Mutual Fund Analysis

Investment Objective & Portfolio Mgmt.

fl o o r, 20, C o m m uni t y C ent re, new 2008 BUSINES SCHOOL c oREPORT l o ny , SUBMITTED TO ICFAI A PROJECT Mr. Nitish Dipankar Ne w D el hi - 110065 STANDARD CHARTERED SUBMITTED BANK S 2

nd

Area Sales Manager (Standard Chartered Bank)

BY

ON

Ranjeet Kumar

INVESTMENT OBJECTIVES & PORTFOLIO MANAGEMENT AT STANDARD CHARTERED BANK 07BS3315

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ACKNOWLEDGEMENT

“Life is a journey; it's not the years in your life that count. It's the life in your years.” But Life can’t be completed without the support of many people. Any accomplishment requires the effort of many people and this work is not different. I would like to take this opportunity to thanks STANDARD CHARTERED BANK for giving me an opportunity to be a part of their esteem organization and enhance my knowledge by granting permission to do summer training project. I would also like to extend my sincere regards to Mr.NITISH DIPANKAR (Area Sales Manager, Standard Chartered Bank), my project guide for his guidance and support throughout my training .My learning has been immeasurable and working under him was great experience. I would always be grateful to him for the providing such an opportunity; and exposure to ground realities of business operations and functionalities. I would also thank Prof.P.C. VERMA my faculty guide ICFAI Business School, Gurgaon, for his immense guidance and suggestions in carrying out this project. Last but not the least I also wish to thanks

to everybody who helped me

through the successful completion of the project. The learning from this experience has been immense and would be cherished throughout my life. “It is good to have an end to journey toward; but it is the journey that matters, in the end.”

CONTENTS IBS, GURGAON

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Investment Objective & Portfolio Mgmt. 1.

Introduction…………………………………………………………………………..4

2.

Investments……………………………………………………………………………6

3.

Planning Your Investment………………………………………………………8

4.

Investment Options Available in India………………………………….14

5.

Current Banking Scenario of Indian Banking System………….26

6.

Indian Banking: Strength & Weaknesses………………………………31

7.

Standard Chartered Bank……………………………………………………….33

8.

Standard Chartered Bank in India………………………………………….36

9.

Products Offered……………………………………………………………………..42

10. Saving Accounts………………………………………………………………………43 11. ULIPs………………………………………………………………………………………..48 12. Mutual Funds…………………………………………………………………………….59 13. ULIPs Vs Mutual Funds……………………………………………………………108 14. Impact of Union Budget 2008-09…………………………………………..114

15.Survey………………………………………………………………………………………123 16. Profile of Respondents…………………………………………………………….125 17. Analysis…………………………………………………………………………………….130 18. Recommendations…………………………………………………………………..161 19. Conclusion………………………………………………………………………………..163 20. Annexure………………………………………………………………………………….167 21. References……………………………………………………………………………….171

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INTRODUCTION Rationale of the Project In the current banking scenario, all the banks are engaged in an in-depth introspection for analyzing their strengths and weakness and identifying core competencies to set a mission in which they are likely to find themselves as leaders. In all private and foreign banks stress is being laid on knowing their customers. This involves not just finding the profile details about the customer but also catering to their different needs. The needs and investment pattern of all individual change according to their life stages and are strongly influenced by their demographics. This project helps to analyze customer investment habits and suggest portfolio.

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Methodology The study was exploratory in nature and aimed at exploring the factors, which formed the basis for selection of different types of investments by individuals. The study also aimed at finding out what type of investment pattern is followed by individuals of different profiles and what is their frequency of investments so as to know where a person should invest. Individuals already availing or planning to avail the services of different banking firms both in public and private functioning at Delhi and Gurgaon, formed the population from where the sample was drawn. a sample of approx 100 respondents was studied for the purpose of this study. The research was carried out by collecting primary data for the study through a self-developed, non-disguised questionnaire for the customers of various

banks.

For

developing

the

profile

of

the

customers,

the

respondents were classified into various groups on the basis of their age, occupation and income. For age wise classification the respondents were categorized into four groups - group of 18-30 yrs, group of 30-40, 4050 and groups above 50. For income group there were four categories low income group of less than 250000, middle income 250000-500000, 500000-100000, high level income group of greater than 1000000. We tried to find keeping income as constant what are the various instruments they invest, for how long they invest etc.. For occupation wise classification four categories were selected namely service, business, self-employed and others for people like housewives. Limitation of the Study The study which is being conducted is limited by following reasons:1) Disclosure of information from the banks is a constraint-when I

approached the various banks for information there was lack of IBS, GURGAON

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cooperation on the part of the employees in giving the right information. 2) Unwillingness of the respondents to provide information-when I

approached the customers for filling the questionnaire, I encountered 2 kinds of problems. First they did not have time to fill the questionnaire, second they did not want to answer any question regarding income. 3) Incapacity to survey large number of people. I could survey approx

100 people. So whatever analysis has been done is done accordingly. 4) The people surveyed belonged to NCR region only-investment habits of people in different regions differ.

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INVESTMENTS In finance, the purchase of a financial product or other item of value with an expectation of favorable future returns. In general terms, investment means the use money in the hope of making more money. Done wisely, it can help meet individual financial goals like buying a new house, paying for college education of children, enjoying a comfortable retirement, or whatever is important to an individual. Savings form an imperative part of the economy of any nation. With the savings invested in various options available to the people, the money acts as the driver for growth of the country. Indian financial scene too presents an excess of avenues to the investors. You do not have to be wealthy to be an investor. Investing even a small amount can produce considerable rewards over the long-term, especially if one does it regularly. But one need to decide about how much you want to invest and where. To choose wisely, one need to know the investment options thoroughly and their relative risk exposures. An investment can be described as perfect if it satisfies all the needs of all investors. So, the starting point in searching for the perfect investment would be to examine investor needs. If all those needs are met by the investment, then that investment can be termed the perfect investment. Understanding the needs of the investor and ensuring that the most appropriate investments are selected is the most essential. The investment needs of an investor are simply his lifestyle needs converted into financial terms. These include the normal living expenses, food,

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accommodation, as well as education, health, recreation, transport, special occasions like marriages, festivals etc.

Investment Strategies You can make your own investment picking approach or adopt one after consulting financial experts or investment advisors. Whatever method you use, keep in mind the importance of diversification, or variety in your investment portfolio and the need for a strategy, or a plan, to guide your choices.

Investment approaches The options you choose to put your money in reflect the investment strategy you are using - whether you realize it or not. Most people adopt the following approaches:Conservative These investors take only limited risk by concentrating on secure, fixedincome investments etc. Moderate Such Investors take moderate risk by investing in mutual funds, bonds, select blue chip equity shares etc. Aggressive These are investors who take major risk on investments in order to have high (above-average) returns like speculative or unpredictable equity shares, etc. As a matter of fact, the investment approach of an investor is directly linked to his or her ability to shoulder risk. The ability to take risks depends largely IBS, GURGAON

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on personal circumstances and factors like age, past experiences with investment, level of responsibility, etc.

Planning Your Investment: Investment Planning is the process of identifying and implementing effective investment strategies to create and accumulate the financial resources for achieving financial planning goals. This section includes in-depth information related to investment planning. One of the parts of developing a comprehensive financial plan is the development of an investment plan. There are six steps that one should follow while developing an investment plan. •

The Means to Invest.

In order to even begin this portion of your financial plan, one must determine that he/she is ready to save. In this step one need to determine if one is going to use the money on some good or service (spend it), or if one will invest or save the money. •

Investment Time Horizon

In this step, you will be determining how long you plan to invest and when you will need the funds to meet your financial objective(s). You must decide, based

on

the

time

horizon

of

your

objectives,

among

short-term

investments, long-term investments or some combination. In this step you are going to be determining what you will be saving for, which should give some indication of your time horizon. •

Risk vs Return

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Risk and returns go hand in hand. Higher the risk, higher is the possibility of earning a good return. Thus, it follows that all types of investment have some form of risk attached to it. Theoretically, even 'safe' investments (such as bank deposits) are not without some element of risk. Broadly, here are the various types of risks that you might have to face as an investor. ➢ Credit Risk The risk is that the issuer of the security will default, or not repay the principal amount. This is valid for corporate bonds etc. ➢ Liquidity Risk If you invest in securities, stocks, bonds, you are risking their sell ability. In other words, your money gets stuck unnecessarily, creating an asset-liability mismatch. ➢ Market Risk Financial markets are volatile in nature. Volatility means sudden swings in value from high to low, or the reverse. The more volatile an investment is, the more profit or loss you can make, since there can be a big spread between what you paid and what you sell it for. But you also have to be prepared for the price to drop by the same amount. Those who invest in stocks and mutual funds typically run this risk. ➢ Interest Rate Risk

Depending on the interest rate movement in the economy, the rates of interest investment instruments may go up or come down, resulting in a subsequent reverse movement of their prices. Such a scenario of economic instability might affect mutual funds etc. The whole idea behind investment planning is to evaluate the risk associated with various types of investments and take steps so as to balance it with the desired return. IBS, GURGAON

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You will need to determine what your level of risk tolerance is. As the level of risk tolerance increases so does the potential for higher returns as well as larger losses. •

Investment Selection

Based on above three considerations, investments should be selected to meet your goals. These investments must satisfy your time horizon and your risk tolerance. •

Evaluate Performance

Once investments are chosen and expectations are established, the performance of your investments should be determined by comparing the actual realized returns against the expected returns. The returns should also be compared to a benchmark, such as the S&P 500 index. In addition, the investments should be reevaluated to determine if they continue to meet your investment criteria. •

Adjust the Portfolio

Your portfolio should be adjusted to maintain your goals and your investment criteria. If your goals change, your investments should be reviewed to determine if they continue to meet your objectives. To summarize, once you have determined that you are financially able to begin investing (or saving), you should evaluate your investment goals and set out a plan to accomplish these goals. Once you have begun your investment plan, you must periodically review the performance of your investments and re-evaluate your objectives and investments to make certain there is a good fit.

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Inflation Devil Inflation, the rate at which the general level of prices for goods and services rises, can steadily erode the purchasing power of your income. That is why you should invest a portion of your savings at a rate higher than the inflation rate to recover the loss of purchasing power. This means that over time a rupee will be able to buy a lesser amount of goods and services. If the inflation rate is 5%, then Rs. 100 worth of goods will cost Rs. 105 after a year. The following table indicates how the value of Rs 1,00,000 will change over time at different levels of inflation.

Inflation % p.a. Years

2

3

4

4.5

5

6

5

90,573

86,261

82,193

80,245

78,353

74,726

10

82,035

74,409

67,556

64,393

61,391

55,839

15

74,301

64,186

55,526

51,672

48,102

41,727

20

67,297

55,368

45,639

41,464

37,689

31,180

25

60,953

47,761

37,512

33,273

29,530

23,300

30

55,207

41,199

30,832

26,700

23,138

17,411

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The Power of Compounding Regardless of where you choose to put your money - cash, stocks, bonds, or a combination of these - the key to saving for the future is to make your money work for you. This is done through the power of compounding. Compounding investment earnings is what can make even small investments become larger, given enough time. You are probably already familiar with the principle of compounding. The money you put into a bank account earns an interest. Then, you earn interest on the money you originally put in, plus on the interest you have accumulated. As the size of your account grows, you earn interest on a bigger and bigger pool of money. The following table shows how much your money would grow when you invest a fixed amount per month over a period of 10, 15, 20, 25, and 30 years, assuming an interest rate of 10% p.a.

Amount (Rs) Years

1000

2000

3000

4000

5000

5

78,082

156,165

234,247

312,330

390,412

10

206,552

413,104

619,656

826,208

1,032,760

15

417,924

835,849

1,253,773

1,671,697

2,089,621

20

765,697

1,531,394

2,297,091

3,062,788

3,828,485

25

1,337,890

2,675,781

4,013,671

5,351,561

6,689,452

30

2,279,325

4,558,651

6,837,976

9,117,301

11,396,627

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How power of compounding makes your money grow, when you invest a fixed amount every month Here's how much your money would grow if you make an lump sum (onetime) investment and leave it untouched. The interest rate has been assumed to be 10%.

Amount (Rs) Years

100000

200000

300000

400000

500000

5

161,051

322,102

483,153

644,204

805,255

10

259,374

518,748

778,123

1,037,497

1,296,871

15

417,725

835,450

1,253,174

1,670,899

2,088,624

20

672,750

1,345,500

2,018,250

2,691,000

3,363,750

25

1,083,471

2,166,941

3,250,412

4,333,882

5,417,353

30

1,744,940

3,489,880

5,234,821

6,979,761

8,724,701

The real power of compounding comes with time. The earlier you start saving, the more your money can work for you. To attain certain amount of corpus within a set period of time, a pro-active investment style is preferable. Thus, no matter how young you are, the sooner you begin saving for the future, the better it is.

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Investment options available in India Today choosing a best investment plan is difficult because there are so many investment options available in India. These days we are getting more money compared to last decades.

1) Bank Fixed Deposits (FD) Fixed Deposit or FD is the most preferred investment option today. Minimum period is 15 days and maximum is 5 years and above. Senior citizens get special interest rates for Fixed Deposits. This is considered to be a safe investment because all banks operated under the guidelines of Reserve Bank of India. Other features are; •

Very low risk and low liquidity.

•

Low returns, but assured. Depending on the tenure and bank, could be around 6-9%

•

Since returns are fully taxable, the post-tax returns will be still lower.

•

Good for very low risk investors and those in the nil or low tax brackets. As interest rate scenario seems to be peaking, one could consider investing in 3-5 year FDs.

1) Fixed maturity plans (FMPs) FMPs, as they are popularly known, are the equivalent of a fixed deposit in a bank, with a caveat. The maturity amount of a fixed deposit in a bank is 'guaranteed', but only 'indicated' in the FMP. Its other features are; •

Low risk and low Liquidity.

•

No assured returns but depending on tenure and the MF, could be around 6-9%. (Ability to deliver the indicative returns).

•

MFs attract much lower taxation and hence give better post-tax returns vis-à-vis Bank FDs. IBS, GURGAON

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•

Good for low risk investors, but in high tax brackets. Good for investing the debt portion of one’s portfolio.

1) National Saving Certificate (NSC) NSC is backed by Govt. of India so it is a safe investment method. Minimum amount is Rs 100 and no upper limit. From FY 2005-'06 onwards interest accrued on NSC is taxable. •

Low risk with low liquidity (6 years lock-in).

•

8% assured returns.

•

Interest fully taxable. But eligible for Sec 80C benefit.

Not very attractive vis-à-vis other options like 5-year Bank FDs.

1) Public Provident Fund (PPF) PPF is another form of investment backed by Govt. of India. Minimum amount is Rs500 and maximum is Rs70,000 in a financial year. A PPF account can be opened in a head post office, GPO and selected branches of nationalized banks. Both PPF and NSC considered to be best investment option as it is backed by Government of India •

Low risk with very low liquidity (15-year lock-in period. Partial withdrawal allowed after 6 years).

•

8% assured returns. Interest is tax-free. Also Sec 80C benefit. Hence a good scheme.

•

Good tax saving investment option. Good for investing the debt portion of one’s portfolio

1) Equity This need high risk appetite. Ideal for those investors who have a good corpus, good knowledge and time to track the stock markets regularly. Care IBS, GURGAON

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should be taken to invest in good profit making companies. Penny stocks should be avoided •

High risk and high liquidity.

•

Market linked returns. Good potential.

•

Attractive tax treatment. No Long Term (investment of more than 1 year) Capital Gain Tax and 10% Short Term Capital Gains Tax.

1) Mutual Funds Mutual Fund companies collect money from investors and invest in share market. Investing in mutual funds is also subject to market risks but return is good. The various fund options are; Equity Funds •

High risk and high liquidity in open-ended funds.

•

Market linked returns. Good potential.

•

Attractive tax treatment. No Long Term Capital Gain Tax and 10% Short Term Capital Gains Tax.

•

Ideal for small and common investors, but with high risk appetite. SIP and a long term investment horizon can cut down risk and increase the probability of making good returns. Ideally, one should build a welldiversified portfolio with say 40-50% money in 5-7 diversified funds (large cap oriented), 20-30% money in 3-4 mid/small-cap funds, 1015% in 3-4 sector funds and 10-20% in balanced funds.

ELSS Funds •

High risk with low liquidity (3 years lock-in period).

•

Market linked returns. Good potential.

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•

Attractive tax treatment. No Long Term Capital Gain Tax and 10% Short Term Capital Gains Tax. Also Sec 80C benefit.

•

Good tax saving investment option. Amounts beyond Rs.1 lakh limit could be invested in open-ended funds. SIP in ELSS would reduce the volatility risk.

Balanced Funds •

Medium to High risk. High Liquidity.

•

Medium to high returns. Market linked.

•

Attractive tax treatment. No Long Term Capital Gain Tax and 10% Short Term Capital Gains Tax.

•

Though convenient as both debt and equity investment is covered under one fund, it may be better to invest separately in equity and debt funds for better control.

Debt Funds •

Low to Medium risk. High Liquidity.

•

Returns are market-linked. Today could be around 5-7%, but susceptible to interest rate risk.

•

Lower taxation of MFs makes such funds attractive.

•

Can be avoided in a rising interest rate scenario but is good in a falling interest rate scenario.

1) 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 corner stone; in ULIPs premium payments is the key component.

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•

Low to High Risk depending on the investment option i.e. Pure Debt or Mixed or Pure Equity. Low Liquidity (3-5 years lock-in period).

•

Low to high depending on the investment option. Market linked returns.

•

Tax free returns also Sec 80 C benefit available.

•

Not an attractive option due to high charges, low flexibility and low diversification. There are other better similar investment products like MFs with low charges, high flexibility and high diversification. As regards life cover, the same could be done through a term policy.

1) Endowment/Money back Plan

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 •

Low risk and very low liquidity

•

Low returns. Generally around 6-6.5%.

•

Tax free returns. Also Sec 80 C benefit available.

Not an attractive option due to low returns. There are other better similar investment products like PPF. As regards life cover, the same could be done through a term policy There are many investment options available like investing in Gold, Real Estate , commodities etc. the features of this options are;

1) Real Estate •

Variable risk and variable liquidity depending on the type and location of property.

•

Market linked returns. Good potential. IBS, GURGAON

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•

No tax advantages, except attractive tax benefits on the home loans.

•

High initial investment required which could make one’s portfolio lopsided;

high

transactions

costs

like

title-search,

registration

brokerage etc.; and cannot be partly liquidated. Therefore, real-estate MFs (expected in the near future) may be a better alternative than direct property investment. If investing directly, it is important to assess the potential and clear title.

1) Commodities •

High risk with high liquidity.

•

Market linked returns.

•

No tax advantages.

•

Highly cyclical.

1) Gold •

Low long-term risk. But volatile in short term. High Liquidity.

•

Has traditionally been a hedge against inflation. So returns could be around inflation levels.

•

No tax advantages.

•

Not an attractive investment option. Can be used for portfolio diversification to partly hedge against inflation. Gold MFs are better than buying physical gold.

Because of these unique properties, gold has traditionally been the currency of choice for much of the world's population. The value of gold has transcended all national, political, and cultural borders, making it the ideal currency.

1) Post Office Schemes •

Low risk and low Liquidity. IBS, GURGAON

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•

MIS scheme give 8% interest. Time deposit 6.25-7.5%.

•

Since returns are taxable, the post-tax returns will be still lower.

•

Good for very low risk investors and those in the nil or low tax brackets.

BANKING The banking section will navigate through all the aspects of the banking system in India. It will discuss upon the matters with the birth of the banking concept in the country to new players adding their names in the industry in coming few years. The banker of all banks, Reserve Bank of India (RBI), the Indian Banks Association (IBA) and top 20 banks like IDBI, HSBC, ICICI, ABN AMRO etc, IBS, GURGAON

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has been well defined. However, in the introduction part of the entire banking cosmos, the past has been well explained under four different heads namely: ➢ History of Banking in India ➢ Nationalization of Banks in India ➢ Scheduled Commercial Banks in India. ➢ Current Scenario of Banking in India. History of Banking in India Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India’s banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India’s growth process. The government’s regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. Not long ago. An account holder had to wait for hours at the bank counters for getting a draft of for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dials a pizza. Money has become the older of the day. Nationalization of Banks in India

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The nationalization of banks in India took place in 1969 by Mrs. Indira Gandhi the then Prime Minister. It nationalized 14 banks then. These banks were mostly owned by businessmen and even managed by them. ➢ Central Bank of India

➢ Bank of Maharashtra ➢ Dena Bank ➢ Punjab National Bank

➢ Syndicate Bank ➢ Canara Bank

➢ Indian Bank ➢ Indian Overseas Bank

➢ Bank of Baroda ➢ Union Bank ➢ Allahabad Bank ➢ United Bank of India

➢ UCO Bank ➢ Bank of India

Before the steps of nationalization of Indian banks, only State Bank of India (SBI) was nationalized. It took place in July 1955 under the SBI Act of 1955. Nationalization of seven State banks of India (formed subsidiary) took place on 19th July, 1960. The State Bank of India is India’s largest commercial bank and is ranked one of the top five banks worldwide. It serves 90 million customers through a network of 9000 branches and it offers – either directly or through subsidiaries a wide range of banking services. IBS, GURGAON

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The second phase of nationalization of Indian banks took place in the year 1980. Seven more banks were nationalized with deposits over 200 crores. Till this year, approximately 80% of the banking segment in India was under government ownership. After the nationalization of banks in India, the branches of the public sector banks rose to approximately 800% in deposits and advances took a huge jump by 11,000%. ➢ 1955: Nationalization of State Bank of India. ➢ 1959: Nationalization of SBI subsidiaries. ➢ 1969: Nationalization of 14 major banks. ➢ 1980: Nationalization of seven banks with deposits over 200 crores.

Scheduled Commercial Banks in India The commercial banking structure in India consists of: ➢ Scheduled Commercial Banks in India ➢ Unscheduled Banks in India Scheduled banks in India constitute those banks which have been included in the second schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42(6) (a) of the act. As on 30th June, 1999, there were 300 scheduled banks in India having a total network of 64,918 branches. The scheduled commercial banks in India comprise of State Bank of India and its associates (8), nationalized banks (19), foreign banks (45), private sector banks (32), co-operative banks and regional rural banks.

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“Scheduled banks in India” means the State Banks of India constituted under the State Banks of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the banking companies (Acquisition and Transfer of Undertaking) Act, 1970 (5 of 1970). Or under section 3 of the banking companies ( Acquisition and Transfer of Undertakings) Act, 1980 ( 40 of 1980), or any other bank being a bank included in the second schedule to the Reserve Bank of India Act, 1934 ( 2 of 1934), but does not include a co-operative”. “Non-scheduled bank in India” means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank”. The following are scheduled Banks in India (Public Sector): ➢ State Bank of India

➢ State Bank of Bikaner and Jaipur ➢ State Bank of Hyderabad ➢ State Bank of Indore ➢ State Bank of Mysore ➢ State Bank of Patiala ➢ State Bank of Saurashtra ➢ State Bank of Travancore ➢ Andhra Bank ➢ Allahabad Bank

➢ Bank of Baroda ➢ Bank of India

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➢ Bank of Maharashtra ➢ Canara Bank ➢ Central Bank of India ➢ Corporation Bank

➢ Dena Bank ➢ Indian Overseas Bank

➢ Indian Bank ➢ Oriental Bank of Commerce ➢ Punjab National Bank

➢ Punjab and Sind Bank ➢ Syndicate Bank ➢ Union Bank of India

➢ United Bank of India ➢ UCO Bank ➢ Vijaya Bank The following are the Scheduled Banks in India (Private Sector) •

Vysya Bank Ltd

•

Axis Bank Ltd

•

Indusind Bank Ltd

•

ICICI Banking Corporation Bank Ltd

•

Global Trust Bank Ltd

•

HDFC Bank Ltd

•

Centurion Bank Ltd

•

Bank of Punjab Ltd IBS, GURGAON

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Investment Objective & Portfolio Mgmt. •

IDBI Bank Ltd

The following are the Scheduled Foreign Banks in India •

American Express Bank Ltd.

•

ANZ Grid lays Bank Plc.

•

Bank of America NT & SA

•

Barclays Bank Plc

•

Citi Bank N.C.

•

Deutsche Bank A.G.

•

Hongkong and Shanghai Banking Corporation

•

Standard Chartered Bank.

Current Scenario of Indian Banking System Indian economy is one of the fastest growing economies in the world. The country’s GDP is growing at an average rate of almost 7% during the last decade with the GDP growth rate touching 9.4% in the last year. The Indian banking industry also had its share in the growth of the Indian economy. With the Indian economy moving on to a high growth trajectory, consumption levels soaring and investment riding high, the Indian banking sector is at a watershed. The industry has been growing faster than the real economy, resulting in the ratio of assets of commercial banks to GDP increasing to 92.5% at end-March 2007. The Indian banks have also been doing exceptionally well in the financial sector with the price-to-book value being second only to China. Consequently, the degree of leverage enjoyed by the banking system, as reflected in the equity multiplier (measured as total assets divided by total IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

equity), has increased from 15.2% at end March 2006 to 15.8 % at the end of March 2007. Growth of the sector A burgeoning economy, financial sector reforms, rising foreign investment, favorable regulatory climate and demographic profile has led to India becoming one of the fastest growing banking markets in the world. The overall banking industry's business grew at a CAGR of about 20 per cent from US$ 469.4 billion as of March 2002, to US$ 1171.29 billion by March 2007. In the current fiscal, aggregate bank deposits increased by 23.8 per cent, year-on-year, as of January 4, 2008 as against 21.5 per cent a year ago. While aggregate demand deposits increased by 15.6 per cent, aggregate time deposits increased by 25.3 per cent in the same period, indicating migration from small savings schemes of the Government. Similarly, aggregate deposits of the scheduled commercial banks (SCB), after growing by 17.8 per cent and 24.6 per cent in 2005-06 and 2006-07, rose by 25.2 per cent, year-on-year, as on January 4, 2008. In fact, the absolute increase of US$ 96.34 billion (14.6 per cent) in the current fiscal year up to January 4 2008 was higher than the US$ 70.59 billion (13.2 per cent) increase in the same period last year. Simultaneously, loans and advances of SCBs rose by over 30 per cent (i.e. 33.2 per cent in 2004-05, 31.8 per cent in 2005-06 and 30.6% cent in 200607)

in

the

last

three

financial

years,

underpinned

by

the

robust

macroeconomic performance. The growth has continued in the current fiscal IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

with non-food credit by SCBs increasing by 22.2 per cent, year-on-year, as on January 4, 2008. Private Sector Ever since the banking operations had been opened to the private sector in 1990s, the new private banks have been increasing its role in the Indian banking industry. Against the industry average growth of about 20 per cent in the past five years, the new private sector banks registered a growth of about 35 per cent per annum, growing from US$ 41.63 billion as of March 2002 to US$ 186.71 billion by March 2007. Consequently, new private banks market share has increased from about 9 per cent in 2001-02 to 16 per cent as of March 2006-07. Foreign banks, which totaled 29 in June 2007, have also been expanding at a rapid pace. For example, India was the fastest growing market for Global banking major HSBC in 2006-07, with a growth rate of 64 per cent. The balance sheet of private banks and foreign banks in India expanded by 38.7 per cent and 39.5 per cent during 2006-07, taking their combined share (along with private banks) in total assets of the banking sector to grow from 22.3 per cent at the end of March 2006 to 24.9 per cent by March 2007.

Investment Banking The flurry of mergers and acquisition deals by Indian corporate has boosted the investment banking revenues to a record high. Investment banking

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Investment Objective & Portfolio Mgmt.

revenues from India crossed the US$ 1 billion mark for the first time in 2007 to US$ US$ 1.069 billion. This is significantly higher than the US$ 400 million investment banking revenues recorded in 2006. Also, this surge in revenues has propelled India to become the third largest market for investment banking in Asia-Pacific in 2007. Potential While this growth has been very impressive, the potential banking market waiting to be tapped in India is still fairly huge. Out of the 203 million Indian households, three-fourths, or 147 million, are in rural areas and 89 million are farmer households. In this segment, 51.4 per cent have no access to formal or informal sources of credit, while 73 per cent have no access to formal sources of credit. In fact, according to a report by Boston Consultancy Group, India has the second largest financially excluded households of about 135 million, which is next only to china. Also, about 60 million new households are expected to be added to India's bankable pool between 2005 and 2009. With such a large untapped market, the Indian banking industry is estimated to grow rapidly, faster than even china in the long run. 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 2008, the retail credit is

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Investment Objective & Portfolio Mgmt.

expected to cross Rs 5, 70,000 crore by 2010 and huge SME sector which contributes significantly to India’s GDP.

Road Ahead Banks aspiring to become global must have a presence in India and other emerging markets, as they are set to become a major source of financial sector revenue and profit growth. As the Indian banking industry continues its rapid growth along with rise in financial services penetration in the Indian economy, the industry's profit is likely to simultaneously surge ahead. According to a report by Boston Consultancy Group, the profit pool of the Indian banking industry is estimated to increase to US$ 20 billion in 2010 and further to US$ 40 billion by 2015. Simultaneously, driven by the expansion of the middle class population. With such a favorable scenario, India is likely to emerge as the third largest banking hub in the world by 2040, says a Price Waterhouse Coopers report.

Indian Banking: Strength & Weaknesses

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Investment Objective & Portfolio Mgmt.

Major Strength Areas *

Area to be geared up for future Growth.

Regulatory Systems

Diversification of markets beyond

Economic Growth Rate

big cities

Technological Advancement

Size of banks

Risk Assessment Systems

HR Systems

Credit Quality

Banking Infrastructure Labour Inflexibilities High Transaction Costs

Indian Banking Sector

Turnaround success strategies

Strategies To Be Adopted For Creating World Class Banking System Consolidation Strict Corporate Governance Norms Regional Expansion (Both within India as well as Outside) Higher FDI limits FTA with countries where India has comparative advantage in banking sector

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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 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. The current policy environment enables a fair level of foreign participation even in the non-banking financial sector of the country.

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Investment Objective & Portfolio Mgmt.

STANDARD CHARTERED BANK: BACKGROUND Standard chartered: leading the way in Asia, Africa and Middle East Standard Chartered Bank is a British bank headquartered in London with operations in more than seventy countries. It operates a network of over 1,700 branches and outlets (including subsidiaries, associates and joint ventures) and employs 73,000 people. The name Standard Chartered comes from the two original banks from which it was founded – The Chartered Bank of India, Australia and China, and The Standard Bank of British South Africa.

It is listed on the London Stock Exchange and the Hong Kong Stock Exchange and is among the top 25 constituent members of the FTSE 100 Index. In its unique position as an international bank with strong franchise, Standard Chartered combines an in-depth knowledge of local markets with global product expertise to offer effective financial solutions. The bank capitalizes on its onshore presence across Asia, Africa and the Middle East to offer customers convenient and reliable access to the widest range of currency markets, to date local market information, country-specific global risk management strategies, and customized capital raising and liquidity management solutions.

Group chief executive peter sand IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

The present CEO is PETER SAND he was nominated as the CEO in November 2006 Sands has been with the bank since 2002, and was most recently serving as Group Finance Director. Prior to his appointment to the Board of Standard Chartered PLC, Peter was a Director with worldwide consultants McKinsey & Co. Peter had been with McKinsey since 1988 where he worked extensively in the banking and technology sectors in a wide range of international markets. He was elected a partner of McKinsey in 1996 and became Director in 2000.

Standard Chartered Today Today Standard Chartered is the world's leading emerging markets bank employing 30,000 people in over 500 offices in more than 50 countries primarily in countries in the Asia Pacific Region, South Asia, the Middle East, Africa and the Americas.

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Investment Objective & Portfolio Mgmt.

The new millennium has brought with it two of the largest acquisitions in the history of the bank with the purchase of Grind lays Bank from the ANZ Group and the acquisition of the Chase Consumer Banking operations in Hong Kong in 2000. These acquisitions demonstrate Standard Chartered firm committed to the emerging markets, where it has a strong and established presence and where it sees their future growth.

Awards Standard Chartered Bank has ended 2007 on a high note by bagging best bond house titles from three well-respected finance titles, fortifying its strengths and capabilities as a bond powerhouse in the key markets of Asia, Africa and the Middle East. Some of the awards which standard chartered received last year are Best Trade Finance Bank in Singapore, Best Transaction Bank in Korea - SC First Bank, Best Domestic Custodian in Korea - SC First Bank. best structured trade finance bank, best sub-custodian in Indonesia, Korea and Thailand, best trade finance bank in Singapore, best bank for liquidity management Africa. there are many more awards which the bank received for its good and efficient performance throughout the world.

Recent Acquisitions In the year 2000 standard chartered plc was in news because of its acquisition of Grid lays bank. Standard Chartered Completes Acquisition Of American Express Bank For $823 Million. IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

AEB

is

a

wholly-owned

subsidiary

of

AXP.

Founded

in

1919

and

headquartered in New York, this acquisition will Significantly enhance Standard Chartered’s Financial Institutions transaction banking business by bringing both new client relationships and new capabilities to this key customer segment.

Standard Chartered Bank in India 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 12th 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 “Grind lays” Bank in 2000 were two key events that were have played an important role in making the Bank the largest international Bank in India. Mr. NEERAJ SWARUP is the present CEO of standard Chartered bank India. Mr. Swarup had been heading HDFC Bank's consumer banking business for the last four years. He was also associated with the Bank of America. Standard Chartered Bank is the largest international banking group in India with 83 branches in 33 cities. It also has 231 ATMs. The Bank is having a combined customer base of 2.5 million in retail banking and over 1200 corporate customers. Stan Chart’s Indian operations now accounts for 17% of its global revenues in 2007, making it the second largest contributor (with operating profit of $690 million) to the global revenues after Hong Kong. The key business of Standard Chartered Bank in India include consumer banking—mortgages, personal loans and wealth management- and –

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Investment Objective & Portfolio Mgmt.

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 “Sap nay” credit card, the international debit card that provides free access to over 1500 visa ATMs, 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 customers.

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Investment Objective & Portfolio Mgmt.

PRESENCE OF STANDARD CHARTERED BANK IN INDIA: 33 CITIES WITH MORE THAN 83 BRANCHES.

MORE THAN BANKING IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

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 is believing’, a programme that aims to restore sight to one million people globally by 2007, 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.

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Investment Objective & Portfolio Mgmt.

Products offered by standard chartered

OPERATION

SME BANKING

COMMERCIAL BANKING

INSURANCE

INVESTMEN T SERVICES

ULIP

LOANS

PERSONAL BANKING

ACCOUNTS

SAVINGS ACCOUNT

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Investment Objective & Portfolio Mgmt.

ACCOUNTS

TERM

aaSaan

DEMAT

Parivaar

2-IN-1

No Frills Account

SAVINGS

aXcessPlus

CURRENT

Super Value

PRODUCTS OFFERED IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

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. PERSONAL BANKING: To cater the diverse financial needs, Standard

Chartered offers a wide range of premium banking products and services through its network of 83 branches in 33 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 tailormake a product suite to take care of his specific banking needs.

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.

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.

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Investment Objective & Portfolio Mgmt.

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: 1. Savings Account : Personal banking 2. Unit Linked Insurance Plan (ULIP): Personal banking 3. Mutual Funds: Commercial banking

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 earn some interest on the residual balances. For details of different

saving accounts offered by StanC & comparison with different

bank’s a/s see annexure. Standard Chartered bank offers four types of Savings account catering to the needs of different customers namely: 1) Axcess Plus -Standard Chartered bank's aXcess Plus is an innovatory savings account that provides you with unparalleled aXcess to your money. The customer can get instant cash at over 1 Million ATMs across the world through the Visa network. And a globally valid Debit Card that lets you shop at over 326,000 outlets in India and at over 21 Million outlets across the world. Minimum average quarterly balance to be maintained is Rs.10,000. Unique Features: •

Free aXcess to cash anytime, anywhere, across India

•

Free Unlimited Visa ATM transactions* (Cash withdrawal and balance IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

enquiry) •

Free Standard Chartered Bank branch access across the country

•

Free Doorstep Banking

•

Free Demand Drafts/Pay Orders* (drawn at SCB locations)

•

Free Payable at Par Chequebook

Other features are: •

International debit card

•

Phone banking

•

Internet banking

•

Extended banking hours

•

365 days branches open

The aXcess plus customers get FREE aXcess to cash withdrawals at over 6500 Visa ATMs in up to four free transactions per month. This is over and above unlimited free aXcess to all Standard Chartered Bank ATMs.

2) Super Value – An account with lots of facilities and can be termed as an account much more than an ordinary saving account. You name it and they offer it. The unique SuperValue savings account is proof that the best things in life come free. With an average quarterly balance of just Rs. 50,000, you get a host of services from Standard Chartered absolutely free.

•

Free globally valid Debit cum ATM card. IBS, GURGAON

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Investment Objective & Portfolio Mgmt. •

Free doorstep banking.

•

Free payable at par cheque books/ account statements/ demand drafts.

•

Free Bill Pay, Inter banks funds transfer.

•

Free foreign inward remittance certificate.

•

Free access to 6500 ATMs across India.

Other benefits of the Super Value account •

Globally valid debit card - make purchases at over 12 million merchant outlets and withdraw cash at over 810,000 ATMs worldwide using funds from your account.

•

Multicity Banking - access your account even when you are out of town.

•

Enjoy extended banking hours at all our branches, and Speed Cheque Clearing and Metro Clearing facilities.

•

24-hour branches, 365 day branches available at select locations.

•

Phone banking - available to you 365 days a year on a 24-hour basis in the metros and everyday of the week at other centers.

•

Internet banking - access and transact on your accounts through the Internet from any part of the world.

•

Free Investment Advisory Services to assist you in investing in a range of mutual funds.

•

Full suite of complimentary banking services including credit cards, loan products and capital market services.

3) No Frills Saving Accounts - No Frills Savings Account, a New account to meet your basic banking requirements

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Investment Objective & Portfolio Mgmt.

You can now open an account with Standard Chartered Bank, with an average quarterly balance of as low as Rs. 250. What’s more – you can avail of Anywhere Banking, by which you can access your account from any branch of Standard Chartered Bank in India. Unique features are; •

Quarterly Average Balance, as low as Rs. 250

•

ATM card & Debit Card available

•

4 free transactions per month at any Standard Chartered Bank channel (Internet banking, Phone Banking, ATM & Branch)

•

Anywhere banking – Access your account from any branch of Standard Chartered Bank.

•

Access to Phone Banking and Internet Banking

•

Free Cheque deposit at any SCB Branch or ATM.

Eligibility criteria This account is available to individual Resident Indian customers. Account may be opened after being properly introduced in a manner approved by the Bank

4) aaSaan - Here's introducing Standard Chartered Bank's aaSaan savings account - the easy solution to all your banking needs. Its unique features are:•

No Minimum Balance requirement

•

Free unlimited access to any SCB branch across the country for Customer in-person IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

•

Unlimited Free access to Standard Chartered Bank ATM's

•

Up to 4 free cash withdrawal transactions per month at other domestic VISA ATMs.

•

Nominal quarterly fee of Rs. 100 (reversed if the Average Balance in the quarter is Rs 10,000 or more

Other Facilities •

International Debit Card

•

Phone banking

•

Net Banking

•

Extended banking hours*

•

Locker facility*

•

Doorstep banking

To open an aaSaan account, you have to initially fund the account with Rs. 10,000 (Rs. Ten Thousand)

5) Parivaar- Parivaar is a unique Wealth Management Solution from Standard Chartered Bank that offers your family flexibility, convenience and essential tools for wealth accumulation and preservation.

•

Your family can maintain individual savings accounts with the benefit of clubbing balances in grouped accounts.

•

Anytime, anywhere access to accounts through ATMs, Phone Banking and Inter Net banking.

•

Option of Systematic Investment Plan (SIP), a well known long IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

term wealth building tool that allows you to invest a fixed amount of money every month in specific mutual funds. This comes with a direct debit facility and avoids the need to remember dates and write cheques every month.

•

Globally valid ATM-cum-debit card can be used at 55,000 merchant outlets in India and 12 million outlets worldwide.

ULIP (Unit Linked Insurance Plan)

ULIP is an abbreviation for Unit Linked Insurance Policy. A ULIP is a life insurance policy which provides a combination of risk cover and investment. The dynamics of the capital market have a direct bearing on the performance of the ULIPs. ULIP is life insurance solution that provides for the benefits of protection and flexibility in investment. The investment is denoted as units and is represented by the value that it has attained called as Net Asset Value (NAV). ULIP came into play in the 1960s and became very popular in Western Europe and Americas. The reason that is attributed to the wide spread popularity of ULIP is because of the transparency and the flexibility which it offers. As times progressed the plans were also successfully mapped along with life insurance need to retirement planning. In today’s times, ULIP provides solutions for insurance planning, financial needs, financial planning for children’s future and retirement planning. IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

A ULIP, as the name suggests, is a market-linked insurance plan. A ULIP is a unit linked insurance plan. This is the type of investment where the characteristics of insurance and mutual fund are combined. Some part of the money invested goes into the insurance cover and the remaining goes into an asset class. 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 govt. securities.

Type of Funds Most insurers offer a wide range of funds to suit one’s investment objectives, risk profile and time horizons. Different funds have different risk profiles. The potential for returns also varies from fund to fund. The following are some of the common types of funds available along with an indication of their risk characteristics.

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Investment Objective & Portfolio Mgmt.

General Description

Nature

Risk Category

of Investments Equity Funds

Primarily

Medium to High

invested

in

company stocks the

with general

aim of capital appreciation Income, Fixed Interest Invested and Bond Funds

in Medium

corporate bonds, government securities and other

fixed

income instruments Cash Funds

Sometimes known

Low as

Money Market Funds

—

invested

in

cash, deposits

bank and

money IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

market instruments

Balanced Funds

Combining

Medium

equity investment with

fixed

interest instruments

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 up to 60% of premium in equities. Likewise, an individual with a lower risk appetite can select a ULIP that invests up to 20% of premium in equities.

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?

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Reasons why ULIPs score over endowment plans Such has been the popularity of ULIPs in the recent past that they have outpaced the growth of regular endowment plans. We take a look at the most important reasons why ULIPs score over endowment plans. 1. The power of equity Simply put, ULIPs are life insurance plans, which have a mandate to invest upto 100% of their corpus in equities. While individuals have the choice to shift between equity and debt (explained later in this article), several studies have shown that equities are best equipped to deliver better returns compared to their fixed-return counterparts like bonds and gsecs. And given the fact that life insurance is a long-term contract, equity-oriented ULIPs augur well for the policyholder.

2. Flexibility While ULIPs offer the opportunity to invest up to 100% in equity, it is also true that ULIPs provide individuals the flexibility to shift to up to 100% debt. It is entirely upon the individual how he wishes to allocate his premiums between equity and debt. This is not the case with endowment type plansindividuals can't choose their investment avenues and have to be content with the insurance company's investment decisions which revolve largely around debt. ULIPs are available in 3 broad variants: 'Aggressive' ULIPs, which invest upto 100% of their corpus in equities, 'Balanced' ULIPs which invest upto 60% of their corpus in equities and 'Conservative' ULIPs which invest up to 100% of their corpus in debt instruments and the money market instruments*. Individuals are free to decide where they want to invest their IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

money. For example, individuals with an appetite for risk can invest their entire money in equities while conservative individuals have the option to park their money in balanced or conservative ULIPs. * The percentages given in the paragraph above may differ across life insurance companies. That

apart,

ULIPs

terminating/resuming

also

provide

premiums,

individuals

with

the

increasing/decreasing

flexibility

premiums

of and

paying top-ups (i.e. a one-time sum over and above the regular premium) whenever possible. These options are not available in regular endowment plans. 3. Transparency For the first time, ULIPs introduced transparency into the manner in which life insurance products were being managed. This is something that was missing in conventional savings-based insurance products (like endowment/ money-back/ pension plans). To understand why we are saying this, one has to first understand the structure of traditional endowment plans. Traditional endowment plans have been opaque in more ways than one. To begin with, traditional endowment plans have invested a sizable portion of their corpus in debt instruments like gsecs and bonds. The quantum of money invested is not known. Individuals do not have access to portfolios of endowment plans so they never find out how much money is in debt/equities. Add to this the fact that the expenses, which form a sizable percentage of the premium in the first few years, are also not clear and you have a situation where the individual is 'investing' in life insurance purely on the basis of faith and little else! Unit linked plans brought transparency into the scheme of things. Today, if an individual wants to invest in a ULIP, he knows upfront what percentage IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

of the premium is being invested, what are the charges being levied and where his monies are being invested. This is a welcome change for the policyholder. Another advantage ULIPs offer is that they enable insurance seekers to compare plans across companies and help him buy a plan that fits well into his portfolio. Also ULIPs disclose their portfolios at regular intervals, so you know exactly where your money is being invested. 1. 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.

5. Liquidity ULIPs offer liquidity to the individual. He can withdraw money anytime he wishes to once the initial years' premiums are paid. He will not be levied with any surrender charges i.e. he stands to get the full market value of his investments, net of charges, till date. This is unlike conventional endowment plans where individuals tend to lose out on surrender charges on surrendering their policies. Besides, part surrender is also allowed in ULIPs. Simply put, part surrender allows individuals to withdraw a part of their corpus and thus keep the policy alive, albeit with some adjustments. This helps individuals tide over a situation where they need cash but have few 'liquid' investments at their disposal. So does this mean that it is the end of the road for endowment plans? Not IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

quite! Individuals need to understand the de-merits of investing in marketlinked products like ULIPs. The latter are susceptible to the vagaries of markets and can burn a hole in your portfolio over the short term. So if you can't withstand that kind of volatility, equity-oriented ULIPs are not the right investment option for you. Insurance seekers would do well to take into consideration their risk appetite as well as their overall financial portfolio before taking a final call on ULIP investments. The ideal option is to have a prudent mix of endowment and ULIPs depending on your preference for either long-term growth or stability.

CHARGES Premium Allocation Charge This is a percentage of the premium appropriated towards charges before allocating the units under the policy. This charge normally includes initial and renewal expenses apart from commission expenses.

Mortality Charges These are charges to provide for the cost of insurance coverage under the plan. Mortality charges depend on number of factors such as age, amount of coverage, state of health etc Fund Management Fees These are fees levied for management of the fund(s) and are deducted before arriving at the Net Asset Value (NAV). Policy/ Administration Charges These are the fees for administration of the plan and levied by cancellation of units. This could be flat throughout the policy term or vary at a preIBS, GURGAON

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Investment Objective & Portfolio Mgmt.

determined rate. Surrender Charges A surrender charge may be deducted for premature partial or full encashment of units wherever applicable, as mentioned in the policy conditions. Fund Switching Charge Generally a limited number of fund switches may be allowed each year without charge, with subsequent switches, subject to a charge. Service Tax Deductions Before allotment of the units the applicable service tax is deducted from the risk portion of the premium. Investors may note, that the portion of the premium after deducting for all charges and premium for risk cover is utilized for purchasing units.

ULIP – STANDARD CHARTERED The flexible Unit linked life insurance plans at Standard Chartered bank provides the opportunity to participate in market-linked returns while enjoying the valuable benefits of life insurance. Insurance Plans for Standard Chartered Bank customers is issued by Bajaj Allianz Life Insurance Company Limited.

BAJAJ ALLIANZ: Bajaj Allianz General Insurance Company Limited is a joint venture between Bajaj Auto Limited and Allianz SE. Both enjoy a reputation of expertise, stability and strength. IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

The Allianz Group is one of the leading global services providers in insurance, banking and asset management. With approximately 181,000 employees worldwide (as of December 31, 2007), the Allianz Group serves more than 80 million customers in about 70 countries. On the insurance side, Allianz is the market leader in the German market and has a strong international presence. In fiscal 2007 the Allianz Group achieved total revenues of over 102 billion euros. Allianz is also one of the world’s largest asset managers, with thirdparty assets of 765 billion euros under management at year end 2007. 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 In the Indian market, together are committed to offer Insurance solutions that provide all the security needed for a family.

BAJAJ ALLIANZ NEW SECURE FIRST PLAN Bajaj Allianz New Secure First offers the unique option of combining the protection of life insurance with the attractive prospect of investing in securities. It provides you with an opportunity to have a direct stake in the performance of financial market. . 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. This is the one-stop solution to investment, tax-saving and protection needs.

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Investment Objective & Portfolio Mgmt.

The key features of New Secure First Plan are: •

It is a unit linked plan with a minimum of 5 years and maximum maturity age 70

•

Guaranteed death benefit: Value of units plus Sum Assured.

•

Choice

of

5

investment

funds

today

with

flexible

investment

management: you can change funds at any time and also invest in the newer funds that would be introduced from time to time. •

Attractive investment alternative to fixed –interest securities

•

Provision for full/partial Withdrawl any time after three years from commencement if three full years’ premium are paid.

•

Unmatched flexibility to match changing needs of customer to manage investments, pay top-ups, and cash withdrawal option.

Other benefits are; •

Maturity benefit- On maturity, the value of units in the fund will be paid out and policy will terminate.

•

Option of choosing from a host of additional rider benefits:

UL Accidental Death Benefit, UL Accidental Permanent Total/Partial Disability Benefit, UL Critical Illness; Benefit and UL Hospital Cash Benefit •

Increase savings by paying top up premiums

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Investment Objective & Portfolio Mgmt.

•

Flexibility to increase / decrease the regular premiums

MUTUAL FUNDS A mutual fund is a pool of money, collected from investors, and is invested according to certain investment objectives. A mutual fund uses the money collected from the investors to buy those assets which are specifically permitted by its stated investment objective. The fund’s assets are owned by the investors in the same proportion as their contribution bears to the total contributions of all investors put together.

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Investment Objective & Portfolio Mgmt.

HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank the. The history of mutual funds in India can be broadly divided into four distinct phases First Phase – 1964-87 GROWTH OF UNIT TRUST OF INDIA Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of

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Investment Objective & Portfolio Mgmt.

RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under management. Second Phase – 1987-1993 (Entry of Public Sector Funds) 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

Third Phase – 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

India with Rs.44, 541 crores of assets under management was way ahead of other mutual funds.

Fourth Phase – since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified

Undertaking

of

Unit

Trust

of

India,

functioning

under

an

administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes. The graph indicates the growth of assets over the years.

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Investment Objective & Portfolio Mgmt.

CHARGES The Asset Management Companies (AMCs) managing the Mutual Funds levy a load as a percentage of NAV at the time of entry into the Schemes or at the time of exiting from the Schemes. Entry Load - It is the load charged by the fund when an investor invests into the fund. It increases the price of the units to more than the NAV and is expressed as a percentage of NAV. Exit Load - It is the load charged by the fund when an investor redeems the units from the fund. It reduces the price of the units to less than the NAV and is expressed as a percentage of NAV. Cost of Churning/Turnover cost - It refers to the costs associated with the churning (or changes made to the holdings) of the portfolio. Portfolio changes have associated costs of brokerage, custody fees, transaction fees and registration fees, which lower the returns. The quantum depends on the management style of the fund manager.

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Expense Ratio - The Expenses of a mutual fund include management fees and all the fees associated with the fund's daily operations. Expense Ratio refers to the annual percentage of fund's assets that is paid out in expenses.

Tax Capital Gains Tax- The profit realizations on sale of securities and certain other capital assets (including units of mutual funds) are called capital gains. The gains can be classified into long-term or short-term depending on the period of holding of the asset and are charged to tax at different rates. Gains on mutual fund units held for a period of 12 months or more are long-term gains. These gains are taxable. Dividend Distribution Tax – The Mutual Fund schemes distributing dividends on their units to the investors attract a distribution tax as per tax laws. Securities Transaction Tax – AMCs managing the portfolio have to pay STT on transaction (buying/selling) of different securities in the stock market. Presently the tax rate is 0.025%.

Pointers to Mutual Fund Performance Mutual Fund industry today, with about 34 players and more than five hundred schemes, is one of the most preferred investment avenues in India. However, with a plethora of schemes to choose from, the retail investor faces problems in selecting funds. Factors such as investment strategy and management style are qualitative, but the funds record is an important indicator too. Though past performance alone can not be indicative of future performance, it is the only quantitative way to judge how good a fund is at present. Therefore, there is a need to correctly assess the past performance of different mutual funds. Quite simply then a fund generating more returns

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Investment Objective & Portfolio Mgmt.

than the other is considered better than the other. But this is just half the story. Return alone should not be considered as the basis of measurement of the performance of a mutual fund scheme, it should also include the risk taken by the fund manager because different funds will have different levels of risk attached to them.

Risk associated with a fund can be defined as fluctuations in the returns generated by it. The higher the fluctuations in the returns of a fund during a given period, higher will be the risk associated with it. These fluctuations in the returns generated by a fund are resultant of two guiding forces. First, general market fluctuations affecting all the securities present in the market are called market risk or systematic risk and second, fluctuations due to specific securities present in the portfolio of the fund, called unsystematic risk. The Total Risk of a given fund is sum of these two and is measured in terms of standard deviation of returns of the fund.

Systematic risk is measured in terms of Beta, which represents fluctuations in the NAV of the fund vis-à-vis market. The more responsive the NAV of a mutual fund is to the changes in the market; higher will be its beta. Beta is calculated by relating the returns on a mutual fund with the returns in the market. While unsystematic risk can be diversified through investments in a number of instruments, systematic risk cannot. By using the risk return relationship, we try to assess the competitive strength of the mutual funds vis-à-vis one another in a better way. It should be appreciated that there is a level of risk that a fund has taken to generate this return. So what is really

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relevant is not just performance or returns. What matters therefore are Risk Adjusted Returns (RAR). The only caveat whilst using any risk-adjusted performance is the fact that their clairvoyance is decided by the past. Each of these measures uses past performance data and to that extent are not accurate indicators of the future.

There are different statistical parameters available on which a fund may be analyzed. These are:

1. Standard Deviation

The most basic of all measures- Standard Deviation allows evaluating the volatility of the fund. Alternatively, it allows measuring the consistency of the returns.

Volatility is often a direct indicator of the risks taken by the fund. The standard deviation of a fund measures this risk by measuring the degree to which the fund fluctuates in relation to its mean return, the average return of a fund over a period of time.

A security that is volatile is also considered higher risk because its performance may change quickly in either direction at any moment.

A fund that has a consistent four-year return of 3%, for example, would IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

have a mean, or average, of 3%. The standard deviation for this fund would then be zero because the fund's return in any given year does not differ from its four-year mean of 3%. On the other hand, a fund that in each of the last four years returned -5%, 17%, 2% and 30% will have a mean return of 11%. The fund will also exhibit a high standard deviation because each year the return of the fund differs from the mean return. This fund is therefore more risky because it fluctuates widely between negative and positive returns within a short period. 2. Beta (ß)

Beta is a fairly commonly used measure of risk. It basically indicates the level of volatility associated with the fund as compared to the benchmark. So quite naturally the success of Beta is heavily dependent on the correlation between a fund and its benchmark. Thus if the fund's portfolio doesn't have a relevant benchmark index then a beta would be grossly inadequate.

A beta that is greater than one (ß >1) means that the fund is more volatile than the benchmark, while a beta of less than one (ß <1) means that the fund is less volatile than the index. A fund with a beta very close to 1 (ß ~1) means the fund's performance closely matches the index or benchmark.

If, for example, a fund has a beta of 1.03 in relation to the BSE Sensex, the fund has been moving 3% more than the index. Therefore, if the BSE Sensex increased 10%, the fund would be expected to increase 10.30%. Investors expecting the market to be bullish may choose funds exhibiting high betas, which increase investors' chances of beating the market. If an investor expects the market to be bearish in the near future, the funds that IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

have betas less than 1 are a good choice because they would be expected to decline less in value than the index. 3. R-Square

The success of Beta is dependent on the correlation of a fund to its benchmark or its index. Thus whilst considering the beta of any security, investors should also consider another statistic- R squared that measures the Correlation. The R-squared of a fund advises investors if the beta of a mutual fund is measured against an appropriate benchmark. Measuring the correlation of a fund's movements to that of an index, R-squared describes the level of association

between

the fund's

volatility

and

market

risk,

or more

specifically, the degree to which a fund's volatility is a result of the day-today fluctuations experienced by the overall market. R-squared values range between 0 and 1, where 0 represents no correlation and 1 represents full correlation. If a fund's beta has an R-squared value that is close to 1, the beta of the fund should be trusted. On the other hand, an R-squared value that is less than 0.5 indicates that the beta is not particularly

useful

because the

fund

is

being

compared

against

an

inappropriate benchmark.

4. Alpha

Alpha = (Fund return-Risk free return) - Funds beta *(Benchmark returnrisk free return)

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Investment Objective & Portfolio Mgmt.

Alpha is the difference between the returns one would expect from a fund, given its beta, and the return it actually produces. An alpha of -1.0 means the fund produced a return 1% higher than its beta would predict. An alpha of 1.0 means the fund produced a return 1% lower. If a fund returns more than its beta then it has a positive alpha and if it returns less then it has a negative alpha. Once the beta of a fund is known, alpha compares the fund's performance to that of the benchmark's risk-adjusted returns. It allows you to ascertain if the fund's returns outperformed the market's, given the same amount of risk. The higher a funds risk level, the greater the returns it must generate in order to produce a high alpha. Normally one would like to see a positive alpha for all of the funds owned. But a high alpha does not mean a fund is doing a bad job nor is the vice versa true as alpha measures the out performance relative to beta. So the limitations that apply to beta would also apply to alpha.

Alpha can be used to directly measure the value added or subtracted by a fund's manager. The accuracy of an alpha rating depends on two factors: 1) The assumption that market risk, as measured by beta, is the only risk measure necessary. 2) The strength of fund's correlation to a chosen benchmark such as the BSE Sensex or the NIFTY. 5.

Sharpe Ratio

Sharpe Ratio= Fund return in excess of risk free return/ Standard deviation of Fund IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

In case funds have low correlation with indices or benchmarks, they should be evaluated using the Sharpe ratio. Since it uses only the Standard Deviation, which measures the volatility of the returns there is no problem of benchmark correlation. The higher the Sharpe ratio, the better a funds returns relative to the amount of risk taken.

Performance of Diversified Funds

Sharpe ratios are ideal for comparing funds that have a mixed asset classes. That is balanced funds that have a component of fixed income offerings.

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Investment Objective & Portfolio Mgmt.

ADVANTAGES OF INVESTING IN MUTUAL FUNDS •

Flexibility: The investments pertaining to the Mutual Fund offers the public a lot of flexibility by means of dividend reinvestment, systematic investment plans and systematic withdrawal plans.

•

Affordability: The Mutual funds are available in units. Hence they are highly affordable and due to the very large principal sum, even the small investors are benefited by the investment scheme.

•

Liquidity: In case of Open Ended Mutual Fund schemes, the investors have the option of redeeming or withdrawing money at any point of time at the current rate of net value asset.

•

Diversification: The risk pertaining to the Mutual Funds is quite low as the total investment is distributed in several industries and different stocks.

•

Professional Management: The Mutual Funds are professionally managed. The experienced Fund Managers pertaining to the Mutual Funds examine all options based on research and experience.

•

Potential of return: The Fund Managers of the Mutual Funds gather data from leading economists and financial analysts. So they are in a better position to analyze the scopes of lucrative return from the investments.

•

Low Costs: The fees pertaining to the custodial, brokerage, and others is very low.

•

Regulated for investor protection: The Mutual Funds sector is regulated by the Securities Exchange Board of India (SEBI) to safeguard the rights of the investor. IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

DISADVANTAGES OF INVESTING IN MUTUAL FUNDS: The Drawbacks of Mutual Funds are the major obstacles for the growth of the same. Management risks, trading limitations and absence of taxes are some of the major drawbacks of mutual funds. Fees and commissions: The Mutual funds charge administrative fees



to meet the daily expenses. Many funds charge brokerage or 'loads' to pay financial planners or financial consultants, brokers. In case a shareholder does not use the services of financial adviser, he still has to pay a sales commission. •

No Guarantees: All investments bear risk factors. The Mutual Funds are no different. It depends on the stock market. A fall in the stock market would trigger a fall in the value of the mutual fund shares. Although the risk factor pertaining to Mutual funds are much lower compared to Mutual Funds.

•

Inefficiency of Cash Reserves: The Mutual Funds maintain big cash reserves, for situations such as a number of large withdrawals. The investors are provided with liquidity, and a major portion of the financial resources is maintained as cash, and it is not invested in some assets.

•

Management risk: The investment pertaining to the Mutual Funds depends on the fund manager and his selection of the mutual fund portfolio, which is based on speculation. If things do not go as expected, the investments may not earn enough money.

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Investment Objective & Portfolio Mgmt. •

Taxes: The proceeds from the sale of mutual funds are taxable, even if the same is reinvested in mutual funds.

•

No Insurance: The Mutual funds are regulated by the central government. However mutual funds are still not insured against losses.

•

Trading Limitations: The Mutual Funds usually have high liquidity, but most of the mutual funds, such as open-ended funds, are bought or sold at the end of the day

•

Loss of Control: In case, if the mutual funds are managed by the investor himself, the portfolio management may go bad and have an adverse effect on the earnings from the investment.

TYPES OF MUTUAL FUNDS •

By Structure ○ Open - Ended Schemes ○ Close - Ended Schemes ○ Interval Schemes

•

By Investment Objective ○ Growth Schemes ○ Income Schemes ○ Balanced Schemes ○ Debt Schemes ○ Money Market Schemes

•

Other Schemes IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

○ Tax Saving Schemes ○ Load & No Load Schemes ○ Special Schemes  Index Schemes  Sector Specific Scheme  Gilt Funds Open-ended Funds Open-ended or open mutual funds are much more common than closedended funds and meet the true definition of a mutual fund – a financial intermediary that allows a group of investors to pool their money together to meet an investment objective– to make money! An individual or team of professional money managers manage the pooled assets and choose

investments,

which

create

the

fund’s

portfolio

They

are

established by a fund sponsor, usually a mutual fund company, and valued by the fund company or an outside agent. This means that the fund’s portfolio is valued at "fair market" value, which is the closing market value for listed public securities. An open-ended fund can be freely sold and repurchased by investors. •

Buying and Selling: Open funds sell and redeem shares at any time directly to shareholders. To make an investment, you purchase a number of shares through a representative, or if you have an account with the investment firm, you can buy online, or send a check. The price you pay per share will be based on the fund’s net asset value as determined by the mutual fund company. Open funds have no time duration, and can be purchased or redeemed at any time, but not on the stock market. An open fund issues and redeems shares on demand, whenever IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

investors put money into the fund or take it out. Since this happens routinely every day, total assets of the fund grow and shrink as money flows in and out daily. The more investors buy a fund, the more shares there will be. There's no limit to the number of shares the fund can issue. Nor is the value of each individual share affected by the number outstanding, because net asset value is determined solely by the change in prices of the stocks or bonds the fund owns, not the size of the fund itself. Some open-ended funds charge an entry load (i.e., a sales charge), usually a percentage of the net asset value, which is deducted from the amount invested. •

Advantages: Open funds are much more flexible and provide instant liquidity as funds sell shares daily. You will generally get a redemption (sell) request processed promptly, and receive your proceeds by check in 3-4 days. A majority of open mutual funds also allow transferring among various funds of the same “family” without charging any fees. Open funds range in risk depending on their investment strategies and objectives, but still provide flexibility and the benefit of diversified investments, allowing your assets to be allocated among many different types of holdings. Diversifying your investment is key because your assets are not impacted by the fluctuation price of only one stock. If a stock in the fund drops in value, it may not impact your total investment as another holding in the fund may be up. But, if you have all of your assets in that one stock, and it takes a dive, you’re likely to feel a more considerable loss.

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Investment Objective & Portfolio Mgmt.

•

Risks: Risk depends on the quality and the kind of portfolio you invest in. One unique risk to open funds is that they may be subject to inflows at one time or sudden redemptions, which leads to a spurt or a fall in the portfolio value, thus affecting your returns. Also, some funds invest in certain sectors or industries in which the value of the in the portfolio can fluctuate due to various market forces, thus affecting the returns of the fund.

Closed-ended Funds Close-ended or closed mutual funds are really financial securities that are traded on the stock market. Similar to a company, a closed-ended fund issues a fixed number of shares in an initial public offering, which trade on an exchange. Share prices are determined not by the total net asset value (NAV), but by investor demand. A sponsor, either a mutual fund company or investment dealer, will raise funds through a process commonly known as underwriting to create a fund with specific investment objectives. The fund retains an investment manager to manage the fund assets in the manner specified. •

Buying and Selling: Unlike standard mutual funds, you cannot simply mail a check and buy closed fund shares at the calculated net asset value price. Shares are purchased in the open market similar to stocks. Information regarding prices and net asset values are listed on stock exchanges, however, liquidity is very poor. The time to buy closed funds is immediately after they are issued. Often the share price drops below the net asset value, thus selling at a discount. A minimum investment of as much as $5000 may apply, and unlike the more common open funds discussed below, IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

there is typically a five-year commitment. •

Advantages: The prospect of buying closed funds at a discount makes them appealing to experienced investors. The discount is the difference between the market price of the closed-end fund and its total net asset value. As the stocks in the fund increase in value, the discount usually decreases and becomes a premium instead. Savvy investors search for closed-end funds with solid returns that are trading at large discounts and then bet that the gap between the discount and the underlying asset value will close. So one advantage to closed-end funds is that you can still enjoy the benefits of professional investment management and a diversified portfolio of high quality stocks, with the ability to buy at a discount.

•

Risks: Investing in closed-end funds is more appropriate for seasoned investors. Depending on their investment objective and underlying portfolio, closed-ended funds can be fairly volatile, and their value can fluctuate drastically. Shares can trade at a hefty discount and deprive you from realizing the true value of your shares. Since there is no liquidity, investors must buy a fund with a strong portfolio, when units are trading at a good discount, and the stock market is in position to rise.

Equity An equity fund can invest in a large-cap, mid-cap or a small-cap stock. You might have heard these words being thrown around rather liberally by all the new funds on offer. 'Cap' refers to market capitalization (M-cap) of a stock. M-cap is defined as the total market value of the equity of a IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

company. For example, if a company has 1,000 shares outstanding and the price of each share is Rs 20, the market value of the total equity of the company is Rs 20,000 (1,000*20). To exemplify, the market capitalization of Reliance is approx Rs 200,000 crore (Rs 2,000 billion), while that of Hero Honda is around Rs 15,000 crore (Rs 150 billion). Large cap, hence, refers to companies which have a large market capitalisation (usually above Rs 5,000 crore). Mid-cap refers to companies whose market value lies between Rs 1,000 crore to Rs 5,000 crore. Any company with market capitalization of less than Rs 1,000 crore is called a small cap company. Now different fund houses have different definitions of where a 'cap' ends and where the other begins but these are rough bench-marks. One of the biggest selling points currently of the new fund offers is that the small cap companies of today will increase in value so much that they will become the next mid-cap or large-cap companies. Looking at managing equities differently, we say that the fund manager may pick a growth or a value stock. Growth companies are typically ones which are witnessing high amount of growth in their profits (due to growth in underlying demand, increase in prices, new technology, etc). These firms command a valuation which is superior to firms with a lower growth potential. Value companies, on the other hand, are in mature industries where they offer more stable cash flows and a reasonable valuation to buy them. Note that in a market downturn, a growth stock can become a value stock if it is available cheap! A fund manager may decide to invest exclusively in growth or value stocks or in a combination of both. Debt

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Investment Objective & Portfolio Mgmt.

Debt funds can similarly be classified in to long, medium and short tenor funds. While the definitions are flexible again, long funds typically invest in instruments with maturity greater than 5 years, while short-term funds invest in instruments with less than one year of maturity; medium-term funds invest in the 1-year to 5-year range. Note that the longer the duration (roughly average maturity) of the investments, the more sensitive it is to interest rate movements. Also remember that the price of bonds varies inversely with interest rates. On the other axis, a debt fund can invest in high quality instruments like government of India bonds, bonds issued by healthy PSUs, top-notch corporate, etc. It can progressively lower its investment quality by investing in not-so-stable corporate or in fixed deposits of co-operative banks. The advantage of lowering credit quality is higher expected returns.

Balanced Fund The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of Fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds. Money Market or Liquid Fund

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Investment Objective & Portfolio Mgmt.

These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, Certificates of deposit, commercial paper and inter-bank call money, Government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short Periods. Gilt Fund These funds invest exclusively in government securities. Government Securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.

Index Funds Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.

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Investment Objective & Portfolio Mgmt.

There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges. Load Funds A Load Fund is one that charges a commission for entry or exit. That is, each time you buy or sell units in the fund, a commission will be payable. Typically entry and exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a good performance history. No-Load Funds A No-Load Fund is one that does not charge a commission for entry or exit .That is, no commission is payable on purchase or sale of units in the fund .The advantage of a no load fund is that the entire corpus is put to work.

Other Special Schemes:

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Investment Objective & Portfolio Mgmt.

NAV Scheme

AMC

OBJ.

Dt.

1. ABN AMRO Tax Advantag e Plan

2. BOBELSS 96

Plan 4. Canara

ABN

Equity- Apr-

AMRO

ELSS

BOB

Fund 6. DSP

ELSS

Saver Fund

Birla

Fund

3 Yrs

Inceptn

14.36 5.86 13.87 12.4 12.65 -NA-

12.55

08

24.1

4.37 9.55

5.97 23.95 26.15 17.3

ELSS

08

12.51 3.99 10.71 5.37 14.89 31.56 30.26

21Equity- AprCanbank

ELSS

08

16.67 5.64 -7.7

17.7 3.78

25.95 11.56

21Equity- AprChola

ELSS

08

14.32 7.19 14.74 0.07 7.38

-NA-

15.29

-NA-

28.77

-NA-

11.49

21DSP

Equity- Apr-

Merrill

ELSS

08

13.74 6.24 14.11 4.62 35

17-

7. DWS Tax Saving

08

Equity- Apr-

Merrill Lynch Tax

1 Yr

21-

Chola Tax Saver

Qtr

-

Equity- Apr-

Equity - 93 5. DBS

Mth

21-

Robeco Tax Saver

Wk

21-

3. Birla Equity

NAV

Equity- AprDeutsche

ELSS

08

13.78 5.45 11.7

19.8 32.5

21-

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Page 83

Investment Objective & Portfolio Mgmt.

Tax Saving Schemes These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity oriented scheme. Sector specific funds/schemes These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the Performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert. The graph below shows the risk and return from various kinds of funds. there are certain funds where the return is more but at the same time the risk associated is more.

IBS, GURGAON

Page 84

Investment Objective & Portfolio Mgmt.

Equity Linked Savings Scheme A special product offered by mutual funds. These schemes invest in equity i.e. shares and generally have a lock-in period of three years. Balanced Funds – These funds invest part of their corpus into Debt Instruments which give a fixed rate of return and the remaining part of the corpus into Equity giving a high rate of return. Thus, overall the balanced

IBS, GURGAON

Page 85

Investment Objective & Portfolio Mgmt.

funds give a moderate rate of return with lower risk as compared to the pure equity funds.

NA V Dat Scheme

AMC

OBJ.

e

Mt NAV

Wk

h

Qtr

1 Yr

-

-

3

Incept

Yrs

n

ABN RO Dual Advant age Fund Plan B Series 1Regula r

ABN

21-

AMR

Balanc

Apr

O

ed

-08

3.2 3.3 2.9 1.2 9.79

9

6

21-

1. BOB

7

9

-NA-

-2.23

-

Balanc

Apr

27.2

3.8 2.4 11. 21.

19.8

BOB

ed

-08

7

9

4

6

24.48

Benc

Balanc

16-

142.

1.6 0.1 -

13.

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14.32

mark

hmar

ed

Apr

49

9

Split

k

Balanc e Fund 2. Bench

8

8

-08

1

11. 58 1

Capital Fund Preferr ed IBS, GURGAON

Page 86

Investment Objective & Portfolio Mgmt.

Units (Class A) 21-

3. Birla

Balanc e Fund

Birla

Balanc

Apr

31.4

3.4 7.5 2.2 12.

21.7

ed

-08

6

5

6

9

1

37

14.52 26.27

4. Birla

21-

Sun Life 95 Fund 5. Canara

Birla

Balanc

Apr

211.

5.7 6.1 8.2 17.

26.8

ed

-08

39

1

8

Robec o Balanc e - II 6. DSP

Top of

2

21-

2

33

Form

-

Canb

Balanc

Apr

44.4

ank

ed

-08

6

2

8.1 0.2 20.

31.9

8

9

2

63

10.4

Merrill Lynch Balanc ed Fund 7. Escort

DSP

17-

Merri

Balanc

Apr

48.6

3.1 7.4 0.8 74.

30.4

ll

ed

-08

7

9

3

s Balanc ed Fund

5

21-

2

8

-

Escor Balanc

Apr

57.1

1.9 4.1 6.3 21.

29.6

ts

-08

3

7

3

ed

3.33

9

IBS, GURGAON

4

4

28.02

Page 87

Investment Objective & Portfolio Mgmt. 8. Escort

s Opport unities Fund 9. FT India Balanc ed Fund 10. HDFC Balanc ed Fund 11. HDFC Pruden ce Fund 12. ICICI

21-

-

Escor Balanc

Apr

28.5

-

ts

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8

0.2 2

ed

Tem

1.5 7.4 13.

21-

1

55

14.4 2

16.99

27.8

18.03

-

pleto

Balanc

Apr

39.3

3.8 7.4 3.2 18.

n

ed

-08

9

1

4

7

39

21HDF

Balanc

Apr

36.0

4.5 9.8 0.8 16.

21.9

C

ed

-08

4

7

1

2

21-

7

78

18.34

-

HDF

Balanc

Apr

132.

2.8 8.1 6.0 15.

29.2

C

ed

-08

07

1

6

8

9

51

19.88

Pruden tial Balanc ed Fund 13. ICICI

21Prud

Balanc

ential ed

-

Apr

38.5

3.5 6.1 3.1 10.

25.2

-08

1

8

7

16.36

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8.35

2

2

03

Pruden tial Blende d Plan A

21Prud

Balanc

ential ed

-

Apr

12.6

0.0 0.5 1.0 8.8

-08

1

3

2

IBS, GURGAON

9

5

Page 88

Investment Objective & Portfolio Mgmt. 14. ICICI

Pruden tial Blende d Plan B 15. ING

21Prud

Balanc

ential ed

Vysya

Fund 16. J M

ING

Fund 17. Kotak

Balanc e 18. LICMF

JM

Fund 19. Princip

ed Fund 20. SBI Magnu m

9

5

Balanc

Apr

ed

-08

6

9

8

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7.68

24

10.49

25.1

16.79

7.2 3.1 18. 22.1

4.1 8

1

26

-

Balanc

Apr

25.4

4.7 11. 7.2 8.4

ed

-08

5

9

1

2

9

-

-

-

Kota

Balanc

Apr

22.6

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18.5

k

ed

-08

2

7

2

6

21LIC

8

9

17.75

-

Balanc

Apr

53.7

5.5 10. 6.6 24.

25.7

ed

-08

9

9

9

al Balanc

-08

21-

Balanc ed

0.1 0.4 1.0 9.6

21-

Balanc ed

12.3

21-

Balanc ed

Apr

71

21-

3

4

3.11

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Apr

26.4

7.1 2.7 21.

pal

ed

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8

3.6 6

SBI

Balanc

21-

42.0

3.0 6.9 -

ed

Apr

7

4

7

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5

22.8

39

8

12.49

18.

31.4

20.57

2.8 5

7

9

Balanc IBS, GURGAON

Page 89

Investment Objective & Portfolio Mgmt.

ed Fund 21. Sundar am BNP Pariba s Balanc ed Fund 22. Tata Balanc ed Fund 23. Tata

21Sund

Balanc

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38.8

3.8 6.6 2.3 17.

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aram

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1

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Tata

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21-

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UTI

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63.4

3.8 8.6 2.3 15.

21.4

ed

-08

1

8

2

3

IBS, GURGAON

4

91

15.19

Page 90

Investment Objective & Portfolio Mgmt. 26. UTI

Unit Linked Insura nce

21-

Plan (US)

UTI

1971

Balanc

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16.5

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IBS, GURGAON

Page 91

Investment Objective & Portfolio Mgmt.

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IBS, GURGAON

Page 92

Investment Objective & Portfolio Mgmt.

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Page 93

Investment Objective & Portfolio Mgmt.

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Page 94

Investment Objective & Portfolio Mgmt.

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IBS, GURGAON

Page 95

Investment Objective & Portfolio Mgmt.

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IBS, GURGAON

Page 96

Investment Objective & Portfolio Mgmt.

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IBS, GURGAON

Page 97

Investment Objective & Portfolio Mgmt.

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IBS, GURGAON

Page 98

Investment Objective & Portfolio Mgmt.

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Page 99

Investment Objective & Portfolio Mgmt.

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Page

Investment Objective & Portfolio Mgmt.

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IBS, GURGAON 101

Page

Investment Objective & Portfolio Mgmt.

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IBS, GURGAON 102

Page

Investment Objective & Portfolio Mgmt. 29. DS

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IBS, GURGAON 103

Page

Investment Objective & Portfolio Mgmt.

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IBS, GURGAON 104

Page

Investment Objective & Portfolio Mgmt.

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Best Mutual Funds

Best Mutual Funds are selected characteristics

of

a

mutual

fund.

on

the

basis

Performance,

of

specific

management

and

administrative fees are the major considerations in selecting best mutual funds. The Best Mutual Funds are sorted out with the help of the characteristics the mutual funds. Choosing the Best Mutual Funds needs vivid knowledge IBS, GURGAON Page 105

Investment Objective & Portfolio Mgmt.

about the features and concepts of the Mutual Funds.

Best Mutual Funds - Selection •

The selection of Mutual Funds is highly critical for various reasons

•

The Mutual Fund are investments in multiple securities

•

Every single share of a mutual fund is like a small investment in thousands of stocks and bonds

•

The advantages of the mutual funds are that they allow small investors to put their money in a large variety of securities

•

The

Mutual

Funds

charges

administrative

fees

to

all

the

shareholders, which becomes a discouraging factor for small investors Best Mutual Funds - Characteristics •

Low administrative fees: The administrative fees, front-end loads, and management fees are some of the fees charged on the investments.

These

fees

considerably

lower

the

return

from

investments. In case the performance varies, the fees remain constant.

It

is

wise

to

invest

in

a

mutual

fund

with

low

administrative fees rather than a mutual fund which is performing superbly for the past three to four years. •

Experienced management: The Fund Manager pertaining to the Mutual Funds, also referred as the portfolio manager trades, realizes the capital losses and gains, and collects the income in form of interest. A lot depends on the manager, as one who is inexperienced without any previous record of performance may deliver well, but there is guarantee, whereas a manager with a performance record IBS, GURGAON

106

Page

Investment Objective & Portfolio Mgmt.

has proved his worth. •

Above average performance: Investors look for mutual funds, which have performed well for the past three to four years, but the problem is that there is no guarantee that it would perform in the same manner at present. It is wiser to invest in those funds which have performed better than those having higher returns.

Tax Saving Mutual Funds

Tax Saving Mutual Funds are

highly preferred by the investors

as they can enjoy the benefits of Section 88 (of the Income Tax Act). There are a range of parameters which should be followed by the investors who wish to invest in the tax saving mutual fund to ensure returns over a long period. A Short Note on Tax Saving Mutual Funds in IndiaTax Saving Mutual Funds are one of the most preferred areas for investments. This is mainly because the investors treat the tax saving funds at par with the regular diversified equity funds.

They would just follow the same process while choosing a tax saving fund just as they would have done in case of equity fund. A proper study on the performance of the tax saving mutual fund for at least a period of three years or five years is essential for every investor to avoid unnecessary hassles that might pop up later on. The lock-in IBS, GURGAON Page 107

Investment Objective & Portfolio Mgmt.

period for the fund is determined by the fund manager so that the investors cannot sell the stocks anytime they want as selling of stocks at wrong time, especially when the value of stocks lower down is quite inexpedient for the company. Ways To Select a Tax Saving Mutual Fund Performance of a Tax Saving Mutual Fund: The investors are advised to assess the tax saving mutual fund on the returns of its Net Asset Value before going for a purchase. A tax saving mutual fund is determined on the basis of its performance on the Nifty, Sensex and BSE 200. To evaluate the performance of a tax saving mutual fund, it is essential to invest in it for three or five consecutive years. Investment Approach: It is also very important for the investors to have a profound knowledge about the investment approach of the fund manager of the tax saving mutual fund. The investment patterns are either managed through strong systems or individually of which the first one is more relevant though the fund managers enjoy the full privilege to make decisions on the fund. In the first process, the investors get a clear picture beforehand about the investment patterns. Volatility and risk-return: The investors should choose a fund that has a lower 'standard deviation' as this is used to determine the volatility in the performance of the fund's NAV. Expenses: There are a lot of expenditures entailed in a tax saving mutual fund. These expenses include the fund manager's salary, costs for marketing IBS, GURGAON 108

Page

Investment Objective & Portfolio Mgmt.

or advertising of the fund, and other administration costs. The investors should consider the expense ratio of the fund before investing in it. The expense ratio precisely implies the percentage of the fund's assets that corresponds with the cost set for running that particular fund. A lower expense ratio is advantageous for the returns of the fund as the Net Asset Value is calculated after subtracting the expenses. Other Parameters that should be considered by the Investors: The investors must also consider the entry load and track record of the asset management company of the tax saving mutual fund. Some AMCs do not charge the entry load on investments which are made through systematic investment plans.

Some of the Top Performing Tax Saving Mutual Funds During 2007-08 SBI Magnum Tax gain HDFC Mutual Fund (Long Term Advantage Fund) HDFC Mutual Fund (Tax Saver) Birla Sun life Mutual Fund Franklin India Tax shield

Association of Mutual Funds of India

Association of Mutual Funds in India (AMFI) was set up on 22nd August, 1995. It was established with the aim to function as a non-profit IBS, GURGAON 109

Page

Investment Objective & Portfolio Mgmt.

organization. This association is the chief governing body of all Asset Management Companies (AMC) and is registered with Securities and Exchange Board of India (SEBI). Association of Mutual Funds of India at a GlanceAssociation of Mutual Funds in India (AMFI) was set up on 22nd August, 1995.

The members of Asset Management Companies (AMC) have always carried out the responsibility of introducing new mutual fund schemes under the governance and guidelines of its Board of Directors. Association of Mutual Funds in India has played a significant role in creating a healthy and professional market for mutual funds. It has elevated the standard of the mutual fund investment patterns by introducing more beneficiary schemes to attract more investors. The Association of Mutual Funds is also the main governing body of all Asset Management Companies (AMC). The Association of Mutual Funds in India (AMFI) has been registered with the Securities and Exchange Board of India (SEBI). The main principle religiously followed by AMFI is to protect and promote the mutual funds along with the investors or shareholders. Important Aspects of Association of Mutual Funds of India•

AMFI provides professionalism and a proper balance in the mutual fund industry.

•

It promotes the highly-efficient business practices as well as the code of conduct in the mutual fund industry among its members and those who are involved in mutual fund investments.

•

AMFI is registered with SEBI and follows its suggestions while executing its activities. IBS, GURGAON

110

Page

Investment Objective & Portfolio Mgmt.

•

AMFI also represents the Government of India, the Reserve Bank of India and other related higher authority bodies in the mutual fund operations.

•

It also provides training programs to hone the skills of those who are involved in mutual fund investments and also develops a team of efficient and skilled agents.

•

AMFI also carries out various campaigns and awareness programs to inform the individuals about the basic concept of mutual fund investments.

Contact Details of AMFIAssociation of Mutual Funds in India 106, Free Press House, Nariman Point, Mumbai - 400 021, India. Top of Form

Top of Form Criticism of managed mutual funds Historically, only a small percentage of actively managed mutual funds, over long periods of time, have returned as much, or more than comparable index mutual funds. This, of course, is a criticism of one type of mutual fund over another. Another criticism concerns sales commissions on load funds, an upfront or deferred fee as high as 8.5 percent of the amount invested in a fund. Critics point out that high sales commission can sometimes represent a conflict of interest, as high commissions benefit the sales people but hurt the investors. Although in reality, "A shares", which appear to have the highest up front load, (around 5%) are the "cheapest" for the investor, if the investor is IBS, GURGAON 111

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Investment Objective & Portfolio Mgmt.

planning on 1) keeping the fund for more than 5 years, 2) investing more than 100,000 in one fund family, which likely will qualify them for "breakpoints”, which is a form of discount, or 3) staying with that "fund family" for more than 5 years, but switching "funds" within the same fund company.

High

commissions

can

sometimes

cause

sales

people

to

recommend funds that maximize their income. Mutual fund managers, and companies need to disclose by law, if they have a conflict of interest due to the way they are paid. In particular fund managers may be encouraged to take more risks with investors money than they ought to: Fund flows (and therefore compensation) towards successful, market beating funds are much larger than outflows from funds that lose to the market. Fund managers may therefore have an incentive to purchase high risk investments in the hopes of increasing their odds of beating the market and receiving the high inflows, with relatively less fear of the consequences of losing to the market. Many analysts, however, believe that the larger the pool of money one works with, the harder it is to manage actively, and the harder it is to squeeze good performance out of it. This is true, due to the fact that there are only so many companies that one can identify to put the money into ( buy shares of) that fit with the "style" of the mutual fund, due to what is disclosed in the prospectus. Thus some fund companies can be focused on attracting new customers, and forget to "close" their mutual funds to new customers, when they get too big, to invest the assets properly, thereby hurting its existing investors' performance. A great deal of a fund's costs are flat and fixed costs, such as the salary for the manager. Thus it can be more profitable for the fund to try to allow it to grow as large as possible, instead of limiting its assets. Most fund companies have closed some funds to new investors to maintain the integrity of the funds for existing investors. If the funds reach more than 1 billion dollars, IBS, GURGAON Page 112

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many times, these funds, have gotten too large, before they are closed, and when this happens, the funds tend to not have a place to put the money and can and tend to lose value. Other criticisms of mutual funds are that some funds illegally are guilty of market

timing

and

that

some

fund

managers,

also

illegal,

accept

extravagant gifts in exchange for trading stocks through certain investment banks, which presumably charge the fund more for transactions than would non-gifting investment bank. This practice, although done, is completely illegal. As a result, all fund companies strictly limit -- or completely bar -such gifts.

ULIPs vs Mutual Funds: Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual funds in terms of their structure and functioning. As is the cases with mutual funds, investors in ULIPs are allotted units by the insurance company and a net asset value (NAV) is declared for the same on a daily basis. Similarly ULIP investors have the option of investing across various schemes similar to the ones found in the mutual funds domain, i.e. diversified equity funds, balanced funds and debt funds to name a few. Generally speaking, ULIPs can be termed as mutual fund schemes with an insurance component. However it should not be construed that barring the insurance element there is nothing differentiating mutual funds from ULIPs. How ULIPs can make you RICH!

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Despite the seemingly comparable structures there are various factors wherein the two differ. In this article we evaluate the two avenues on certain common parameters and find out how they measure up.

ULIP Vs Mutual Fund ULIPs

Mutual Funds Minimum investment amounts

Investment

Determined by the investor are determined by the fund

amounts

and can be modified as well house No upper limits, expenses Upper determined

Expenses

by

insurance company

Portfolio

limits

for

expenses

the chargeable to investors have been set by the regulator Quarterly

disclosures

are

disclosure

Not mandatory*

mandatory

Modifying

Generally permitted for free Entry/exit loads have to be IBS, GURGAON

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Investment Objective & Portfolio Mgmt.

asset allocation

or at a nominal cost Section

80C

available Tax benefits

investments

on

benefits all

borne by the investor are Section

80C

benefits

are

ULIP available only on investments in tax-saving funds

1. Mode of investment/ investment amounts Mutual fund investors have the option of either making lump sum investments or investing using the systematic investment plan (SIP) route which entails commitments over longer time horizons. The minimum investment amounts are laid out by the fund house. ULIP investors also have the choice of investing in a lump sum (single premium) or using the conventional route, i.e. making premium payments on an annual, half-yearly, quarterly or monthly basis. In ULIPs, determining the premium paid is often the starting point for the investment activity. This is in stark contrast to conventional insurance plans where the sum assured is the starting point and premiums to be paid are determined thereafter. ULIP investors also have the flexibility to alter the premium amounts during the policy's tenure. For example an individual with access to surplus funds can enhance the contribution thereby ensuring that his surplus funds are gainfully invested; conversely an individual faced with a liquidity crunch has the option of paying a lower amount (the difference being adjusted in the accumulated value of his ULIP). The freedom to modify premium payments at one's convenience clearly gives ULIP investors an edge over their mutual fund counterparts. IBS, GURGAON 115

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2. Expenses In mutual fund investments, expenses charged for various activities like fund management, sales and marketing, administration among others are subject to pre-determined upper limits as prescribed by the Securities and Exchange Board of India. For example equity-oriented funds can charge their investors a maximum of 2.5% per annum on a recurring basis for all their expenses; any expense above the prescribed limit is borne by the fund house and not the investors. Similarly funds also charge their investors entry and exit loads (in most cases, either is applicable). Entry loads are charged at the timing of making an investment while the exit load is charged at the time of sale. Insurance companies have a free hand in levying expenses on their ULIP products with no upper limits being prescribed by the regulator, i.e. the Insurance Regulatory and Development Authority. This explains the complex and at times 'unwieldy' expense structures on ULIP offerings. The only restraint placed is that insurers are required to notify the regulator of all the expenses that will be charged on their ULIP offerings. Expenses can have far-reaching consequences on investors since higher expenses translate into lower amounts being invested and a smaller corpus being accumulated. ULIP-related expenses have been dealt with in detail in the article "Understanding ULIP expenses". 3. Portfolio disclosure Mutual fund houses are required to statutorily declare their portfolios on a quarterly basis, albeit most fund houses do so on a monthly basis. Investors get the opportunity to see where their monies are being invested and how they have been managed by studying the portfolio. IBS, GURGAON 116

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There is lack of consensus on whether ULIPs are required to disclose their portfolios. During our interactions with leading insurers we came across divergent views on this issue. There is lack of consensus on whether ULIPs are required to disclose their portfolios. While some insurers claim that disclosing portfolios on a quarterly basis is mandatory, others state that there is no legal obligation to do so. 4. Flexibility in altering the asset allocation As was stated earlier, offerings in both the mutual funds segment and ULIPs segment are largely comparable. For example plans that invest their entire corpus in equities (diversified equity funds), a 60:40 allotment in equity and debt instruments (balanced funds) and those investing only in debt instruments (debt funds) can be found in both ULIPs and mutual funds. If a mutual fund investor in a diversified equity fund wishes to shift his corpus into a debt from the same fund house, he could have to bear an exit load and/or entry load. On the other hand most insurance companies permit their ULIP inventors to shift investments across various plans/asset classes either at a nominal or no cost (usually, a couple of switches are allowed free of charge every year and a cost has to be borne for additional switches). Effectively the ULIP investor is given the option to invest across asset classes as per his convenience in a cost-effective manner. This can prove to be very useful for investors, for example in a bull market when the ULIP investor's equity component has appreciated, he can book profits by simply transferring the requisite amount to a debt-oriented plan. 5. Tax benefits IBS, GURGAON 117

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ULIP investments qualify for deductions under Section 80C of the Income Tax Act. This holds good, irrespective of the nature of the plan chosen by the investor. On the other hand in the mutual funds domain, only investments in tax-saving funds (also referred to as equity-linked savings schemes) are eligible for Section 80C benefits. Maturity proceeds from ULIPs are tax free. In case of equity-oriented funds (for example diversified equity funds, balanced funds), if the investments are held for a period over 12 months, the gains are tax free; conversely investments sold within a 12-month period attract short-term capital gains tax @ 10%. Similarly, debt-oriented funds attract a long-term capital gains tax @ 10%, while a short-term capital gain is taxed at the investor's marginal tax rate. Despite the seemingly similar structures evidently both mutual funds and ULIPs have their unique set of advantages to offer. As always, it is vital for investors to be aware of the nuances in both offerings and make informed decisions.

Impact Analysis on the Mutual Fund Industry Of the Union Budget 2008-09

Fixed Income Markets to Benefit Measures •

Revenue deficit target reduced to 1% in FY09 from 1.4% in FY08; fiscal deficit target reduced to 2.5% in FY09 from 3.1% in FY08

•

Gross borrowings lower at Rs.1.45 trillion in FY09 from Rs.1.56 trillion in FY08; net borrowing also lower at Rs.1.01 trillion from Rs.1.11 trillion in FY08 IBS, GURGAON

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•

Measures announced to develop bond, currency and derivatives markets that will include launching exchange-traded currency and interest rate futures and developing a transparent credit derivatives market with appropriate safeguards.

•

Measures announced to enhance tradability of domestic convertible bonds by putting in place a mechanism that will enable investors to separate embedded equity options from convertible bonds and trade them separately.

•

Measures announced to encourage development of a market-based system for classifying financial instruments based on their complexity and implicit risks.

•

Proposal announced to exempt from TDS, corporate debt instruments issued in demat form and listed on recognized stock exchanges.

Impact

•

Decision of expanding the corporate debt market will help in increased focus towards bond funds and in a scenario where interest rates are not expected to be adverse in the medium term, this would further assist in increasing the popularity of bond funds which have not been doing well in the last few years.

•

Development of the derivatives markets can in turn enhance the development of the structured products market.

•

Better than targeted fiscal position of the government can impart some bullishness to G-Secs and hence to Gilt funds. IBS, GURGAON

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Service Taxes Realigned for ULIPs Measures

•

Asset management services provided under Unit Linked Insurance Plans (ULIPs) would be brought on par with asset management services provided under mutual funds as regards chargeability to service tax.

•

Services provided by stock/commodity exchanges and clearing houses would also be brought under the service tax net.

Impact

•

The competitiveness of mutual funds vis-à-vis ULIPs in the investment basket of investors is expected to increase somewhat.

•

Transactional expense levels of mutual funds are expected to go up marginally on account of their exposure to stock and commodity exchanges which are expected to pass on the service tax. But clarity on what would define services here and on what amount the service tax would be levied is awaited

Tax Calculation in India

The Tax Calculation in India is the method for calculating the amount of tax for different individuals. Any individual income i.e., income of a public sector employee and income of private sector employee is taxable under the IBS, GURGAON 120

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Income Tax Act of India. The tax calculation in India is done on the basis of the income of an individual under various defined heads of income, as mentioned in the 4th chapter of the Income Tax Act, 1961 (Section 14)

The different heads of income for tax calculation in India  Salary  House property  Profit in business or profession  Capital gains Other sources There are different slabs given for taxation under the new budget given by the finance minister which are different for man, woman and senior citizens which are as follows:

FOR MAN Income Up to Rs. 1,50,000 Rs. 1,50,001 to Rs.

Tax Rate Nil

3,00,000 Rs. 3,00,001 to Rs.

10%

5,00,000 More than

20% Rs.

5,00,000

30% FOR WOMAN

Income Up to Rs. 1,80,000

Tax Rate Nil IBS, GURGAON

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Rs. 1,80,001 to Rs. 3,00,000 Rs. 3,00,001 to Rs.

10% 20%

5,00,000 More than

30%

Rs.

5,00,000 FOR

SENIOR

CITIZENS Income Up to Rs. 2,25,000 Rs. 2,25,001 to Rs.

Tax Rate Nil 10%

3,00,000 Rs. 3,00,001 to Rs.

20%

5,00,000 More than

30%

Rs.

5,00,000

Now for the calculation of income tax, section 88 is no more valid, only section 80C is applicable. Section 88 offered a rebate. A rebate is when the government gives you a concession on your income if you invest in certain instruments. Section 80C does not offer a rebate but a deduction from taxable income. The upper limit under both, Section 88 and Section 80C is Rs 1, 00,000. Under Section 88 Since the maximum amount that could be invested under Section 88 was Rs 1, 00,000, the maximum tax that could be saved was up to Rs 20,000. Let us explain it with the help of an example as: You had to pay tax = Rs 28,000 your rebate = 20% IBS, GURGAON 122

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Investment Objective & Portfolio Mgmt.

you invested Rs 1, 00,000 in the instruments eligible for a rebate. Your savings = Rs 20,000 of your tax (20% of Rs 1, 00,000). So instead of paying tax of Rs 28,000, you pay a tax of Rs 8,000 (Rs 28,000 - Rs 20,000).

Under Section 80C Let's say your taxable income is Rs 100,000. You invest Rs 70,000 in the Public Provident Fund. Your taxable income drops to Rs 30,000 (Rs 1, 00,000 - Rs 70,000). So if you up to Rs 1, 00,000 invest in the relevant instruments, you save tax up to that amount. Section 80C gives more investment flexibility No more sub-caps exist. The maximum amount under Section 88 (Rs 1, 00,000) has several subcaps. For instance, a maximum of Rs 10,000 in Equity Linked Savings Schemes. These are diversified mutual funds with a tax benefit. They invest in the shares of various companies of various sectors. Then there was a minimum of Rs 30,000 that had to be invested in infrastructure bonds. These were the bonds that were issued by financial institutions like ICICI and IDBI. These restrictions do not exist anymore. There is much more freedom to select where to invest under Section 80C. You can decide how much percentage of your income can go in which investment. So, if you want to invest the entire Rs 1, 00,000 in ELSS, no one is there to stop you. IBS, GURGAON 123

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Eligible avenues for Section 80C: 1. Payment of life insurance premium. 2. Contribution to Provident Fund. 3. Repayment of principal amounts on housing loans. 4. Payment of tuition fees. 5. Investments in PPF. 6. Investments in NSC. 7. Investments in Equity-Linked Savings Schemes. 8. Investments in Infrastructure Bonds.

Why Section 80C scores over Section 88 Investing in line with one's risk appetite is a tenet of financial planning and Section 80C promotes the same. Removal of sectoral caps on investments for tax-planning purposes means that investors can invest in line with their risk appetites and needs. A risk-taking investor can invest his entire corpus of Rs 100,000 in a highrisk instrument like ELSS; conversely a risk-averse investor can select small savings schemes like PPF and NSC. As a result, every investor's tax-saving portfolio can now reflect his individual preferences. Another advantage that Section 80C offers is for investors whose gross total income is greater that Rs 500,000. Under the earlier tax regime, these investors were not eligible for Section 88 tax rebates. However, Section 80C has done away with this disparity and investors across tax brackets can claim the Rs 100,000 deduction. IBS, GURGAON 124

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Investment Objective & Portfolio Mgmt.

Impact

•

This is expected to increase the disposable income in the hands of the individuals to some extent which could translate into increased retail investments in mutual funds.

Increase in Short term Capital Gains Measures

•

Short Term Capital Gains Tax raised from 10% to 15%

Impact

Since long term capital gains tax has been left unchanged, this hike in

•

short-term capital gains tax could encourage long-term investments which augur well to the development of the concept of “long term” in the Indian Mutual Fund industry, which is conspicuous by its absence but which is coveted by the fund industry given the greater flexibility that this provides in fund management. •

At the same time since the short term capital gains tax is still lower than the income tax slabs of typical capital market investors, it is not expected to cause too many investors to turn away from mutual funds. The fact that the dividend distribution tax structure has not changed

•

would mean that dividend reinvestment plans in liquid schemes will IBS, GURGAON Page 125

Investment Objective & Portfolio Mgmt.

continue to be popular and also the liquid plus category will continue to attract inflows as the tax rates there would continue to be lower than the liquid category. Thrust on Infrastructure Sector Measures •

Call for more reforms in coal and electricity sectors

•

Coal sector regulator to be appointed.

•

Fourth Ultra Mega Power Project (UMPP) at Tilaiya to be awarded shortly; five more UMPPs in Chhattisgarh, Karnataka, Maharashtra, Orissa and Tamil Nadu likely

•

Allocation for National Highway Development Programme (NHDP) raised from Rs.109 billion in FY08 to Rs.130 billion in FY09

•

Rural Infrastructure Development Fund (RIDF) corpus in FY09 raised to Rs.140 billion

•

Oil and Gas - New Exploration Licensing Policy (NELP) to attract investment of the order of $3.5 - 8 bn for exploration and discovery.

•

Government of India is expected to list more PSUs to unlock their values. Impact

•

With so much focus on the infrastructure sector, it is expected that infrastructure funds which have been the key out-performers in the industry of late both in terms of returns performance as well as attracting fund flows, will continue to occupy a prominent place.

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Investment Objective & Portfolio Mgmt.

SURVEY As a part of our project, a survey of customers was being conducted in Delhi NCR region to know the perceptions of the investors about the investment schemes basically ULIP and MUTUAL FUNDS OBJECTIVE OF THE SURVEY: The major objective of the study •

To know the current pattern of investment among different age groups and different occupations.

•

To know the investors’ perceptions about different investment options and their investment concerns, their expected returns, and their future expectations from different investment schemes.

•

To know the reputation and acceptability of the two products i.e. ULIP and MUTUAL FUNDS (of Standard Chartered bank specially) among the above mentioned categories.

•

To know the potential customers for the investment schemes: ULIP and Mutual Funds of Standard Chartered bank.

RESEARCH METHODOLOGY The survey process involved two phases: First phase included identification and selection of the target audience to be studied and to determine the parameters on which respondents will justify their preferences. The audience were targeted and analyzed basically on the basis of three important parameters: Age, Occupations and Income. Demographical information IBS, GURGAON 127

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was also taken in order to know the investment patterns according to the location, age, gender etc. A questionnaire (shown in the end of the report) was designed to collect the needed information from the respondents. In the second phase data was collected through questionnaire from more than 100 respondents within Gurgaon region. First component of the survey was age brackets. Age brackets taken were: •

18-30

•

30-40

•

40-50

•

Above 50

The aim of taking small age brackets was to find out which age group of people, company need to tape, to increase the sales of the company’s products, since generally people make their investment decision on the basis of their age. So, age was the vital component of my survey and I tried to make sure that, to do the survey among the people of different age groups. Next component of the questionnaire was the purpose of investment, to find out the need of the people that why they make investment planning like, for future security purpose or for tax saving purpose or for any other reason. Next component was the type of investment to find out whether people are interested or not to invest in the kind of product which the company is offering. Next component of the questionnaire was the nature of job; this component was taken to find out the relationship between risk appetite and the nature of job and also the relationship between type of investment and nature of job. Another component of the questionnaire was to find out the risk appetite of people. This was also very important component to conduct the survey. IBS, GURGAON 128

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One more very important component of questionnaire was the duration of investment to find out the current trend of the market; that is, to find out whether people are interested in long-term investment plan or short-term investment plan. Results were viewed cautiously as sample was from a specific population. The responses that were generated during this exercise were converted in the form of percentages to have a comparative outlook, as the numbers itself cannot explain the true picture. These percentages were then represented through the simple tools like bar graphs, pie charts.

Sample size A sample is a part of the target population carefully selected to represent that population. As this study is based on finding the investment behavior towards different investment options in the market. The sample size is 200. Limitations of the study Every research is incomplete without its own limitations. In this research too there were some limitations. They are: •

Results are just an indication of the present scenario and may not be applicable in the future.

•

As the study was conducted only in Delhi & NCR so it can be said that the study was regionally biased.

•

Since sampling was done under the simple random sampling method, where easily approachable respondents were picked up. So this may not represent the whole universe.

•

The size of the sample is small i.e. 200. IBS, GURGAON

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Profile of Respondents

Analysis A major chunk of people surveyed fall in the age-group of 18-30 years, followed by the age-group of 30-40 years. Only 9% of the respondents consisted of above 50 years.

Analysis 76% of the respondents are male while female consisted of a small group of 24%.

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Investment Objective & Portfolio Mgmt.

Analysis Most of the respondents belongs to Business which covers 40% of the distribution and it is closely followed by service which comprised of 38% and further followed by self-employed and others (e.g. house-wives) which are smaller in proportion.

Analysis More than half of the respondents belong to the income group of 2.5 – 5 Lacs. 19% of the respondents belong to 5-10 Lacs whereas same proportion of respondents fall under the category of less than 2.5 Lacs. IBS, GURGAON 131

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Investment Objective & Portfolio Mgmt.

ANALYSIS 1)

FINDINGS BASED ON AGE:

Risk appetite of people belonging to different age groups

Age plays a very crucial role in taking risk. From the graph, it is very much clear that people in all the age groups falls mainly in the moderate risk category. As the age factor increases, people divert more towards low risk category. It is further explained individually in the form of pie-charts as:

Analysis:

IBS, GURGAON 132

Pie- chart indicates that people with age group 20Analysis: 30 years are neither too People of this age group much risk lover nor they prefer risk to spend their are highly averse, butmoney Page in highly risky instruments, all have a medium risk and .mutual funds form the appetite major part of their investments.

Investment Objective & Portfolio Mgmt.

Analysis: This age group is risk Analysis: averse and wants to have Peopleinvestments of this age with group are safer highly conservative moderate returns. in nature and want to invest their money in very low risky investments like fixed deposits. Relation between Age & Withdrawl of Money

ANALYSIS From the above graph it can be concluded that respondents across all age groups withdraw their money within 1-3 years, followed by the horizon of 310 years with the only exception being the people above 50 years who didn’t find it safe to invest for 3-10 years.

It is further explained individually in the form of pie-charts as:

AGE AND AVENUES USED FOR INVESTMENT S

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Investment Objective & Portfolio Mgmt.

ANALYSIS The most favorite and sort out investment option favored by each and every age group is Mutual Funds which is getting a close competition with stock investment.

It is further explained individually in the form of pie-charts as:

ANALYSIS PEOPLE IN THE AGE GROUP OF 18-30 YEARS ARE RISK-AVERSE & THIS CLEARLY SHOWS THEIR INTEREST IN MUTUAL FUNDS.ONLY 13% OF THE RESPONDENTS FINDS IT SAFE TO INVEST IN ULIP. AS THE AGE-GROUP IS QUIET YOUNG THESE PEOPLE DON’T WANT TO INVEST IN FIXED DEPOSIT. THE YOUNG BLOOD TAKES INTEREST IN STOCK INVESTMENT AS 19% OF THIS AGE-GROUP OPTED FOR STOCKS. BUT ONLY 8% OF THE PEOPLE TAKE UP INSURANCE AT THIS POINT OF LIFE, WHERE AS OTHERS (REAL ESTATE.GOLD ETC.) COMPRISES OF ONLY 10%.

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Investment Objective & Portfolio Mgmt.

ANALYSIS PEOPLE IN THE AGE GROUP OF 30-40 YEARS ARE IN THE MIDDLE OF THEIR CAREERS AT THIS POINT OF TIME THEY CAN TAKE RISK AS IT IS CLEAR FROM THE GRAPH ITSELF THAT 29% ARE OPTING MUTUAL FUND WHEREAS STOCK OPTION WHICH COMPRISES OF 21% HAS EMERGED AS THE SECOND MOST PREFERRED INSTRUMENT FOLLOWED BY INSURANCE HAVING 18% SHARES. ULIP IS NOT KNOWN TO EVERYBODY AT THIS POINT OF TIME. FDS AND OTHERS ARE HAVING SHARE OF 12% AND 8% RESPECTIVELY.

ANALYSIS MUTUAL FUND REMAINS A FAVORITE INVESTMENT OPTION OF THIS MID AGE GROUP AS 26% OF THE RESPONDENTS FAVOURS THIS INSTRUMENT FOLLOWED BY INSURANCE WHICH OCCUPIES QUITE A HEALTHY STAKE OF 20% IN THE CHART.

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Investment Objective & Portfolio Mgmt. STOCKS STILL REMAINS A CANDY IN THE HANDS OF INVESTORS AS 17% OF THE PEOPLE BELONGING TO THIS AGE GROUP HAVE FAITH IN STOCKS WHERE AS FDS, ULIP HAVE 13% & 12% RESPECTIVELY.

ANALYSIS PEOPLE ABOVE 50 YEARS OF AGE PREFER PUTTING MONEY IN MUTUAL FUNDS ONLY BECAUSE OF ITS HEAVY RETURN AS 31% OF THESE INVESTORS IN THE CHART FAVORS MUTUAL FUNDS. NOW AT THIS POINT OF TIME PEOPLE CHANGE THEIR PREFERENCE FROM FD & STOCKS TO OTHERS (GOLD, REAL ESTATE ETC.)BECAUSE AT THIS STAGE I.E BEFORE RETIREMENT PEOPLE NEED HOUSE FOR THEMSELVES & THERE ARE MANY OTHER RESPONSIBILITIES. THE MOST PREFEERED INSTRUMENT FOR THE PEOPLE ABOVE 50 YEARS OF AGE IS INVESTING IN FIXED DEPOSIT, FOLLOWED BY A NEAR EQUAL DISTRIBUTION FOR STOCKS.

Age and Purpose behind Investment ANALYSIS PEOPLE OF ALL THE AGE GROUPS HAVE HIGH INCLINATION TOWARDS SAVING TAXES.NEARLY PEOPLE OF EACH AGE-GROUP SAVES MONEY TO SAVE THEIR TAX RETURNS. THOUGH THERE ARE PEOPLE WHO INVEST BECAUSE OF CAPITAL GAINS.

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It is further explained individually in the form of pie-charts as:

ANALYSIS INVESTORS IN THE AGE-GROUP OF 18-30 YEARS ARE HIGHLY INCLINED TOWARDS TAX SAVING AS 56% OF THE INVESTORS PREFER TAX SAVING WHEN THEY GO FOR AN INVESTMENT. AT THIS AGE PEOPLE DON’T SAVE FOR RETIREMENT BUT 24% OF INVESTORS GO FOR CAPITAL GAINS AS THEIR MOTIVE FOR INVESTMENT & ONLY 15% INVEST FOR FUTURE NEEDS.

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Investment Objective & Portfolio Mgmt.

ANALYSIS A PERSON IN THE AGE GROUP OF 30-40 YEARS INVESTS TO SAVE THEIR TAXES. MORE THAN 50% OF THE INVESTORS FIND TAX SAVING AS THE BEST OPTION AS THEY ARE SAVING FOR FUTURE AS WELL AS DOESN’T HAVE TO GIVE THEIR HARD EARNED MONEY TO THE GOVERNMENT. THIS GROUP OF PEOPLE ALSO FAVORS CAPITAL GAINS TO INCREASE THEIR MONEY AS 28% OF THE INVESTORS INVEST BECAUSE OF CAPITAL GAINS. ONLY 14% OF THE PEOPLE GIVE PREFERENCE TO FUTURE NEEDS 6% THINK OF THEIR RETIREMENT & THEN INVEST.

ANALYSIS PEOPLE IN THE AGE GROUP OF 40-50 YEARS HAVE A HIGH INCLINATION TOWARDS TAX SAVINGS & CAPITAL GAINS WHEN THEY GO FOR AN INVESTMENT. THOUGH THE TAX SAVING CHUNK ACCOUNTS TO 48% AND THE OTHER 52% ARE OCCUPIED BY CAPITAL GAINS, FUTURE NEEDS & RETIREMENT WHICH CONSTITUTE OF 21%, 17% & 14% RESPECTIVELY.

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Investment Objective & Portfolio Mgmt.

ANALYSIS INTERESTINGLY PEOPLE ABOVE 50 YEARS OF AGE ARE MORE INTERESTED IN SAVING THEIR TAX LIABILITY AS THESE PEOPLE OCCUPY HALF OF THE CHART. 25% OF THE PEOPLE ARE INTERESTED TO INVEST IN THE RETIREMENT PLANS TO MAKE THEIR FUTURE SAFE. THIS FIGURE CAN BE EASILY DRAWN OUT AS THIS GROUP OF PEOPLE IS NEARING THE RETIREMENT AGE & THEY HAVE TO MAKE THEIR FUTURE SAFE. CAPITAL GAINS & FUTURE NEEDS GETS AN EQUAL WEIGHTAGE OF 14%.

2) FINDING BASED ON OCCUPATION

ANALYSIS IBS, GURGAON 139

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Investment Objective & Portfolio Mgmt.

THE BAR GRAPH ABOVE SHOWS HOW PEOPLE OF DIFFERENT OCCUPATION INVEST. INVESTING IN STOCK MARKET IS NOT EVERYONE’S CUP OF TEA. PEOPLE WHO CAN TAKE RISK CAN INVEST IN STOCK MARKET & INVESTING IN STOCKS IS VERY MUCH PREVALANT AMONG BUSINESSMEN. MUTUAL FUND INVESTMENT IS SAFE AMONG SELF-EMPLOYED.

It is further explained individually in the form of pie-charts as:

ANALYSIS BUSINESSMEN ARE PEOPLE WHO ARE CONSIDERED TO TAKE RISK IN STOCK INVESTMENT.49% OF BUSINESSMEN INVESTS IN STOCKS TO GET HIGH RETURN & OTHER 50% CONTITUTE OF ULIP, FIXED DEPOSIT, INSURANCE, MUTUAL FUNDS, & OHTERS (REAL ESTATE, GOLD ETC.) THIS CATEGORY OF PEOPLE CANNOT SUSTAIN WITH A FIXED RETURN SO THEY INVEST IN SHARE MARKET & THEY ARE ALSO RISK TAKERS.

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ANALYSIS SELF-EMPLOYED (CA, DOCTORS ETC.) HAVE A STRONGER PREFERENCE FOR INVESTING IN MUTUAL FUNDS & INSURANCE WHICH CONSTITUTE OF 34% & 23% RESPECTIVELY. THIS CATEGORY OF INVESTORS WANT THEIR HARD EARNED MONEY TO BE SAFE SO THEY PLAY SAFELY WITH MUTUAL FUNDS & ONLY 13% TAKES RISK & INVESTS IN STOCKS. THIS TYPE OF PEOPLE NEED A CONTINUOUS GROWTH & MUTUAL FUNDS ONLY PROVIDE THEM WITH THIS GROWTH ENGINE. 17% OF SELF-EMPLOYED GROUP INVESTS IN ULIP & ONLY 9% TAKES INTEREST IN FD.

ANALYSIS SERVICEMEN PREFER TO PLAY WITH THEIR MONEY SAFELY. SO 37% OF THESE PEOPLE KEEP THEIR MONEY IN BANK ACCOUNTS I.E HAVING THEIR FIXED DEPOSITS. AFTER THIS THEY PREFER INSURANCE & MUTUAL FUNDS WHICH COMPRISES OF 16% & 17% OF THEIR INVESTMENT RESPECTIVELY. THESE PEOPLE DON’T WANT TO TAKE RISK WITH THEIR HARD EARNED MONEY SO ONLY 13% INVESTS IN STOCKS & 11% INVESTS IN ULIP. ONLY 6% OF PEOPLE INVESTS IN OTHERS(GOLD, REAL ESTATE.)

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OCCUPATION & INVESTMENT PURPOSE

ANALYSIS IT IS CLEAR FROM THE BAR GRAPH THAT PEOPLE HAVE THE STRONGEST PREFERENCES FOR ACHIEVING CAPITAL GAINS WHETHER THEY BELONG TO BUSINESS, SELF-EMPLOYED, OR SERVICE CLASS. MORE OR LESS EQUAL PREFERENCE IS SEEN IN FUTUTE NEEDS, TAX-SAVING & RETIREMENT.

ANALYSIS BUSINESS CLASS IS RISK TAKERS & THEIR MAIN INTEREST IS WEALTH MAXIMIZATION. THIS CLASS OF PEOPLE HAVE THE STRONGEST PREFERENCE FOR ACHIEVING CAPITAL GAINS WITH 51% OF SHARE, IBS, GURGAON 142

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Investment Objective & Portfolio Mgmt.

FOLLOWED BY FUTURE NEEDS WHICH COMPRISES 22%.IT SEEMS THEY ARE LESS WORRIED ABOUT THEIR TAX SAVING & RETIREMENT.

ANALYSIS

LIKE BUSINESS CLASS, THE MAIN INTEREST OF THE SELF-EMPLOYED IS TO ACHIEVE CAPITAL GAINS. IT COMPRISES OF ALMOST HALF OF THE TOTAL SELF-EMPLOYED.OTHER HALF COMPRISES OF FUTURE NEEDS, TAX SAVING & RETIREMENT, IN WHICH FUTURE NEEDS HAD THE MAXIMUM SHARE WHICH IS CLOSELY FOLLOWED BY TAX SAVING & RETIREMENT.

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ANALYSIS LOOKING AT THE ABOVE CHART IT IS CLEAR THAT SERVICE CLASS HAS ALSO CLOSE AFFINITY WITH CAPITAL GAINS LIKE THE OTHER TWO CLASSES I.E BUSINESS & SELF-EMPLOYED. BUT PEOPLE IN THE SERVICE CLASS ARE WILLING TO SAVE MORE FOR TAX SAVING & RETIREMENT.AND 22% PEOPLE ALSO SAVE FOR FUTURE NEEDS.

3) FINDING BASED ON INCOME

INCOME & PERCENTAGE OF INVESTMENT

ANALYSIS IBS, GURGAON 144

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PEOPLE IN EACH GROUP OF INCOME LEVEL APPROXIMATELY SAVE TO 1025% OF THEIR INCOMES. THIS BAR GRAPH GIVES A CLEAR CUT PICTURE OF PEOPLE’S INCOME & THEIR SAVING PATTERN.

It is further explained individually in the form of pie-charts as:

ANALYSIS

IN THE LOWER INCOME GROUP I.E PEOPLE HAVING INCOME OF LESS THAN 2.5 LACS, ONLY TWO CATEGORIES EXISTS. ONE IS PEOPLE WHO INVEST 010% OF THEIR EARNING WHICH CONSTITUTE OF 65% AND THE OTHER CATEGORY WHICH INVESTS 10-25% OF ITS EARNING COMPRISES OF 35%.

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ANALYSIS IN THE MIDDLE INCOME GROUP I.E 2.5-5 LACS THERE IS ALMOST AN EQUAL DISTRIBUTION OF PEOPLE INVESTING THEIR TOTAL EARNINGS. 46% OF THIS GROUP INVESTS THEIR 10-25% OF THEIR INCOME WHERE AS 48% INVESTS ONLY 0-10% OF THEIR MONEY. ONLY 6% OF PEOPLE INVESTS ABOVE 25% OF THEIR HARD EARNED MONEY.

ANALYSIS

65% OF THE PEOPLE WHO EARN MORE THAN 5 LACS INVEST 10-25% OF THEIR EARNINGS WHERE AS 21% PEOPLE INVESTS 0-10%. IN THE INCOME GROUP OF 5-10 LACS 14% OF THE POPULATION INVESTS ABOVE 25%. IBS, GURGAON 146

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Investment Objective & Portfolio Mgmt.

ANALYSIS

AS PEOPLE INCOME INCREASES THEIR INVESTMENT PATTERN ALSO CHANGES. PEOPLE OF HIGH INCOME GROUP I.E HAVING EARNING OF MORE THAN 10 LACS SAVES OR INVESTS A GOOD AMOUNT OF MONEY. 24% OF THIS CATEGORY OF PEOPLE INVESTS ABOVE 25% OF THEIR EARNINGS. THOUGH 60% OF PEOPLE INVEST 10-25% OF THEIR TOTAL EARNINGS. AND ONLY 16% OF THIS GROUP INVESTS IN THE RANGE OF 0-10% OF THEIR EARNINGS.

INCOME & PURPOSE OF INVESTMENT IBS, GURGAON 147

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ANALYSIS PEOPLE HAVE DIFFERENT INCOMES & ACCORDING TO THEIR INCOME THEIR PURPOSE OF INVESTMENT ALSO VARY. IT IS CLEARLY VISIBLE IN THIS GRAPH THAT EACH LEVEL OF INCOME GROUP HAVE DIFFERENT REQUIREMENT & ACCORDING TO THAT INVESTMENT PATTERN DIFFERS.

It is further explained individually in the form of pie-charts as:

ANALYSIS

PEOPLE IN THE LOW INCOME GROUP I.E LESS THAN 2.5 LACS HAVE A TENDANCY TO SAVE FOR FUTURE NEEDS & 45% PEOPLE FALLS IN THIS CLASS. AND THESE PEOPLE HAVE A TENDANCY TO INVEST FOR FUTURE NEEDS & TO EARN CAPITAL GAINS IN THAT ORDER.THEY DO NOT HAVE MUCH TAX LIABILITY SO THEY DO NOT HAVE TO BOTHER ABOUT THAT.BUT 17% PLAN THEIR FUTURE.

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ANALYSIS

AS PEOPLE ‘S INCOME INCREASES SO THE TENDANCY TO SAVE FOR TAX DEDUCTIONS ALSO INCREASES.PEOPLE WHO’S INCOME RANGES FROM 2.55 LACS FALLING IN THE MIDDLE INCOME GROUPS INVEST FOR THE PURPOSE OF TAX SAVING, FUTURE NEEDS & CAPITAL GAINS WHICH STANDS OUT TO BE 51%, 22%, & 19% RESPECTIVELY.

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ANALYSIS

PEOPLE WHO FALLS UNDER THE CATEGORY OF 5-10 LACS INCOME SLAB INVESTS FOR THE PURPOSE OF TAX SAVING. 54% OF PEOPLE INVEST TO SAVE TAX. OTHER INVESTMENTS COMPRISES NEARLY OF 50% & CAPITAL GAINS, RETIREMENT, & FUTURE NEEDS ACCOUNT TO THIS 50%.

ANALYSIS

PEOPLE BELONGING TO THE HIGH LEVEL OF INCOME GROUP’S MAIN MOTTO IS TO SAVE TAX THESE PEOPLE INVESTS FOR THE PURPOSE OF TAX REDUCTIONS & CAPITAL GAINS. A LARGE NUMBER OF PEOPLE I.E 58% INVESTS ONLY TO SAVE TAX.21% SAVES FOR CAPITAL GAINS, 13% PLAN FOR THEIR RETIREMENT & ONLY 8% ACCOUNTS FOR FUTURE NEEDS.

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Recommendations

Age •

The segment (18-30) can be a potential customer segment for the bank as most of the people are falling in the income group of less than Rs.15000 per month. The company can target this segment by offering its ULIP product both as an insurance and investment product, which can provide high returns as the investments and provide the insurance cover too, as a large segment doesn’t have an insurance cover. The return in new Capital Unit Gain Plan is around 20% which is quite good enough.

Mutual

Fund

Schemes

can

also

be

offered

to

those

respondents in this age group who are risk takers as in mutual funds small amounts can invested. The need is to make this segment aware of the products like ULIP (which is promising return of 20-25% p.a.) and tap as many customers as possible. Also Positioning of the Mutual Funds should be such that attracts customers. •

In order to tap the 30-40 years segment ULIP can be promoted as an investment option rather than an insurance product. Mutual funds need to be promoted as only a small segment is investing in mutual funds. Mutual funds and ULIP both can be the best investment option for this segment. IBS, GURGAON

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Investment Objective & Portfolio Mgmt. •

As the segment 40-50 years is an investing and risk taking segment, Mutual funds promising higher returns can be promoted in this segment. The product ULIP is also highly acceptable by this segment, so both of these products can be promoted as a best investment options promising high returns and low risks. People in this age group can also invest in real estate as by this age people are in the position to invest large lump sum money for this investment.

•

In the segment of above 50 age group people be targeting for the Mutual funds as can be seen that very few people are investing M.Fs. this is because this segment consists of risk averters as this segment have invested in Fixed Deposits and government securities and insurance than any other investment product as safety is the most important factor which is being considered while investing by this segment. But these people are neutral for these investments. These thus theses products can be promoted as safe investments and better than F.D’s only then this segment can be tapped.

Income •

The income bracket less than Rs.15000 per month are basically safe investors and have not and do not prefer investing in mutual funds and ULIP. Thus positioning of these products should be such that people are attracted towards this scheme. Emphasis on marketing of the products should be given.

•

Respondents

under

income

bracket

Rs.15000-Rs.30000

have

mainly invested in insurance and real estate. But when survey was done and their preference was asked these respondents strongly preferred investing in these strategies. IBS, GURGAON 152

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Investment Objective & Portfolio Mgmt.

Income Bracket of Rs.30000-Rs.50000 is the strong contenders for

•

investing their money and these people have invested in real estate, insurance and fixed deposits. Moreover there is mixed preferences for their investments thus proper segmentation of the sample should be done accordingly marketing strategies should be adopted. •

Though there is a small percentage of respondents in income bracket above Rs.50000 who least prefer investing in mutual fund. But this is the segment which can be well targeted and their portfolio should be such that gives them more returns. The case of ULIP is different as people strongly prefer investing in this investment strategy. Thus emphasis for selling ULIP in this income bracket.

Occupation The survey conducted has resulted in the observation that the business class should be targeted for ULIP and Mutual funds as they strongly prefer investing in these two products. These products should be positioned as safe investment and then been sold it to service class and retirees as these investors are the safe investor.

Conclusion As the main objective of the project is to analyze the investment strategies of various retail investors, the whole analysis of project is divided into three phases— Phase 1

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Investment is integral part of savings i.e. people invests from the amount which they saved after their daily expenditures. But still anyone rarely invests the whole amount he saved, and thus the question arise ‘where to keep the savings?’ and the most common answer to this question is saving a/cs of the banks. Thus while analyzing the investment strategies our first target segment was saving bank a/c of our organization. Standard Chartered bank offers 5 types of Savings account matching different needs of customers namely: · Axcess plus · Super Value · Parivaar account · Saral Account · Aasan Account The product which we analyze for our bank was axcess plus saving a/c of it in context with the same type of saving a/cs of the other organizations. For this we did an organization survey and collect the information about the different banks a/cs. This collected data was then posted in the excel sheet and thus a comparative analyses was done focusing the different competitive strategies followed by the banks in marketing their product. E.g. ICICI bank & HDFC bank follows the aggressive marketing policy whereas banks as STANDARD CHARTERED & ABN AMRO follow the targeted marketing policy. The former cater to the needs of every customer and target the mass customer segment present in market while the latter focuses only on the selected

segment

and

provides

a

very

good

service

with

charges

comparatively high than other banks. As our main objective behind this research was to analyze the competitive strategies we also did selling of this product so that we can analyze the need IBS, GURGAON Page 154

Investment Objective & Portfolio Mgmt.

of the different customers while choosing a saving bank a/c. Thus we sell the axcess plus and did a comparative analyses of the various needs of the customer e.g. very good service, always filled ATMs, low charges etc.

PHASE 2 People used to invest from the savings and some of the major investment instruments are ULIPs, MUTUAL FUNDS, LIC, etc. which caters to different investment needs of the investors as mentioned earlier. Every investor has lot of expectations from his investment but there is always priority given to the one expectation on the other. E.g. a customer might expect very high returns

from his investment but when it comes to the risk he prefer to

invest in bonds as he didn’t want to bear risk at all. Thus his priority is safe investment rather than very high returns. To analyze this we did a market survey considering the following facts in mind✔ It consist sample from all the age groups of investors. ✔ It caters to all class of society i.e. businessmen, servicemen and self

employed. ✔ People from different income groups were included in sample size. ✔ Sample

size also consist sample of respondents with different

disposable incomes. Etc Thus a questionnaire was formed including all these factors and a market survey was done in Delhi NCR region. The main aim of survey was to analyze the risk appetite of different respondents in different age groups, with different annual income, disposable income etc. so that while designing the portfolio of the customer we can actually identify the need of the customer and suggest him the investments according to his need.

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After collecting the required information an excel sheet was prepared in which the data was posted. Then we plan to did the graphical analyses of whole the data collected. These graphs will analyze the relations between different factors which were kept in mind while doing the analyses. To go into more depth of the investors thinking we did selling of this product too. The main aim behind this selling was to know the factors which an investor kept in mind before investing in any instrument. One of the most common factors we came to know was BRAND NAME. Apart from the ULIPs we also laid emphasis on deep theoretical study of mutual funds which are one of the most common investment instruments. This study includes comparative analyses of returns in different ULIP plans with different types of MUTUAL FUNDS. In this study comparison is done not only for returns but also keeping risk factor in mind.

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ANNEXURE-I COMPARISON OF SERVICE CHARGES AMONG DIFFERENT PRIVATE BANKS Service Charges

STAN C

ABN AMRO

ICICI

HDFC

KOTAK M

Average Balance

10000

10000

5000

5000

10000

750/quarter*

750/quarte r**

750

Non maintenance of AB <5000 >=5000 to < 7500 >=7500 to 10000

1500 1250 750

500/mont h 400/mont h 300/mont h

* Rs. 250/quarter for sr.citizens & young star customers (minors) ** if customer is semi urban than AQB will be 2500/quarter Debit card fees

normal debit card

200/yr

180/yr

99/yr

100/yr

smart fill card gold card

399/yr 799/yr

na 400/yr

99/yr* na

na 500/yr

Free for 1st year Rs.100 for subsequent years na na

na

180/yr

na

na

100/card

Additional cards supplementary cards

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Investment Objective & Portfolio Mgmt. add on cards replacement card fee damaged card fee woman’s card

na

180/yr**

na

500/yr***

250/card

na

200/card 200/card na

200/card 200/card na

100/card free 150/card

100/card free na

* smart fill card is HPCL DEBIT CARD in ICICI ** minimum limit for add on card in ABN AMRO is RS.15000 & service charge will be as 500/mont <7500 h >=7500 to 400/mont <10000 h >=10000 to < 300/mont 15000 h ***for easy shop woman’s card fee will be RS 150/yr in HDFC ATM's transaction UTI ATMS*

free

Charged

Cheque Book At par cheque book 0 to 500

501 & above cheque return Inward

ICICI

SBI**

cash withdrawal(fr om partners Rs 20 & from non partners Rs 60)

rs 25 from any other bank except SBI

50****

free

50***

Others( Visa domestic ATMs

free

400

300

100 OUTWARD 100 100***** 100 *subsequent to the month where transaction criteria not fulfilled & bal<10,000

300

300

350

Rs 1/ 1000(min Rs 50)

HDFC & KOTAK M

IBS, GURGAON 158

200

Page

Investment Objective & Portfolio Mgmt. ** only in gold card , 2 transactions per month *** only if AQB is not maintained otherwise free **** free 1st cheque book of 25 leaves ***** 50/Cheque for local cheque deposited by customer statements monthly statement Adhoc statement

200/yr 50/yr

Facilities Dmat a/c Dmat maintain charges

Internet Banking Phone Banking

free free

200/yr na

free* 100/stat

free 100/yr

na

free

na

360 per yr

free free

free free

free free

free free

DD/POS DD COMMISON On same bank

50

on other bank

2.5/1000* *

2/1000(min shown 50) below

2.5/1000*

4/1000 (100 min)

* min 50 max 5000 ** min 50 max 8000 HDFC commission schedule on branch location up to 10000 10000-50000 50000-100000 above 100000 * for sr.citizens /rural areas ** min 150/***min 250/- & max 5000

50,40* 75,60* 2.5/1000** 2/1000***

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On non branches location-----rs 50/- plus charges as below rs 500/500/- to 1000/1000/- to 5000/5000/- to 10000/10000/ to 100000/100000 and above * max rs 5000 PO commission schedule * 75 for PO Upto 50000 max 5000

Account closing charge

Door step banking

500 less than 6 months

50

10 15 25 30 3/1000 6/1000*

1/1000*

within 12 months 500/-

250 within 1 yr, nil after 1 yr

courier Rs. 25 & DD Rs. 50 par transactio n

Rs. 10 par transaction

dd charges

< 14 & >6 months no charge, 15 days to 6 months 100/-

dd charges

Rs.600 if closed within 6 months. Else no charges

na

ANNEXUR E-II QUESTIONNAIRE Name50

Age-

18-30

31-40

41-

>50

Telephone NoOccupation a) Service c)Self employed

b)Business d) Others IBS, GURGAON

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Current annual incomea) <2,50,000 c) Rs 5,00,000-10,00,000

b) Rs 2,50,000-5,00,000 d) >Rs 10,00,000

1) Have you invested in any of the following? a) Fixed deposits. c) Stocks

b) Mutual Fund d) ULIP e) Others

2) You begin to withdraw money from your investment a) 0-1 yr b) 1-3 yrs c) 3-10 yrs d) 10 yrs or more 3) What is your primary investment focus? a) Retirement c) Future uncertainty

b) Wealth creation d) Tax rebate

4) Brand name is considered while making a decision to invest a) Disagree b) Uncertain c) Agree e) don’t know 5) What is the most important criterion for you selecting a particular investment plan? a) Past performance b) Service c) Promoter’s background d) any other________________ 6) Your approx. fixed monthly expenses? a) < Rs.10,000 c) Rs. 25,000-50,000

b) Rs 10,000-25,000 d) Rs >50,000

7) How would you describe yourself as a risk taker? a) Willing to take risk for higher return b) Can take calculated risk. c) Low risk taking capabilities. e) Extremely averse to risk

References

www.standardchartered.co.in www.bajajallianz.com www.nseindia.com www.mutualfundsindia.com IBS, GURGAON 161

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www.valueresearchonline.com

ICFAI Journals The Economic Times

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