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    A Project Report On Study of Banking Products and Investment Behavior of Consumers PDF

    Uploaded by

    Shashi Ranjan
    report

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    © All Rights Reserved
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    Report on Study of Banking Products and Investment Behavior of consumers Summer Project Report Submitted For the Partial Fulfillment of Two Years Full Time Post Graduate Diploma of Management (2007-2009) Project supervisor Project by Jaipuria Institute of Management Noida ACKNOWLEDGEMENT I wish to express my gratitude to Standard Chartered Bank's management for giving us an opportunity to be a part of their esteem organization and enhance our knowledge by granting permission to do our summer training project under their guidance. The project of the kind, that | am fortunate enough to be involved in, needed the vision, guidance and expertise of various persons. Thus it was the vision, untiring guidance and on-hand support and help of which actually allowed me to do justice to the given topic. | am grateful to , our guide, for his invaluable guidance and cooperation during the course of the project. He provided us with his assistance and support whenever needed that has been instrumental in completion of this project. Finally | would like to thank the members of my family and all my friends for their support and encouragement. The leaming during the project was immense & invaluable. Our work basically included the study of various financial products of the bank and understanding the customer investing patterns. The present report is an amalgamation of our thoughts and our efforts to study the present banking and investment scenario and market potential for the sale of products like ULIP and Mutual Funds. EXECUTIVE SUMMARY The title of the project is to study the banking product and investment behavior of consumers while the objective of project is to find out the potential customers for Standard Chartered bank and to find the investment behavior of investors which would help the bank personal to decide proper strategy to tap a larger market The vee secesisisssees Manages the entire sales functions of north zone of Standard Chartered bank. He wants to provide such type of products and services which can satisfy to his customers. He also suggests some strategic and innovative ideas for improvement. Chapter 1- The Indian banking system deals with introduction of the investment scenario in India and the investment process. Standard Chartered bank deals with the history of the bank, products offered by it and extensive study of savings account, ULIP, and mutual fund. Chapter 2 Introduction to study deals with scope and need of study, Objective of the Study provides the direction to the study means it defines the strategy to achieve the objective of the study. Chapter 3 Research Methodology defines all those method by which the researcher has done the research. Chapter 4 Review of Relevant Literature literatures were reviewed to understand the changes in banking system and modification of banks as per the need of the consumers Chapter 5 Findings and Analysis contains the survey outputs relating investment behavior using SPSS software, and analysis of the output. Chapter 6 Conclusion, Limitations and Suggestions concludes the whole study by telling limitations and suggestions. S.No. Chapter 1. Chapter 2. Chapter 3. Chapter 4. Chapter 5. Table Contents PARTICULAR, i. Company Certificate ii, College Certificate iii, Acknowledgement iv. Executive Summary Lists of Figures Lists of Tables Introduction - The Indian Banking System 1.1 The Current State and Road Ahead 1.2 New Business Opportunities 1.3 Major foreign banks in India 1.4 Investment Strategies in India 1.5 Introduction to Standard Chartered 1.6 Products offered by Standard Chartered 1.7 Savings account 1.8 ULIP (Unit Linked Insurance Plan) 1.9 Concept of mutual fund Introduction to the Study 2.1 Needs of study 2.2 Scope of study 2.3 Objective of study Research Methodology Review of Relevant Literature Findings and Analysis PAGE NO. 41-42 42-43 43 45-46 47-57 Chapter 6. Conclusion, Limitation and Solutions 6.1 Conclusion 6.2 Limitations 6.3 Suggestions Appendix Bibliography Miscellaneous 58 59 59 - 60 S.No. Chapter 1 14 1.2 Chapter 7 54 52 53 54 55 56 87 58 59 5.10 5.11 5.12 Lists of Figures Particulars Introduction - The Indian Banking System New business opportunity tapped by banks Mutual fund operation flow chart Findings and Analysis Age group pie chart Type of investor according to age Investment made as per age Investment made as per income Influence pie chart Factors affecting investment decision Reinvestment as per age Reinvestment as per income Investment horizon as per age Investment horizon as per income Maturity sum use as per age Maturity sum use as per income Page No. 29 47 48 49 50 51 52 53 53 53 54 55 56 S.No. Chapter 1 14 12 1.3 Chapter 5 51 52 53 Lists of Tables Particulars introduction to Indian banking system Parameters and service charges charged by bank ULIP expense table Comparison table of ULIP- Findings and Analysis Age distribution Influence frequency chart Factor affecting investment decision Page No. 10-11 16 28 47 51 52 Chapter-1 INRODUCTION The Indian Banking System 1.1 The Current State and Road Ahead India's banking sector is growing at a fast pace. India has become one of the most preferred banking destinations in the world. The reasons are numerous: the economy is growing at a rate of 8%, Bank credit is growing at 30% per annum and there is an ever-expanding middle class of between 250 and 300 million people (larger than the population of the US) in need of financial services. All this enables double- git returns on most asset classes which is not so in a majority of other countries. Foreign banks in India achieving a return on assets (ROA) of 3%, their keen interest in expanding their businesses is understandable. Indian markets provide growth opportunities, which are unlikely to be matched by the mature banking markets around the world. Some of the high growth potential areas to be looked at are: the market for consumer finance stands at about 2%-3% of GDP, compared with 25% in some European markets, the real estate market in India is growing at 30% annually and is projected to touch $ 50 billion by 2009, the retail credit is expected to cross Rs5,70,000 crore by 2010 from the current level of Rs1,89,000 crore in 2004-05 and huge SME sector which contributes significantly to India's GDP. In order to gain further access to the global trade, the government is expanding the Free Trade Agreements (FTA’s) with many countries (like Singapore, Thailand, and other ASEAN members). After the Comprehensive Economic Co- Operation Agreement (CECA) with Singapore, the goverment is now planning a similar deal with the 25-member European Union. The EU is also likely to ask India to liberalize its financial sector on the lines of the India-Singapore CECA. 1.2 New Business Opportunities With the interest income coming under pressure, banks are urgently looking for expanding fee-based income activities. Banks are increasingly getting attracted towards activities such as marketing mutual funds and insurance policies, offering credit cards to suit different categories of customers and services such as wealth management and equity trading. These are indeed proving to be more profitable for banks than plain vanilla lending and borrowing. New Business Opportunities tapped by banks Derivatives Trading 38.8% weit Solling of Mutual ‘Managemen Funds 73.6% 21.05% Forex Manage 604% Bancassurance Te% Fig 1.1 New business opportunity tapped by banks Major foreign banks in India are ABN-AMRO Bank Dhabi c ‘a8 American Express Bank Ltd BNP Paribas cit DBS Bank Ltd Deutsche Bank HSBC Ltd Standard Chartered Bank 1.4 Investment Strategies in India Conventionally, Indian investors were investing in the following avenues: Fixed Deposits — They cover the fixed deposits of varied tenors offered by the commercial banks and other non-banking financial institutions. These are generally a low risk prepositions as the commercial banks are believed to return the amount due without default. By and large these FDs are the preferred choice of risk-averse Indian investors who rate safety of capital & ease of investment above all parameters. Largely, these investments earn a marginal rate of retum of 6-8% per annum. Government Bonds — The Central and State Governments raise money from the market through a variety of Small Saving Schemes like national saving certificates, Kisan Vikas Patra, Post Office Deposits, Provident Funds, etc. These schemes are risk free as the government does not default in payments. But the interest rates offered by them are in the range of 7% - 9%. Money-back insurance - Insurance in India is mostly sold and bought as investment products. They are preferred because of their add-on benefits like financial life-cover, tax-savings and satisfactory retums. Even if one does not manage to save money and invest regularly in financial instruments, with insurance, the policyholder has no choice. if he does not pay his premiums on time, his insurance cover will lapse. Money-back Insurance schemes are used as investment avenues as they offer partial cash-back at certain intervals. This money can be utilized for children’s education, marriage, etc. Endowment Insurance - These policies are term policies. Investors have to pay the premiums for a particular term, and at maturity the accrued bonus and other benefits are returned to the policyholder if he survives at maturity. Bullion Market — Precious metals like gold and silver had been a safe haven for Indian investors since ages. Besides jewellery these metals are used for investment purposes also. Since last 1 year, both Gold and Silver have highly appreciated in value both in the domestic as well as the international markets Stock Market — Indian stock markets particularly the BSE and the NSE, had been a preferred destination not only for the Indian investors but also for the Foreign investors. This is evident from the fact that Fis are buying huge stakes on the Indian bourses. Although Indian Markets had been through tough times due to various scams, but history shows that they recovered very fast. Many scrip’s had been value creators for the investors. People have eamed fortunes from the stock markets, but there are people who have lost everything due to incorrect timings or selection of fundamentally weak companies. Real Estate — Approximately one fourth of all homes sold in 2006 have been purchased as an investment. Retums are almost guaranteed because property values are always on the rise due to a growing world population. Residential real estate is more than just an investment. Mutual Funds - There is a collection of investors in Mutual funds that have professional fund managers that invest in the stock market collectively on behalf of investors. Mutual funds offer a better route to investing in equities for lay investors. A mutual fund acts like a professional fund manager, investing the money and passing the returns to its investors. All it deducts is a management fee and its expenses, which are declared in its offer document. Unit Linked Insurance Plans - ULIPs are remarkably alike to mutual funds in terms of their structure and functioning; premium payments made are converted into units and a net asset value (NAV) is declared for the same. In traditional insurance products, the sum assured is the comer stone; in ULIPs premium payments is the key component. 1.5 Introduction to Standard Chartered Standard Chartered is one of the world's most intemational banks, employing almost 60,000 people, representing over 100 nationalities, worldwide. This diversity lies at the heart of the Bank's values and supports the Bank's growth as the world increasingly becomes one market. Standard Chartered PLC is listed on both the London Stock Exchange and the Hong Kong Stock Exchange and is consistently ranked in the top 25 among FTSE-100 companies by market capitalization. Standard Chartered has a history of over 150 years in banking and operates in many of the world's fastest-growing markets with an extensive global network of over 1,400 branches (including subsidiaries, associates and joint ventures) in over 50 countries in the Asia Pacific Region, South Asia, the Middle East, Africa, the United Kingdom and the Americas. With strong organic growth supported by strategic alliances and acquisitions and driven by its strengths in the balance and diversity of its business, products, geography and people, Standard Chartered is well positioned in the emerging trade corridors of Asia, Africa and the Middle East. Standard Chartered derives over 90 per cent of profits from Asia, Africa and the Middle East. Serving both Consumer and Wholesale Banking customers worldwide, the Bank combines deep local knowledge with global capability to offer a wide range of innovative products and services as well as award-winning solutions. Trusted across its network for its standard of govemance and corporate responsibility, Standard Chartered takes a long term view of the consequences of its actions to ensure that the Bank builds a sustainable business through social inclusion, environmental protection and good governance. Standard Chartered is also committed to all its stakeholders by living its values in its approach towards managing its people, exceeding expectations of its customers, making a difference in communities and working with regulators. It serves both Consumer and Wholesale Banking customers. Consumer Banking provides credit cards, personal loans, mortgages, deposit taking and wealth management services to individuals and small to medium sized enterprises. Wholesale Banking provides corporate and institutional clients with services in trade finance, cash management, lending, securities services, foreign exchange, debt capital markets and corporate finance. 1.5.1 Standard Chartered Bank in India Standard Chartered Bank is the largest international banking Group in India with 78 branches in 30 cities. The Bank is having a combined customer base of 2.5 million in retail banking and over 1200 corporate customers. The key businesses of Standard Chartered Bank in India include consumer banking - primarily credit cards, mortgages, personal loans and wealth management - and - wholesale banking, where the Bank specializes in the provision of cash management, trade, finance, treasury and custody services. Standard Chartered was the first to issue global credit card in India, the first to issue Photo card, the first Picture Card and was the first credit card issuer to be awarded the ISO 9002 certification. Some other product innovations of Standard Chartered Bank in India include the 'Sapnay' credit card, the international debit card that provides free access to over 1500 Visa ATM's, a first in the banking industry, Mileage, an overdraft facility against the security of a car and Smart Credit, a personal line of credit’ for salaried customer. The name is derived from Standard & Chartered. Standard Bank of British South Africa merged with Chartered Bank of India, Australia and China in 1969. Chartered Bank opened its first overseas branch in India, at Kolkata, on 12 April 1858. During that time Kolkata was the most important commercial city and was the hub of jute and indigo trades. The merger with the Standard Bank of British South Africa in 1969 and the acquisition of Grindlays Bank in 2000 were two key events that have played an important role in making the Bank the largest international bank in India. 1.5.2 CSR by Standard Chartered Corporate Social Responsibility (CSR) is at the core of the values of Standard Chartered Bank. The Bank is committed to the communities and environments in which it operates. The Bank strongly supports the trend towards delivering shareholder value in a socially, ethically and environmentally responsible manner. ‘Living with HIV' is a global community initiative of — Standard Chartered that is aimed at raising awareness of HIV/AIDS amongst employees through workshops and amongst stakeholders by providing thought leadership Under ‘Seeing believes’, a programme that aims to restore sight to one million people globally by 2006, the Bank has raised funds to help 8000 people to see. In partnership with Sight Savers International and VISION2020 the Bank is now involved in two flagship projects at Vishakhapatnam and Muzaffarpur, both aimed at the elimination avoidable blindness. Furthermore, in support of the communities ravaged by the Asian Tsunami Crisis in 2004 the Standard Chartered Group committed US$ 1 million to India. The Bank is utilizing these funds for the rehabilitation of two villages adopted near Chennai. In 2004, Standard Chartered initiated the phenomenally successful Standard Chartered Mumbai Marathon - an event dedicated to charity fund raising. The two marathons held so far have forged partnerships with customers and charities and deepened the Bank's ties with the community, with over US$ 1 million being raised in 2005. 1.6 Products offered by Standard Chartered Standard Chartered bank provides different products and services in order to cater the needs of the customers which can be broadly classified into the following categories: 1.6.4 Personal Banking To cater the diverse financial needs, Standard Chartered offers a wide range of premium banking products and services through its network of 81 branches in 31 cities across the country. As a privileged customer of this bank, the customers can always be assured of a banking service that is flexible enough to tallor-make a product suite to take care of his specific banking needs. 1.6.2 SME Banking SME Banking provides integrated financial solutions to small and medium businesses, through a relationship management approach. Its customer focused product offerings include working capital finance, trade services, foreign exchange, and cash management. 1.6.3 Commercial Banking Standard Chartered has maintained a long local presence, since 1858, with particular emphasis on relationship banking. Significant networks have been established with vendors and financial-related organizations to enable it to offer the customers a comprehensive range of flexible financial services, with special focus on transactional banking products. Supported by state-of-the-art operations, Standard Chartered is pro-active in improving every part of services. Electronic Delivery system has been put in place to ensure that transactions are handled speedily. It has its Cash Product Specialists and dedicated Customer Service Centers to provide its customers with effective solutions. to fully understand the workings and functions of Standard Chartered Bank, the scope of this project has been limited to the detailed study of only three products offered by this bank under the above mentioned categories: Savings Account : Personal banking Unit Linked Insurance Plan (ULIP): Personal banking Mutual Funds: Commercial banking 1.7 Savings account ‘An account primarily opened for and operated by individuals, wherein the numbers of transactions are few and which give the customer liquidity, with the facility to eam some interest on the residual balances. Standard Chartered bank offers 4 types of Savings account matching different needs of customers namely: 1. Axcess Plus :The Standard Chartered Bank have launched the Excess Plus saving account as a premium product placed in the market with maintenance of minimum quarterly balance of 10,000/- The product in supposed to be targeted to a specific group elite of customers. This will help to increase the volume and ‘as such the profitability of the company. The name axcess plus means that the account is accessible anywhere anytime, as well as it will be an innovative and convenient services for the customers needs. 2. Super Value 3. Parivaar account 4. No frills Account 5. Aasaan account 6. 2-in-1 account 1.71 Eligibility criteria | Indian Residents NRI's Clubs, Associations, Trusts and Registered Societies HUF (Hindu Undivided Family) Foreign Nationals (QA-22) 1.7.2. Product feature in general Account can be in sole name or in joint names Minimum balance: Minimum Quarterly balance of a specific amount is to be maintained failing to which a specific fees per quarter has to be paid. Account can be operated at any branch across the country. PARAMETERS: SAVINGS ACCOUNT NAME ‘ACCOUNTS CHARGES FOR OPENING THE ACCOUNT AVERAGE QUARTERLY (DAILY)BALANCE REQD. PENALTY AQB DORMANT A/C CHARGES FOR UNSUFFICIENT ACCOUNT CLOSURE DEMAND DRAFT DRAWN AT OWN BANK(min fee Rs.50 & max Rs.1500) CANCELLATION DRAWN AT OTHER BANK( Min Fee Rs, 250) PAY ORDER STATEMENTS STATEMENT OF ACCOUNT,(E- STMT) CHARGES STATEMENT MONTHLY STATEMENT CHARGES ISSUE BALANCE CONFIRMATION CERTIFICATE FOR DUPLICATE CARDS DEBIT CARD ANNUAL FEE DEBIT CARD REPLACEMENT FEE ATM PARTNER) SERVICES NETBANKING INTERBRANCH/ BANKING BILLPAY PHONE BANKING MOBILE BANKING(SMS) INTERCHANGE(NON INTERCITY AXcessPlus Savings Account NIL Rs.10000 Rs. 1500/qtr_ (BalBal>Rs.5 000) Rs.1000 per yr. Rs.500 (within 6 months) 0.25% Rs 250 0.30% Rs.75 FREE/qtr Rs.100 Rs.100 Free for 1st Yr yr,250/yr Rs.200 per year Rs.200 Free for first 4 transactions per month) Rs.50 for beyond 4 trans. FREE Rs.50 FREE FREE NOT AVAILABLE ‘SuperValue Savings Account NIL Rs 50,000 Rs. 1250/qtr (Rs.5000<=Bal<10k) Rs. 1250/qtr(Rs.1000 0>Bal>Rs.5000) Rs. 1000 per yr. Rs.500 (within 6 months) FREE Rs.250 0.25% FREE FREE/qtr Rs.100 FREE Free for yr.250/yr 4st Yr FREE Rs.200 PARAMETERS: aXcessPlus Savings Account SuperValue Savings Account ‘STANDING INSTRUCTIONS SETTING UP DOOR STEP BANKING CASH PICK UP CASH DELIVERY/TRANSACTION CHEQUE BOOKS CHEQUE BOOK CHARGES(AT PAR) CHARGES FOR STOP PAYMENT OF INSTRUMENT CHEQUE RETURN CHARGES (Issued) CHEQUE RETURN CHARGES (Deposited) MISCELLANEOUS BALANCE CERTIFICATE(Upto 1 Yr)/ more Than 1 Yr old BANKER'S REPORT SIGNATURE VERIFICATION INSURANCE PARTNER Rs.100(for setting) Rs.25(on execution) FREE Rs.100 Rs.250 + other banks charges Rs.100 + — other banks charges FREE/Rs.250 Rs.50 Rs.25 BAJAJ ALLIANZ Rs.100(for setting) Rs.25(on execution FREE FREE FREE FREE FREE Rs.250 FREE FREE/Rs.250 FREE FREE BAJAJ ALLIANZ Table 1.1 parameters and service charges charged by bank 18 ULIP (Unit Linked Insurance Plan) A Unit Link Insurance Policy (ULIP) is one in which the customer is provided with a life insurance cover and the premium paid is invested in either debt or equity products or a combination of the two. In other words, it enables the buyer to secure some protection for his family in the event of his untimely death and at the same time provides him an opportunity to earn a return on his premium paid. In the event of the insured person's untimely death, his nominees would normally receive an amount that is the higher of the sum assured or the value of the units (investments). To put it simply, ULIP attempts to fulfill investment needs of an investor with protection/insurance needs of an insurance seeker. It saves the investor/insurance-seeker the hassles of managing and tracking a portfolio or products. A ULIP, as the name suggests, is a market-linked insurance plan. The main difference between a ULIP and other insurance plans is the way in which the premium money is invested. Premium from, say, an endowment plan, is invested primarily in risk-free instruments like government securities (gsecs) and AAA rated corporate paper, while ULIP premiums can be invested in stock markets in addition to corporate bonds and gsecs. ULIPs offer a variety of options to the individual depending on his risk profile. For instance, an individual with an above-average risk appetite can choose a ULIP option that invests upto 60% of premium in equities. Likewise, an individual with a lower risk appetite can select a ULIP that invests upto 20% of premium in equities 1.8.4 ULIP VS Traditional insurance plan It wasn't too long back, when the good old endowment plan was the preferred way to insure oneseff against an eventuality and to set aside some savings to meet one's financial objectives. Then insurance was thrown open to the private sector. The result was the launch of a wide variety of insurance plans, including the ULIPs. Two factors were responsible for the advent of ULIPs on the domestic insurance horizon. First was the arrival of private insurance companies on the domestic scene. ULIPs were one of the most significant innovations introduced by private insurers. The other factor that saw investors take to ULIPs was the decline of assured return endowment plans. Of course, the regulator -- IRDA (Insurance and Regulatory Development Authority) was instrumental in signaling the end of assured return plans. Today, there is just one insurance plan from LIC (Life Insurance Corporation) -- Komal Jeevan — that assures return to the policyholder.These were the two factors most instrumental in marking the arrival of ULIPs, but another factor that has helped their cause is a booming stock market. While this now appears as one of the primary reasons for their popularity, we believe ULIPs have some fundamental positives like enhanced flexibility and merging of investment and insurance in a single entity that have really endeared them to individuals. 1.8.2 Sum assured Perhaps the most fundamental difference between ULIPs and traditional endowment plans is in the concept of premium and sum assured. When you want to take a traditional endowment plan, the question your agent will ask you are -- how much insurance cover do you need? Or in other words, what is the sum assured you are looking for? The premium is calculated based on the number you give your agent. With a ULIP it works in reverse. When you opt for a ULIP, you will have to answer the question -- how much premium can you pay? Depending on the premium amount you state, you are offered a sum assured as. a multiple of the premium. For instance, if you are comfortable paying Rs 10,000 annual premium on your ULIP, the insurance company will offer you a sum assured of say 5 to 20 times the premium amount 1.8.3 Investments Traditionally, endowment plans have invested in government securities, corporate bonds and the money market. They have shirked from investing in the stock markets, although there is a provision for the same. However, for some time now, endowment plans have discarded their traditional outlook on investing and allocate about 10%-15% of monies to stocks. This percentage varies across life insurance companies. ULIPs have no such constraints on their choice of investments. They invest across the board in stocks, government securities, corporate bonds and money market instruments. Of course, within a ULIP there are options wherein equity investments are capped. 1.8.4 Expenses ULIPs are considered to be very expensive when compared to traditional endowment plans. This notion is rooted more in perception than reality. Sale of a traditional endowment plan fetches a commission of about 30% (of premium) in the first year and 60% (of premium) over the first five years. Then there is ongoing commission in the region of 5%. Sale of a ULIP fetches a relatively lower commission ranging from as low as 5% to 30% of premium (depending on the insurance company) in the first 1-3 years. After the initial years, it stabilizes at 1-3%. Unlike endowment plans, there are no IRDA regulations on ULIP commissions. Broadly speaking, ULIP expenses are classified into three major categories: 4) Mortality charges Mortality expenses are charged by life insurance companies for providing a life cover to the individual. The expenses vary with the age, sum assured and sum- at-risk for the individual. There is a direct relation between the mortality expenses and the abovementioned factors. In a ULIP, the sum-at-risk is an important reference point for the insurance company. Put simply, the sum-at-risk is the difference between the sum assured and the investment value the individual's corpus as on a specified date. 2) Sales and administration expenses Insurance companies incur these expenses for operational purposes on a regular basis. The expenses are recovered from the premiums that individuals pay towards their insurance policies. Agent commissions, sales and marketing expenses and the overhead costs incurred to run the insurance business on a day-to-day basis are examples of such expenses. 3) Fund management charges (FMC) These charges are levied by the insurance company to meet the expenses incurred on managing the ULIP investments. A portion of ULIP premiums are invested in equities, bonds, G.secs and money market instruments. Managing these investments incurs a fund management charge, similar to what mutual funds incur on their investments. FMCs differ across investment options like aggressive, balanced and debt ULIPs; usually a higher equity option translates into higher FMC. Apart from the three expense categories mentioned above, individuals may also have to incur certain expenses, which are primarily ‘optional’ in nature- the expenses will be incurred if certain choices that are made available to individuals are exercised. a) Switching charges Individuals are allowed to switch their ULIP options. For example, an individual can switch his fund money from 100% equities to a balanced portfolio, which has say, 60% equities and 40% debt. However, the company may charge him a fee for ‘switching’. While most life insurance companies allow a certain number of free switches annually, a switch made over and above this number is charged. b) Top-up charges ULIPs allow individuals to invest a top-up amount. Top-up amount is paid in addition to the premium amount for a particular year. Insurance companies deduct a certain percentage from the top-up amount as charges. These charges are usually lower than the regular charges that are deducted from the annual premium, c) Cancellation charges Life insurance companies levy cancellation charges if individuals decide to surrender their policies (usually) before three years. These charges are levied as a percentage of the fund value on a particular date, lustration-: of different charges on ULIP table 1.2 ULIP expense table Tenure Yearly | Expenses (%) Fund fteetwe (Yrs) premium Initial Remaining|Annual Annual fund|vatue rate (Rs) 2 yrs tenure jadministration|management|(Rs) return (pa) (pa) expenses* _| charges (%) (%)"" (Rs) ito 58,417 |6.48 45 [703,694 _|7.53 20 25,000 27.00 3.00 180.00 11.00 11,232,827|/7.98 es [2,042,497|8.22 0 (5,281,631)8.36 pa: per annum * Subject to inflation @ 5% pa. * CAGR Suppose an individual aged 30 years, wants to buy an ‘aggressive’ ULIP for a ‘sum assured of Rs500,000 for 30-Yr tenure. The premium he pays for the same is Rs25,000. The expenses for the initial 2 years is assumed to be 27% while for the remaining tenure, it is 3%. Fund management charges are assumed to be 1% p.a. of the corpus for the entire tenure. We have also assumed that the individual stays aggressive throughout the tenure and does not shift his money between the various fund options. Assuming the investments appreciate at 10% compounded annualized growth rate (CAGR). Thus fund value at the end of 10 years is Rs358,417 and the effective CAGR net of expenses is approximately 6.48%. However, it can be seen that as the years roll by, the CAGR keeps going up with a corresponding increase in the fund value. For example, the fund value at the end of the 20th year is Rs1,232,827 while the CAGR has gone up to approximately 7.98%. At the end of the 30th year, the CAGR has gone up to 8.38%. The reason why the CAGR goes up over a period of time is because the ULIP expenses even out over a period of time. The ‘evening out’ occurs because although the expenses are high in the initial years, they fall thereafter. And as the years roll by, the expenses tend to ‘spread themselves’ more evenly over the tenure of the ULIP. Another reason is also because the expenses are levied on the annual premium amount, which stays the same throughout the tenure. Therefore, the expenses do not have any impact on the returns generated by the corpus. Mortality expenses for ULIPs and traditional endowment plans remain the same as also the administration charges. One area where ULIPs prove to be more expensive than traditional endowment is in fund management. Since ULIPs have an equity component that needs to be managed actively, they incur fund management charges. These charges fluctuate in the 0.80%-1.50% (of premium) range. 1.8.5 Flexibility As we mentioned, one aspect that gives ULIPs an edge over traditional endowment is flexibility. ULIPs offer a host of options to the individual based on his risk profile There are insurance companies that offer as many as five options within a ULIP with the equity component varying from zero to a maximum of 100%. You can select an option that best fits your objectives and risk-taking capacity. Having selected an option, you still have the flexibility to switch to another option. Most insurance companies allow a number of free ‘switches’ in a year. Another innovative feature with ULIPs is the ‘top-up’ facility. A top-up is a one- time additional investment in the ULIP over and above the annual premium. This feature works well when you have a surplus that you are looking to invest in a marketlinked avenue, rather than stash away in a savings account or a fixed deposit. ULIPs also have a facility that allows you to skip premiums after regular payment in the initial years. For instance, if you have paid your premiums religiously over the first three years, you can skip the fourth year’s premium. The insurance company will make the necessary adjustments from your investment surplus to ensure the policy does not lapse. With traditional endowment, there are no investment options. You select the only option you have and must remain with it till maturity. There is also no concept of a top-up facility. Your premium amount cannot be enhanced on a one-time basis and skipped premiums will result in your policy lapsing 18.6 Transparency ULIPs are also more transparent than traditional endowment plans. Since they are market-linked, there is a price per unit. This is the net asset value (NAV) that is declared on a daily basis. A simple calculation can tell you the value of your ULIP investments. Over time you know exactly how your ULIP has performed. ULIPs also disclose their portfolios regularly. This gives you an idea of how your money is being managed. It also tells you whether or not your mutual fund and/or stock investments coincide with your ULIP investments. If they are, then you have the opportunity to do a rethink on your investment strategy across the board so as to ensure you are well diversified across investment avenues at all times. With traditional endowment, there is no concept of a NAV. However, insurers do send you an annual statement of bonus declared during the year, which gives you an idea of how your insurance plan is performing. Traditional endowment also does not have the practice of disclosing portfolios. But given that there are provisions that ensure a large chunk of the endowment portfolio is in high quality (AAA/sovereign rating) debt paper, disclosure of portfolios is likely to evoke little investor interest. 1.8.7 liquidity Another flexibility that ULIPs offer the individual is liquidity. Since ULIP investments are NAV-based it is possible to withdraw a portion of your investments before maturity. Of course, there is an initial lock-in period (3 years) after which the withdrawal is possible. Traditional endowment has no provision for pre-mature withdrawal. You can surrender your policy, but you won't get everything you have earned on your policy in terms of premiums paid and bonuses earned. If you are clear that you will need money at regular intervals then it is recommended that you opt for money-back endowment. 1.8.8 Tax benefits Taxation is one area where there is common ground between ULIPs and traditional endowment. Premiums in ULIPs as well as traditional endowment plans are eligible for tax benefits under Section 80C subject to a maximum limit of Rs 100,000. On the same lines, monies received on maturity on ULIPs and traditional endowment are tax-free under Section 10. 1.8.9 ULIP - Key features in general 1. Premiums paid can be single, regular or variable. The payment period too can be regular or variable. The risk cover can be increased or decreased. 2. Asin all insurance policies, the risk charge (mortality rate) varies with age. 3. The maturity benefit is not typically a fixed amount and the maturity period can be advanced or extended. 4, Investments can be made in git funds, balanced funds, money market funds, growth funds or bonds. 5. The policyholder can switch between schemes, for instance, balanced to debt or gilt to equity, etc. 6. The maturity benefit is the net asset value of the units. 7. The costs in ULIP are higher because there is a life insurance component in it as well, in addition to the investment component. 8. Insurance companies have the discretion to decide on their investment portfolios. 9. They are simple, clear, and easy to understand, 10. Being transparent the policyholder gets the entire episode on the performance of his fund. 14. Lead to an efficient utilization of capital. 12. ULIP products are exempted from tax and they provide life insurance. 13, Provides capital appreciation. 14. Investor gets an option to choose among debt, balanced and equity funds 1.8.10 ULIP - Standard Chartered The flexible Unit linked life insurance plans at Standard Chartered bank provides the opportunity to participate in market-linked retums while enjoying the valuable benefits of life insurance. Insurance Plans for Standard Chartered Bank customers is issued by Bajaj Allianz Life Insurance Company Limited. 1.8.11 BAJAJ ALLIANZ: Background Bajaj Allianz Life Insurance Co Ltd is a joint venture between two leading conglomerates- Allianz AG, one of the world's largest insurance companies, and Bajaj Auto, one of the biggest two and three wheeler manufacturers in the world, Allianz Group is one of the world's leading insurers and financial service providers. Founded in 1890 in Berlin, Allianz is now present in over 70 countries with almost 174,000 employees. Allianz Group provides its more than 60 million customers worldwide with a comprehensive range of services in the areas of Property and Casualty Insurance, Life and Health Insurance, & Asset Management and Banking. Bajaj Auto Ltd, the flagship company of the Rs80bn Bajaj Group is the largest manufacturer of two-wheelers and three-wheelers in India and one of the largest in the world. Bajaj Auto has a strong brand image & brand loyalty synonymous with quality & customer focus in India Allianz AG with over 110 years of experience in over 70 countries and Bajaj Auto, trusted for over 55 years in the Indian market, together are committed to offer Insurance solutions that provide all the security needed for a family. 1.8.42 Capital unit gain a unit liked plan Capital Unit Gain is @ unit linked endowment regular premium plan with the benefit of life protection offered by Bajaj Allianz. By choosing an appropriate premium level and term, individual can match the maturity date of the plan to a specific savings need such as child's education, wedding, retirement etc. It has unmatched flexibility to meet any emergency or any financial need. Bajaj Allianz Capital Unit Gain gives up to 97% allocation from the first year onwards to ensure that your investment income gets accelerated from the first year itself. With Bajaj Allianz Capital Unit Gain one can get to choose from a wide range of high quality investment funds coupled with flexible investment management. This is the one-stop solution to investment, tax-saving and protection needs. The Key Features of the Capital Unit Gain Plan are: + Option of choosing any sum assured between minimum and maximum limits to match insurance needs. + Option of choosing from a host of additional rider benefits: UL Accidental Death Benefit, UL Accidental Permanent Total/Partial Disability Benefit, UL Critical Wines Benefit and UL Hospital Cash Benefit + Increase savings by paying top up premiums. + Same premium allocation for all policy years with higher allocation for top up premiums. + Individuals choice of adopting own investment strategy to grow the funds under the policy + Choice of 5 investment funds with flexible investment management, with the ‘option of changing funds at any time and also invest in the newer funds that would be introduced from time to time. + Partial withdrawals without any surrender charge . + Flexibility to increase / decrease the regular premiums 1.8.13 COMPARISON OF BAJAJ ALLIANZ ULIP vis-a-vis OTHER POPULAR ULIPS AVAILABLE IN INDIA 1.3 comparison table of ULIP Features Bajaj Allianz ICICI ‘ABN Amro Policy Name Capital Unit Gain Life time Plus Life Bond Age 0 Yrs (Risk Minimum age at | commences at age 7) entry 0 4 Maximum age at entry 60 Yrs 65 65 Risk covered for age between 7-70 years 0-75 7-70 years Premium Amount Rs.10000 20000 NA Half-Yearly Available NA Quarterly Available NA Rs.1000 (Rs.5000 for Monthly top up) NA Single premium Available payment option Available Available Min.25000 Y times the annual 1.25 times the Maximum prem. depending on| Annual Premium* | Single Assured Amount | age (Term/2) Premium Age Y 0-30 100 31-35 BS 36-40 70 41-45 50 46-55 30 56-60 20 05 times the Policy Minimum Assured | Term times Annualized | Annual = Premium* Amount Premium. (Term/2) As above annual premium, Regular Premium | Allocation charge in | Allocation rate Allocation allocation % rate

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