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A
PROJECT REPORTON
“THE ROLE OF FINANCIAL PLANNING IN
PORTFOLIO MANAGEMENT”
FOR
HDFC STANDARD LIFE INSURANCE COMPANY
SUBMITTED TOUNIVERSITY OF PUNE
IN PARTIAL FULFILLMENT OF THE REQUIREMENTOF
BACHELOR OF BUSINESS ADMINISTRATION (BBA)
SUBMITTED BYKSHITIJA.AVINASH.LONDHAY
UNDER THE GUIDANCE OF:
Mrs.BHUSHNA.BHAGAT
RNC Arts, JDC Commerce & NSC Science College, NASHIK ROAD. – 422101.
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RESEARCH METHODOLOGY
1. EXECUTIVE SUMMARY
The project gave me a great experience and it has taught me many things which
will be very much helpful for my future at the same time it gave me enough
scope to implement my analytical ability.
.The second part consist of Financial Planning .
It is purely based on whatever I learned at HDFC Standard Life insurance
company. All the topics have been covered in a very systematic way.
HDFC Standard Life is an insurance company . While choosing this firm I was
very happy and excited as HDFC is a big group and the trust of the people are with
them . As it is the first private company to start its own insurance company .
I was having keen interest in knowing :
How the financial planning is done for their customer ?
How the need of the customer is fulfilled ?
As the customer or investor are very much confused in investing their money as itshould be save and also to get good amount of returns .
In the today’s days near about 35 to 36 mutual fund companies are operating in India and
in same number insurance companies are also operating in India. A lot of product and
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near about 1000 schemes are available in mutual fund, and insurance. Both of the term
have a complex product, and that time the investor become confuse and get attracted
towards the product and forget about the essential requirements so needs have a proper
portfolio management or Financial planner who identify a proper need of investor and
create a plan which are related to need and select a product which will give a positive
return to the investor in future..
I was very happy working with them . I also want to get knowledge of Financial
Planning and I can use this knowledge to do my own financial planning.
Sometimes people have a lot of money but they don’t know where to invest this
money that will give a higher return on investment. And sometime people who
does not have a lot of money but they don’t know how to use this money for
achieving future goal’s at that time a need arises of a better financial consultant
who manage a portfolio of individual.
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OBJECTIVES
I. PRIMARY OBJECTIVES :
.
2 To study Financial Planning in individual’s life.
.
II. SECONDARY OBJECTIVES :
1. To study investment
.
2. To study the financial planning as effective tool in maintaining standard of
living in individual’s life for achieving his financial goal’s.
3. To study various planning done by financial consultant for the customer.
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3. INDUTRY PROFILE
INSURANCE:-
Insurance can be defined as assurance of uncertainty . Insurance is about
something going wrong . It’s about things going ; One of the Wonders of human
nature that never believe anything can actually go wrong .
The insurance sector in India has come a full circle from being an open
competitive market to nationalization and back to liberalized market again
Tracking the development in Indian insurance sector reveals 360 degree turn
witnessed over a period of almost two centuries .
The business of life insurance in Indian in its existing form started in India in the
year 1818 with the establishment Oriental Life Insurance in Calcutta..
Some of the important milestone in life insurance business in India are.
1912 : The Indian Life Insurance Companies Act enacted as first statue to
Regulate the life insurance business.
1928: The Insurance Companies Act enacted to enable the government to
Collect statistical information about life and non-life insurance business.
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1938: Earlier legislation consolidated and amended to by the insurance Act
With the objective of protecting the interests of the insuring public.
1965: 245 Indian and insurers and provident societies take over by the central
Government and nationalized. LIC formed by an act of parliament viz.
LIC. Act .1956, with capital contribution of Rs. 5 Crores from
Government of India
INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY
Reforms in the Insurance sector were initiated with the passes of IRDA Bill in
Parliament in December 1999. The IRDA since its incorporation as a statutory
body in April 2000 has fastidiously such to its schedule of framing regulations and
registering the private sector insurance companies.
The other decision taken simultaneously to provide the supporting systems to the
insurance sector and in particular the life insurance companies was the launch of
the IRDA online service for issue and renewal of licenses to agents.
COMPANY PROFILE
HDFC STANDARD LIFE INSURANCE COMPANY LTD.
HDFC Incorporated in 1977 with a share capital of Rs 10 Cores , HDFC has since
emerged as the largest residential mortgage finance institution in the country . The
corporation has had a series of share issues raising its capital to Rs 119 cores .The
gross premium income for the year ending March 31, 2007.
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HDFC operates through almost 450 locations throughout the country with its
corporate hea quarters in Mumbai, India .HDFC also has an international office in
Dubai, UAE, with services associates in Kuwait, Oman and Qatar.
HDFC is the largest housing Company in India for the last 27 years.
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KEY PLAYERS
Mr. Deepak .S. Parekh is the Chairman of the Company. He is also the Executive
Chairman of Housing Development Finance Corporation Limited (HDFC Ltd.) .
He joined HDFC Ltd. In a senior management position in 1978.
He was inducted as whole-time director of HDFC Limited in 1985 and was
appointed as its Executive Chairman in 1993.
Mr. Deepak M Stalker is the Managing Director and CEO of the company since
November , 2000. Prior to this, he was the Managing Director of HDFC Limited
since 1993.
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What is investing?
Investment refers to a commitment of funds to one or more assets that will be held
over some future time period. Almost all individuals have wealth of some kind,
ranging from the value of their services in the workplace to tangible assets to
monetary assets. Anything not consumed today and saved for future use can be
considered an investment. For our purposes, investment will mean a measurable
asset retained in order to increase one’s personal wealth.
Why to invest?We invest to improve our future welfare. Funds to be invested come from assets
already owned, borrowed money, and savings or foregone consumption. By
foregoing consumption today and investing the savings, we expect to enhance our
future consumption possibilities. Anticipated future consumption may be by other
family members, such as education funds for children or by ourselves, possibly in
retirement when we are less able to work and produce for our daily needs.
Regardless of why we invest we should all seek to manage our wealth effectively,
obtaining the most from it. This includes protecting our assets from inflation, taxes
and other factors.
What Process Do We Use to Invest?
The financial planning process consists of six steps that help you take a "big
picture" look at where you are financially. Using these six steps, you can work out
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where you are now, what you may need in the future and what you must do to
reach your goals. These six steps are:
1. Establishing and defining the client-planner relationship
The financial planner should clearly explain or document the services to be
provided to you and define both his and your responsibilities. The planner should
explain fully how he will be paid and by whom. You and the planner should agree
on how long the professional relationship should last and on how decisions will be
made.
2. Gathering client data, including goals
The financial planner should ask for information about your financial situation.
You and the planner should mutually define your personal and financial goals,
understand your time frame for results and discuss, if relevant, how you feel aboutrisk. The financial planner should gather all the necessary documents before
giving you the advice you need.
3. Analyzing and evaluating your financial status
The financial planner should analyze your information to assess your current
situation and determine what you must do to meet your goals. Depending on what
services you have asked for, this could include analyzing your assets, liabilities
and cash flow, current insurance coverage, investments or tax strategies.
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4.Developing & presenting financial planning
recommendations
The financial planner should offer financial planning recommendations that
address your goals, based on the information you provide. The planner should
go over the recommendations with you to help you understand them so that
you can make informed decisions. The planner should also listen to your
concerns and revise the recommendations as appropriate.
5. Implementing the financial planning recommendations.
You and the planner should agree on how the recommendations will be carried out
.The planner may carry out the recommendations or serve as your "coach,"
coordinating the whole process with you and other professionals such as attorneys
or stockbrokers.
6. Monitoring the financial planning recommendations.
You and the planner should agree on who will monitor your progress towards your
goals. If the planner is in charge of the process, she should report to you
periodically to review your situation and adjust the recommendations, if needed,
as your life changes.
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Method of data collection:
A. Primary Data:
Data from primary source collected sitting with financial consultant and askedquestions (interview) to the client.
B. Secondary Data:
The main source secondary data for insurance, is the Name, Address of the
Company Customers for whom insurance the has to be made. This was available
for the Company System.
• Scope of the Study
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The scope of my project was to study the Role of financial planning in
Portfolio Management of the HDFC Standard Life Insurance. For that
Company had assigned me their Financial Consultant as a Trainee. In today’s area
as, the Portfolio Management is really important element of Financial Planning.
While working on Portfolio Management System, I understand the various
factors like, Nature, purpose, conditions, and income level of each and every
customer
Firstly I need to understand what kind of services offered by the Company to their
customers and accordingly I need to take the steps towards the designing the
Portfolio for the individual customers (which includes, salary earner, businessman,
self employed etc.
Limitations of study
• Time period was limited for the project so it was not possible to learn
whole things in the financial planning.
• Client’s interaction was not permitted all the time and on all the topics.
• Wrong information given by the client cannot be result in achieving the
objective of financial planning.
• Time period given by the expertise was very limited to cover the
comprehensive.
•
Concept of financial planning.
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. INTRODUCTION
Mr. Sham, 42 years old, married to Mrs. Gayatri age 39 recently.
Currently earning Rs. 1352000/- p.a. and main support for the family. Gayatri’s
income in mainly for her own savings and personal use. Within next 2-3 yrs she
will stop her consultancy and focus on your children’s education and home.
You are very keen on insurance part. And paying almost 200000/- premium p.a.
Total 14 policies with sum assured Rs. 3815000. Majority of the policies are
Endowment and few Term Insurances.
Net worth analysis shows a net worth of Rs. 4590000/- Total Assets now in July
2008 are Rs. 8182000/- and liabilities of Rs. 3592000/-
2. GOALS & OBJECTIVES
1. Cash Flow & Net worth Management
To have a significant cash flow surplus annually of around 15-18% of household
gross income in order to provide a funding source for all future wealth change
your accumulation targets. Any cash flow review should not significantly lifestyle.
1. Risk planning & ManagementYou want to have a complete family’s personal insurance program. This includes
covering all debts and having lump sums for generating income for the surviving
family members.
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3. Education of both the children.
You have 2 sons. Your goal is to give them the Best quality of Education in best
colleges in India. By, retirement, you expect both of them to be independent and
do not need financial support.
4. Retirement Planning
You have some personal savings. Your goal is to retire at age 60. At that time you
want maintain the standard of living same as before retirement for yourself andspouse. Lowering the standard is unacceptable. You are however not aware
whether the current recourses are adequate to provide retirement needs.
5. Investment Planning
Asset portfolio should grow at a rate, which supports the realization of the wealth
accumulation goals for financial freedom (retirement) and education for children.
6. Estate Planning
To have wills written for both husband and wife and to have a trust set up for the
child.
7. Tax Planning
To optimize tax savings under the Indian tax system. You are keen on using up
all personal tax relieves and rebates and to have good income reallocation
planning.
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Sub-Objectives
1. Good long term capital appreciation.
2. Returns from investment should be tax free or with minimum tax.
Insurance
Insurance is a basic form of risk management, which provides protection against
possible loss to life or physical assets. A person who seeks protection against such
loss is termed as insured, and the company that promises to honor the claim, in
case such loss is actually incurred by the insured, is termed as Insurer. In order to
get the insurance, the insured is required to pay to the insurance company (i.e. the
insurer) a certain amount, termed as premium, on a periodical basis (say monthly,
quarterly, annually, or even one-time).
Concept of Insurance / How Insurance Works
The concept behind insurance is that a group of people exposed to similar risk
come together and make contributions towards formation of a pool of funds. In
case a person actually suffers a loss on account of such risk, he is compensated
out of the same pool of funds. Contribution to the pool is made by a group of
people sharing common risks and collected by the insurance companies in the
form of premiums.
Insurance Covers
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Depending on the circumstances, you may need insurance in the following areas:
• Life
• Health
• Home
• Motor
• Personal Liability
• Professional Liability
• Business
• Disability
• LIFE INSURANCE:
Life insurance is a risk sharing mechanism whereby a policy owner (the insured)
agrees to invest some money with an insurance company that obligates itself to
pay money to a beneficiary on the insured’s death. It is a legal contract between an
insurance company and policy owner.
Life insurance needs analysis:
The first in determining what type of insurance to buy is a ‘needs analyses. You
need to assess the financial impact on your family if the breadwinner should die.
You can assess the in different ways.
I. The Multiple Earning Method:
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The amount of life cover you should buy should be 3 to 10 times of your gross
annual earnings. It completely ignores your financial resources and needs.
The ‘ Human Life Value’ Method:
This method values human life at the present value of all future earnings potential.
The steps for calculating the amount of cover under this method are as below:
• Deduct your personal expenses from your total income. This is the
surplus that you leave for your family and for your investments.
• Calculate the number of years left in your earning life
• Retirement age-Current age.
• Project family expenses up to retirement, allowing for increases due
to inflation and other factors.
• Subtract any pension benefits that they might get at your death.
• Add non-recurring expenses like children’s marriage.
• Calculate the shortfall in the total expenses and income.
• Calculate the present value of the shortfall.
The ‘Needs’ Method:
This method tries to calculate the amount required by your family to maintain their
existing lifestyle and their financial goals. The amount of the life cover under this
Method is calculated by subtracting the total of your current financial resources
from the present value of your family’s projected expenses.
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II. Forms of life cover:
Life insurance covers are availably three forms. Each form exists for a different
objective. These are:
A. Term plan
In the event of death in the policy period, your nominees receive the amount of
your cover i.e. the sum assured. You get nothing if you survive beyond the policy
period.
B. Pension plans
Pension plans are actually pure investment products. They provide with an
alternate income stream after your retirement.
C. Endowment plan
They also offer some returns on the premiums paid by you. So if you die during
the policy Term, your nominee’s get the sum assured plus some returns. Even if
you survive the term, you still get back the sum assures and the returns. However,
the premium charged for endowment plans is 5-6 times higher than the premium
for term plan.
D. Money-back plans:
Money-back plans are a variant of endowment plans. In case of the endowment
plans, the survival benefits are disbursed at the end of the policy term, while in
money-back plans the payback is staggered through the policy period.
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Money back policy is a policy opted by people who want periodical payments. A
money back policy is generally issued for a particular period, and the sum assured
is paid through periodical payments to the insured, spread over this time period. In
case of death of the insured within the term of the policy, full sum assured alongwith bonus accruing on it is payable by the insurance company to the nominee of
the deceased.
E. WHOLE-LIFE PLANS:
The term plan, endowment plans and money back plan provide cover only till a
specified age. Whole life plan provides cover till end of life. The insured has to
pay premium till a specified age. On reaching that age, the insured has the option
to encash the maturity benefits pr continue the cover for his entire lifetime.
F. Unit link insurance plans:
It can be considered as a combination of mutual funds and term plans. Part of the
premium paid is linked to the policy period and the sum assured and the rest is
invested.
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NON-LIFE INSURANCE
Types of non life insurance:
1. Personal-
a. Medical
b. Disability
2. Property-
a. Damage to property
b. Loss of income
c. Indirect losses
3. Liability-
a. Under statute
b Under common law
c Under contract
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SUGGESTIONS
• Company should have to increase awareness in the customers.
• Create a new tools and techniques which will be easy to understand for
clients.
• Company has to use effective Medias that can appeal to the masses.
• Make those ads, which can educate customers about financial planning.
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CONCLUSION
• Most of people are unaware about Financial Planning.
• Mainly businessman & salaried person are more interested to do Financial
Planning.
•Insurance advertisement not succeeds in creating awareness in the people.
People are more interested in investing in traditional Investment options like
insurance, FD, post.
BIBILOGRAPHY
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BOOKS
V.A. AVADHANI, Securities Analysis and Portfolio Management,
Himalaya Publishing House, 9th revised edition.
WEB
http:// www.hdfcsl.com
3. CURRENT FINANCIAL SITUATION
Cash Flow Analysis
In-Flow Rs Out-Flow Rs.
Sham’s Income (after tax)1,352,040 Tax Payment
Gayatri's Income (after tax) 165,000 Sham’s Tax 225,000
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LIC Maturity 134,000 Gayatri's Tax 0
Dividend Received 20,000
Bank Interest 2,100 Subtotal 225,000
Standard of Living
Car loan installments (HondaCity) 212,400
Car loan installments (Wagon R) 79,764
House loan installments 225,144
Personal Loan 235,392
Car maintenance 19,000
House maintenance 12,000
Credit Card payments 6,122
Eating out 48,000
Groceries 12,000
Travel 50,000
Utilities 60,000
Miscellaneous 69,500
Subtotal 1,029,322
Insurance Premium
Sham’s life insurance 108,264
Gayatri's life insurance 57,901
Vehicle Insurance 12,686Other Insurance 21,000
Subtotal 199,851
Total
1,673,14
0 Total 1,454,173
Difference 218,967
Cash out Flow is
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15%
15%
5%
15% 16%
1%
1%
0%
3%
1%
3%
4%
5%
7%
4%
1%
1%
Sham’s
Car loan installments
Car loan installments
House loan
Personal
Car
House
Credit Card
Eating
Grocerie
Travel
Utilitie
Miscellaneo
Sham’s life
Gayatri’s life
Vehicle
Other
4. ASSUMPTIONS
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Following are the assumptions based on the facts and discussions with
you.
Your income will increase at the rate of 10 % per annum until age 60.
Spouse’s income will stop within next 3 years.
Rate of inflation at 7 % per annum based on government official rate on Consumer
Price Index.
Equities investment rate of return at 18% p.a. on long-term basis.
Property investment rate of return at 10 % p.a. covering capital gain.
Investment-linked equities funds at rate of return of 15% p.a.
Investment-linked bond funds at rate of return of 7.5 % p.a.
Pre-retirement investment portfolio rate of return should be 12%
Post-retirement investment portfolio rate of return = 10%
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5. CASH FLOW MANAGEMENT
Net worth Statement – Current
Assets Rs. Liabilities Rs.
Liquid assets: Home Loan 1780000
Cash in hand 20000 Car loans 456000
Saving account 116950 Personal Loan 1356000
Fixed Deposits 0
Mutual Funds 776000
Sub Total 912950
Non-liquid assets:Properties 3500000
Equities 200000
PPF 1005789
Cars 800000
Life insurance cash value 764053
Other Assets 1000000
Sub Total 7269842
TOTAL 8182792 TOTAL 3592000
NETWORTH 4590792
6.RISK MANAGEMENT/INSURANCE PLANNING
The current personal insurance summary is as follows:
Person Plan type Premium p.a. Insurance Cover
Mr. Sham Endowment + Term Insurance 92533/- 3815001/-
Mrs. Gayatri Endowment 56550/- 1142653/-
Master Raj Unit Linked 6395/- 75000/-
Miss Stuti Unit Linked 6351/- 100000/-
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7. EDUCATION PLANNING
It seems that you have not specifically allocated funds for education funding of your one son and one daughter..
8. RETIREMENT PLANNING
There is currently no clear plan on retirement. You have not really focused on this
aspect. It seems that your major focus is on your current profession and you havenot given a thought on Retirement Planning
9. INVESTMENT PLANNING
The following table lists out the portfolio of investment-grade assets currently
owned and the portfolio return rate:
Asset Rs Return Rate Weighted Return Rate
Saving Account 116,950 3.50% 0.14%
Equities 200,000 18.00% 1.26%
Life insurance Value 764,053 4.50% 1.20%
Mutual funds 776,000 15.00% 4.07%
PPF 1,005,789 8.00% 2.81%
Total: 2,862,792 Portfolio Return: 9.48%
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Investments
4% 7%
27%
27%
35% Saving Account Equities Life insurance Mutual funds PPF
STANDARD LIFE
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Standard Life is Europe’s largest mutual life assurance company. Standard Life
which has been in the life insurance business from the past 185 years is a modern
company surviving quite a few changes since selling its first policy in 1825.The
company expanded in the 19
th
century from its original Edinburgh premises ,opening offices in other towns and acquitting other similar businesses.
Standard Life current assests exceeding over $ 70 billion under its managementand has the distinction of being recorded “