belong to 41 to 50 age category. So I can
interpret that generally people bought a product at the middle age (i.e. between 18 to 40).

Sex

10%

Male
Female

90%

From the above chart I found that 90% of respondents are male and 10% are female. Males are
insured themselves first because they are the important person in the family.

89
 Marital Status

33%
Married
Single
67%

From the above chart I found that 67% of respondents are married and 33% are single. So it
can be predicted that generally married person preferred to buy an insurance product.

Education Qualification

Others
Post 3%
Intermediate
Graduate 29%
26%

Graduate
42%

From the above chart I found that 42% of respondents are Graduate, 29% are Intermediate,
26% are Post Graduate and others are 3%.That means most of the customers are highly
educated. It is a good sign for the industry that they are actually able to understand about
different plans and benefits of an insurance product.

90
 Annual Income
5%
0%
Less than Rs1,00,000
6%
Rs1,00,001-Rs2,00,000

17% 42% Rs2,00,001-Rs,300,000

Rs3,00,001-Rs,4,00,000

Rs4,00,001-Rs5,00,000

30% Above Rs5,00,000

From the above chart I found that 47% of respondents are Service holders, 39% are
Businessman, 8%are Students and both 3% are Housewives and Unemployed. So I can say that
service holder and business man are the leading investor in the insurance market.

Occupation

3%
8%
3% Student
Service
Business
39% Housewife
47%
Unemployed

From the above chart I found that 42% of respondents belong to less than Rs 1,00,000
annual income category,30% are between Rs1,00,001 and Rs 2,00,000,17% are between
Rs2,00,001 and 3,00,000,6% are between Rs3,00,001 and 4,00,000,and 5% are between
4,00,001 and 5,00,000. I can say that most of the people belong to the low income group. So
every company positioned their product according to the need of this lower income group.

91
MARKET SURVEY

Dear sir/madam,
I am an MBA student of NSB School Of business , new delhi.I am doing a market survey on
“penetration of unit linked products in Delhi NCR market” I would like to know your views,
preferences, opinions about unit linked plans in life insurance industry.
I request you to spend few minutes for completing this questionnaire. All the information will
be used only for academic purpose.

1. What is your view about insurance?

An investment An expenditure
A tax waiver A saving instrument

2. Please rank the following life insurance companies as per your preference?

A. Birla sun life___________

B. ICICI Prudential________
C. Bajaj Allianz _________
D. HDFC Standard Life ___________
E. LIC__________________

5. Are you insured?

Yes No
If yes then which is/are the insured company/companies?

And what type of benefits are you getting from your insurance policy?
a. safety c. high return
b. flexibility d. savings
If no then
why_________________________________________________________________

5. What type of other form of savings do you have?

a. Bank deposits b. post office deposits e. if any other……………..

c. Mutual funds d. shares and securities

6. Are you aware about unit linked plans?

Yes No

7. If yes, then have you taken this plan?

Yes No
If yes, then go to question no -8

8. If NO, then do you have any future planning to take up this plan?
Yes No

92
9. Which type of unit linked plans are you having?
Term policy Endowment policy
Money back policy Whole life plan
Children plan Pension plan

10. Which of the following features have influenced you to take this plan?
Efficient earnings Different investment fund option

Tax free withdrawal Loan against policy

Flexible premium payment option Flexible withdrawal system

Availability of different rider option all the features

If any other reason please specify______________________________________________

11. Please rank the following Life Insurance Policies.

(1. Very Popular, 2. Popular, 3.To some extent Popular, 4. Least Popular, 5.Not at all
Popular)

Endowment policy
Money back policy Whole life plan
Children plan Pension plan

12. Are you aware about SMC?

Yes No
Please specify the reason

---------------------------------------------------------------------

14. How do you feel about SMC Service? (If any suggestions please specify)
______________________________________________________________

93
 DEMOGRAPHY

1. Name ______________________________________________________________

Address ______________________________________________________________
______________________________________________________________

Contact no ________________________ E mail I’d. _______________________

2. Into which one of the following categories does your current age fall?
Under 20 21 to 25 26 to 35 36to 45
46 to 55 56 and above

3. Please specify your sex.

Male Female

4. Please specify your marital status.

Married Single

5. Please mention your educational qualification.

Intermediate Graduate Post graduate
M.B.B.S Engineer
If Other, please specify__________________________________________________

6. Please mention your occupation.

Service Business student
House wife Unemployed

If business then which business-------------------------------------------------------------

6. Please mention your income per annum.

Less than 1,00,000 1,00,001 to 2,00,000

2,00,001 to 3,00,000 3,00,001 to 4,00,000
4,00,001 to 5,00,000 Above 5,00,000

94
 Section V

Findings, Conclusion and Suggestions

95
 FINDINGS

The survey was carried out at various rural places within the rural areas, among them all there
was something common found every where for which the rural insurance suffer a great set
back. These causes are as follows.

 Ignorance:

People in these areas are not educated largely and hence the rate of illiteracy in the rural
areas is very high as compared to that of the urban habitation. So people of these areas are
ignorant about various products and scheme introduced by SMC from time to time. The
education level is very low among them for which they cannot follow the schemes or
insurance products offered by the company and they could not think of the benefits that
they would receive on occurring of any mishap if they are insured. Unless and until
someone make them thoroughly understand the merits of investing with SMC they are not
going to do so.

 Affordability
There are people in the rural area are people who are just able to earn their livelihood and
some of them also fail to do so. Hence people do not have much surplus earnings which
can be diverted to savings. So poverty is also a major hindrance in the way growth of
insurance sector in the urban as well as rural areas.

 Lack of publicity/ Advertisement by SMC

Lack of advertisement is also a factor which declines the sale of financial products in
market. The people living in the villages are unknown about the availability of various
types of policies which could fulfill their needs. SMC should take a major step to make the
customer aware through various Medias about the availability of various products in the
markets both in urban as well as rural areas in order to tap the customers from the market.

 Claim settlement:
The villagers usually prefer to keep their money in the banks or post office rather than
taking up a life insurance policy because of the lengthy process of settlement of claim for
which the people cannot get the coverage at the time when they require it.

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  Credibility:

One of the major factors influencing the marketing of insurance is the credibility of the
insurers. In the past, there were cases of financial frauds, which affected the faith of the
rural population adversely. Confidence building exercises need to be carried out, and the
government and the IRDA need to join hands with the insurers in this regard.

When we look at the insurance sector, the major reasons for the failure and shortcomings in
their products and services can be summarized as follows:

 Lack of popular and mass appeal in marketing strategy.

 High variation between services provided and consumer’s expectations.
 Expensive policies and high premiums.
 Product differentiation and innovations are not in conformity with the requirements of
the rural population..

Professional style of working has failed to generate confidence and goodwill as rural
population prefers personalized approach and that too in accordance with regional culture.

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 CONCLUSION

After analyzing the existing facts and relevant inferences, we can conclude that there is a
significant requirement of change in products and services and marketing strategy to be
adopted by SMC for penetrating into the these market.

Following steps may provide for significant increase in the rural market share as well as tap the
lower middle class segment in urban areas for ULIP as compared to other private players of
these sectors.

 Policies must be designed in such a manner so as to have low premiums and the
payment schedule must match to the earnings.
 Policies that may have risk coverage up to actual/estimated losses as high assured sums
are not much preferred by rural consumers and also result in high premium payments.
 Risk coverage must be designed in conformity with the incidents experienced in rural
area and in agriculture which causes losses.
 Consideration must be given to specific items of rural area and agriculture considered
as assets while formulating the insurance policies.
 ‘Loans against policies’ feature must be present and procedure for credit granting must
be kept simple.
 Simple policies without any riders must be provided for rural consumers as they give
more weight age to low premium rather than extra benefits.

Private insurers are learning from failures and drawbacks of LIC. LIC’s advantage is the
monopoly it enjoyed so far, the long standing goodwill - its asset as also its huge established
network of agents while private insurers have only made a beginning and has a long way to go.
It is too early for private insurers to take on a giant as the LIC. But it is certain that competition
will increase and in course of time innovative, never-before insurance products will hopefully
be rolled out. And the ultimate winner will be the consumer.

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SUGGESTIONS

NOVEL WAY TO INVAST PEOPLE BY SMC

Development of alternate channels of distribution: SMC should work towards the

development of alternate channels for distribution in insurance in order to increase the existing
levels of penetration.

♦ Bancassurance: It is one such distribution, which is yet to be adopted in

a complete manner. The experience in the countries where it is working in full-fledged
manner is extraordinary. It has emerged as a cost effective tool for distribution of insurance
products. In Orissa where selling insurance could be a challenging job. With the spread of
bank branches in majority of the villages and towns tie-ups with them should help increase
in penetration.
♦ Tie-ups with NGOs/SHGs:The Non-Governmental Organizations and
the Self Help Groups could play a major role in increasing the penetration levels. These are
informal groups, which provide avenue for insurance selling through the mechanism of
group insurance schemes. Group insurance provides greater reach with low operation costs
and fewer rates.
♦ Media Exercises

 Company should give advertisement in monthly and weekly women magazines.

 Now-a-days television is an important media of communication. So company can come
up with emotional advertisements, which can give a better impact to the prospective
customers.
 Company should come out with more products with an affordable price. So that the
rural people as well as the lower middle class segment can enjoy the facility of Unit
Linked products.
 Company can go for street folks, which help them to make people aware of the
products and increase their market penetration in rural areas.

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SUGGESTIONS FOR INVESTOR

Derivatives ---- companies must use derivatives to hedge risk , but with great care and caution
.They must use derivatives just for reducing risk and not for speculation . The objective of
firms using derivatives is to reduce the cash flow volatility and thus , to diminish the financial
Distress costs . This is a consistent with the theory of risk management through derivative .
Derivative markets do require professional speculators to provide liquidity and protection to
firms who trade in derivatives for risk reduction

ULIP & Mutual Funds ---- An investor should know this calculation:-

Calculation of Unit Allocation on the basis of NAV

Birla Sun Life Insurance Company Ltd was the first in India to introduce Unit-Linked life
insurance plans. The performances of portfolios of various investment options is reflected
through Net Asset Value (NAV), which is simply put, as
NAV = Assets – Liabilities – Provisions / No of units outstanding
NAV, is also known as unit price, and is calculated and published on daily basis. NAV is net of
investment management fee. The premium is converted into units of Rs. 10 each (Face Value)
at the NAV of the day when it is received.
The steps follows for unit allocation and although the units to risk cover etc are :

Premium received from the customer

Front End Load deducted to cover the commission and marketing costs
Balance amount available for unit allocation done on the basis of the NAV prevailing on that
day.
Units are allocated
Units cancelled to cover the cost of Insurance and Administrative fee up-front for first month.
Net Units allocated in Policy Holders account
Unit cancelled on month anniversary based on prevailing NAV to cover the cost of Insurance
and administrative fee for all ensuing months.
The process is followed for the subsequent premium so received.

Let us consider an example to understand how BSLI’s unit-linked plan works.

Let the premium = Rs. 5800

(-) Front End Load = Rs. 400 (An assumption that it being a normal not
the first year to understand the concept)
Balance = Rs. 5400

This Rs. 5400 is invested in the funds based on the customers risk appetite. The investment
fund is used to buy units based on the NAV of the chosen fund option on that day. Investment
fund is converted into units.
If NAV is Rs. 12 on that day, then no of units allocated = Rs. 5400 / Rs. 12 per units

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 = 450 units
For the first month the units are cancelled up-front and amount deducted to pay for the risk
cover and expenses. This is 1/12th of the annual amount so calculated.
Every month anniversary thereafter the request no of units are cancelled to cover the balance
components of risk and expenses.

Up front cancellation of units for month – 1

For cost of insurance risk coverage and administrative expenses let the monthly charge
required is Rs. 60/-. Then NAV at Rs 12/ to generate Rs. 60/- five units needed to be cancelled.

Now, no of units = 450 – 5 = 445 units

Up Front canceling of units for month – 2

If the NAV is Rs. 13/- on the second month, to generate a cost of Rs. 60/- the no of units to be
cancelled are 4.62.

The remaining no of units = 445 – 4.61 = 440.38 units.

The process continues like this.

Calculation of returns:

Total Return = {(Current NAV – NAV on Purchase)/ (NAV on Purchase) X 100}

Example:
Assuming NAV on 26/7/06 is = Rs. 13.00
NAV on date of Purchase 15/7/05 is = Rs. 11.00
Difference = Rs. 2.00
Total Return = (Rs. 2.00/ Rs. 11.00 )x 100
= 18.18%

NAV is generally calculated in 4 decimal points since rounding off to lesser decimal points
would distort the number of units being allocated.

Annualized Return (Since Date of Purchase) = (Total Return/No. of Days since date of
purchase) x 365 days

Example:
Assuming NAV on 26/7/06 is = Rs. 13.00
NAV on date of Purchase 15/7/05 is = Rs. 11.00
Difference = Rs. 2.00
Total Return = (Rs. 2.00 / Rs.11.00) x 100
=18.18%
Annualized Return = (18.18/375) x 365
= 17.7%
In present scenario when market in volatile best investment suggestion---

 Long term investment

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  Energy, Infrasector , Real state are good for investment
 ULIP--

 For general per pose – BIRLA SURAL JIVAN

 For pension plan --- ICICI PRU, LIFE STAGE PENSION
 For child plan-- BIRLA & RELIANCE

The mantra of a successful investor

Investing successfully in equity market demands a great deal of knowledge about the market
apart from large sum of money. This market is driven by a number of forces and the mechanics
of the same is quite difficult to understand. More often than not, a common investor misjudges
the prospects of the scrip’s and consequently ends up short of what he had invested. Another
constraint in his way to success is his miniscule investible fund, as compared to the large
volume of transactions of the stock market, which restricts his diversification across a broad
cross-section of industries and sectors. He may also find himself helpless, in investing in large-
cap scrip’s. above all these even if he invests in a well diversified portfolio of high-grade
stocks, success Is not guaranteed. For him, to be a successful investor, it is required to learn the
mantra of market timing. It is often seen that the odd lotter enters when the market tops and
exits at its bottoms and makes some intelligent investors a bit richer during the process. So, the
question here is “what is the way out?” the best way for him to get rid of all these
shortcomings of direct investment in equity market is to invest in Mutual Funds. By investing
in mutual funds, he will get the services of experienced and skilled professionals, backed by a
dedicated investment research team that analyses the performance and prospects of companies
and selects suitable investment options at right time. But even now the exact problem is not
solved as he may end up in losses as NAVs of mutual fund can also decline and if right timing
is not done an investor may end up losing his money. Not long back, the markets were
touching new highs with passing day. This was in the first quarter of year 2000, when Info
Tech sector was booming. The result of a stock market boom was that the NAV of equity funds
were touching dizzy heights. Annualized returns jacked up to astronomical levels. At this
stage, some investors, who had invested prior to the market frenzy, withdrew form the peaking
market having made a bounty. However, consider the plight of people who got in to the funds
at such high levels. Because the markets have since then been engulfed in a turmoil rarely seen,
the NAVs have been spiraling downwards for most funds. Under these conditions, some
investors, not having the nerves of steel, succumbed to the pressures of depreciating
investments and redeemed under losses. What had then appeared to be a necessary correction
in the overhead market robbed many such investors of hard-earned money.

The investors, who sustained the pressure and understood the concept of market correction,
stayed invested for a long period and reduced the losses after the market bounced back. It is
advised that the investment made during peak days is not going to bear any fruit till the
markets reach the levels again. The most important mantra for successful investor is of “getting
in “ & “moving out” at the right time. An ideal investor is one who enters the market at its
bottom or at average levels and leaves the market when it gives the first sign of sinking. Since,
it is not possible for a common investor to correctly time the market, it is advisable to invest
regularly in small amounts when the market appears to be low and withdraw regularly in small
amounts market appears to be high. In any case, he should at least avoid entering at the market
peaks and exiting at bottoms. The effect of “moving in “ at a wrong time i.e. at market peak

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can be negated to some extent if one can stay put for a long period. This is because the market
cycles will take care of the intermediate volatility. The effect of “moving out” at wrong time
however, will continue to haunt the investors should they fall victim to greed.

TERMINOLOGY

Net Asset Value (NAV): - NAV denotes the performance of the particular scheme of mutual
fund. Mutual funds invest the money collected from the investor in securities market. In simple
words, NAV is the market value of the securities changes everyday, NAV of the scheme also
varies from the day-to-day basis. The NAV per unit is the market value of the securities of a
scheme on any particular date e.g. if the market value of the securities of the mutual fund
scheme is Rs. 200 lakhs and the mutual fund has issued 10 lakh units of Rs. 10 each to then
investor, then the NAV per unit of the fund is Rs. 20. NAV is required to be disclosed on a
regular basis daily or weekly depending on the type of the scheme.

Sector Specific Fund / Scheme: - These are the funds/schemes, which invest in securities of
only those sector or industries as specified in the offer document e.g. Pharmaceuticals,
Software, FMCG, banks, and petroleum stocks. The return in these funds will depend upon the
performance of the respective sector/industries, while those funds may give higher return they
are more risky compared diversified funds. Investor need to keep watch on the performance of
those sectors and must exit at an appropriate time.

Tax Saving Schemes: - these scheme offers tax rebate to the investor under the specific
provision of the Income Tax Act, 1961, as the government offer tax incentive for the
investment in specified avenues, like ELSS, Pension Scheme launched by the mutual fund also
offer tax benefits. These are growth oriented and invest pre-dominantly in equities. Their
opportunities and risk associated are like equity-oriented schemes.

Debt Market:- Whole sale debt market where the investors are mostly banks, Financial
Institutions, the RBI, primary dealers, insurance companies, provident funds, MF’s, corporate
investors, Retail Debt market involving participation individuals, small trust and other legal
entities in addition to the wholesale investor classes.

Debt Market and Mutual Funds: - Banks are the largest player in the debt market. Debt
instruments can be classified as:-
 Instruments issued by the government like T-Bills and Bonds.

 Instruments issued by other companies like corporate sector, FI’s

 Long-term investment e.g. bonds and debentures.

 Short –term investment e.g. CP’s and CD’s.

 Secured instruments like secured corporate debenture.

 Unsecured instruments like bonds

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  Instruments paying periodic interest e.g. coupons, and discounted instruments like zero
coupons.
Wholesale debt market (WDM) segment of the NSE is a nationwide platform for trading
indebt market.

Redemption Price:- The price, which is charged from the investor while investing in an open-
ended scheme, is called Sale Price. Repurchase or the redemption price is the price or NAV at
which an open-ended scheme purchase or redeem its units from the unit holder. It may include
exit load, if applicable.

Portfolio:- A group of investment held by an institution or an individual. The process of

choosing which investment goes into a portfolio is known as portfolio management or asset
allocation and decision are based on whether the investment objective is income, growth, or a
balance of the two.

Corpus:- The total investible fund available with a mutual fund scheme at any point of time.

Volatility: - A measure of the fluctuation in the market price of the underlying security.
Mathematically volatility is the annualized standard deviation of the return.

SIP: - Systematic Investment Plan.

 Investing a fixed sum, regularly in a mutual fund.

 Allows one to buy units in a particular scheme on a given date every month.

 Similar to regular savings schemes like a recurring deposit.

 Start with an initial investment.

 Invest a fixed sum every month.

 Minimum investment – Rs. 1000 per month.

 Post-dated cheques/standing instructions to the bank.

 Investments happen on the preset date in the specified scheme every month.

STP: - System Transfer Plan.

This plan is for those investors who want to transfer the funds invested in one scheme
systematically to the other schemes. It is available at weekly, monthly and quarterly basis. No
entry load is charged on the STP amount but exit load is charged as per the source scheme.

SWP: - Systematic withdrawal Plan.

This plan is for the investors who want to withdraw their investment systematically. SWP
terminates automatically if all the units are withdrawn or on the expiry of the enrollment period
whichever is earlier. The applicant has the full right to discontinued SWP at any time he or she
desire.

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Load: - This is charged to the investor when the investor buys or redeems (repurchases) units
and is an adjustment to the NAV, to arrive at the price.

Entry Load: - Load that is charged on sale of units is called entry load. An entry load will
increase the price above the NAV for the investor.

Exit Load:-Load that is charged when the investor redeems his units. Load is used to meet the
expenses related to sale & distribution of units it is subject to the SEBI regulation. SEBI has
stipulated that the maximum entry or exit load cannot be higher then 7 %. It has also been
stipulated that the repurchase price cannot be less than 93% of the sale price. For close end
fund the maximum entry or exit load cannot be higher than 5%.

BIBLIOGRAPHY

BOOKS:-

 Gupta S. L., financial derivatives,Thearty,concepts and problem, prentice hall of India,

New Delhi-2005
 Redheel Keith, financial derivatives, prentice hall of India, new delhi-2003
 Hull john c., options, futures and derivatives, Pearson prentice hall-2006

WEBSITES:-

 www.smcindiaonline.com
 www.10paisa.com
 www.iciciprulife.com
 www.moneycontrol.com

MAGAZINES:-

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 Business world
 Market talks
 Security mantras
 Money wise

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