“A Study on the Customer Satisfaction”

Dissertation submitted In Partial fulfillment for the

Post Graduate Diploma in Business Management

By

ANSHUL SINGHALRoll No.: MDJA08113

Batch 2008-2010

Under the Guidance of

Reporting BossDesignation

Company Name

NSB SCHOOL OF BUSINESS B-II/1, MCIE, Delhi-Mathura Road, New Delhi

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CONTENTS .

DECLARATION 3

ACKNOWLEDGEMENT 4

CERTIFICATE 5

EXECUTIVE SUMMARY 6

PREFACE 8

SECTION I

Introduction of financial products 9

a) Share & Commodity Treading

b) Insurance

c) Mutual Fund

SECTION II

Company Profile 65

SECTION III

Research Methodology 76

SECTION IV

Data Analysis and Interpretation 79

SECTION V

Findings, Conclusion and Suggestions 93

TERMINOLOGY 101

BIBLIOGRAPHY 103

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DECLARATION

It is declared that I, ANSHUL SINGHAL from NSB School Of Business , New Delhi, 2nd

Semester, Regd. No.MDJA08113 , have completed the project report titled “ analysis of financial product ”. It is the result of my hard work and kind help of the staffs of SMC GLOBAL. This report is not taken from any other person or institute.

ANSHUL SINGHALRoll no.-MDJA08113

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ACKNOWLEDGEMENT

I have completed the project report titled “ANALYSIS OF FINANCIAL PRODUCT” on the subject financial management under the sincere guidance of Mr. HARISH PUROHIT (AREA MANAGER OF SMC GLOBAL, DELHI). This report would be incomplete with the help of other staffs of SMC global. I remained indebted to him.

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

I also convey my thanks to Mr.Harish chander purohit (Area Manager) of SMC Investment solution & services whose guidance & cooperation helped me a lot to complete this report.

Anshul Singhal ROLL NO: MDJA08113

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

CERTIFICATE

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

Prof. Alok SatsangiCorporate Relations Cell

EXECUTIVE SUMMARY

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The On the Job Training is an integral part of MBA course, which gives the student a practical experience as to how different organization works. I have been given the golden opportunity to work in a prestigious and known organization i.e., SMC Investment solution & services, from 25th Oct to25th Dec. SMC Investment solution & services is the trading house and also provide unit Linked plans. Unit Linked Plans brings a revolution in Insurance industry through different investment policies. Their flexible characteristic attracts people towards insurance industry. To be a market leader one company must know about its market penetration. For this reason I have done a research entitled “penetration of unit linked plans in DELHI NCR market. I adopted the descriptive research design for the above study because the descriptive research gives a conclusive result. I collected the data from the secondary source for my initial research. But it was not sufficient for me. So I go for the primary data. I collected the primary data through survey with the help of a structured questionnaire. I have used simple random sampling for this survey. A sample size of 150 respondents, those who are insured was taken from various other companies’. I have critically analyzed each and every question in the questionnaire and then this analyzed data was then converted into pie charts for convenience. Some of the important findings are given below:

88% respondents are insured by Life Insurance Corporation, India. Among this 88%, 20% respondents has policies of both LIC and other private insurer company.

76% respondents are having the Traditional Plan.14% has both traditional and unit linked plans.

62% people are unaware about unit linked plans. 38% people are having the endowment Plan and 35% having the money back plan. 28% people say the “Tax free withdrawal system” feature of influence them to take the

policy. Where as 24% people say the “Loan against policy” feature influence them. 50% people told that they have purchased an insurance product for Safety reason. Endowment Plan is the most popular plan where as children plan is the least popular

plan. 58% respondents have their money in the bank and only 9% invested their money in

shares and securities.

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

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

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PREFACE

The global life insurance market stands at $1,521.2 billion while the non-life insurance market

is placed at $922.4 billion. The United States itself accounts for about one-third of the $2443.6

billion global insurance market and Japan stands next with a20.62% share. India takes the 23 rd

position with $993.3 billion annual premium collection with 0.41% share out of one billion

people in India; only 35 million people are covered by insurance. Indian insurance market is

set to touch $25 billion by 2010, on the assumption of a 7% real growth in GDP.

The Insurance Regulatory and Development Authority regulate this fast growing industry. At

present its main concern is rural insurance market which is a vast market with huge business

opportunity which always remained neglected from the beginning.

PERPOSE OF STUDY

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In India the history of Life Insurance dated back to 1818 when it was viewed as Widows

Money, and available only to the British people. The Indians get the flavor of Life insurance

after the establishment of Bombay Mutual Life Insurance Society in 1871, the first Indian

insurer to charge equal premium for British as well as Indian people. Prior to it Indian lives

were charged higher premium because of the inferior and riskier notion of British insurers.

After Life Insurance Companies Act 1912 and Insurance Act 1938, the Indian insurance

industry ran by the monopoly LIC in 1956, under LIC Act 1956. Since, things have changed

now drastically due to the establishment of IRDA in 1999 and liberalization of Indian

insurance market. The purpose of this project is to know about the penetration of unit linked

plans in DELHI NCR market. Here, I have also just attempted an effort to measure the

awareness of ULIP in Mandible, Sandspur, and Deogarh market by market survey.

Objective of the Study

To know about the penetration of unit linked products in Delhi NCR market.

To study the awareness about SMC and its different services...

WHY SMC?

Large avenues of investment solutions and financial services under one roof

Personalized solution and attention offered to each investor.

Research support and timely advice by a high- tech research wing.

Nationwide presence, through a wide network of more than 1250+ branches across

350+cities / towns.

Honesty, transparency and fairness imbibed in all its dealings.

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

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Section- I

Introduction of Financial Products

DERIVATIVE

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Introduction

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

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

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

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

Development of exchange-traded derivatives

Derivatives have probably been around for as long as people have been trading with one another. Forward contracting dates back at least to the 12th century, and may well have been around before then. Merchants entered into contracts with one another for future delivery of specified amount of commodities at specified price. A primary motivation for pre-arranging a buyer or seller for a stock of commodities in early forward contracts was to lessen the possibility that large swings would inhibit marketing the commodity after a harvest . BSE created history on June 9, 2000 by launching the first Exchange traded Index Derivative Contract i.e. futures on the capital market benchmark index - the BSE Sensex. The inauguration of trading was done by Prof. J.R. Varma, member of SEBI and chairman of the committee responsible for formulation of risk containment measures for the Derivatives market. The first historical trade of 5 contracts of June series was done on June 9, 2000 at 9:55:03 a.m. between M/s Kaji & Maulik Securities Pvt. Ltd. and M/s Emkay Share & Stock Brokers Ltd. at the rate of 4755.In the sequence of product innovation, the exchange commenced trading in Index Options on Sensex on June 1, 2001. Stock options were introduced on 31 stocks on July 9, 2001 and single stock futures were launched on November 9, 2002.

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

The need for a derivatives market

The derivatives market performs a number of economic functions:

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

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

3. They catalyze entrepreneurial activity

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

5. They increase savings and investment in the long run

Types of Derivatives

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

Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-tradedContracts A futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price.

A futures contract gives the holder the obligation to buy or sell, which differs from an options contract, which gives the holder the right, but not the obligation. In other words, the owner of an options contract may exercise the contract. Both parties of a "futures contract" must fulfill the contract on the settlement date. The seller delivers the commodity to the buyer, or, if it is a cash-settled future, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has to offset their position by either selling a long position or buying back a short position, effectively closing out the futures position and its contract obligations.Futures contracts, or simply futures, are exchange traded derivatives. The exchange's clearinghouse acts as counterparty on all contracts, sets margin requirements, etc.

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

Types of options The primary types of financial options are: Exchange traded options (also called "listed options") are a class of exchange traded

derivatives. Exchange traded options have standardized contracts, and are settled through a clearing house with fulfillment guaranteed by the credit of the exchange. Since the contracts are standardized, accurate pricing models are often available. Exchange traded options include:

stock options, commodity options, bond options and other interest rate options index (equity) options, and options on futures contracts Over-the-counter options (OTC options, also called "dealer options") are traded

between two private parties, and are not listed on an exchange. The terms of an OTC option are unrestricted and may be individually tailored to meet any business need. In general, at least one of the counterparties to an OTC option is a well-capitalized institution. Option types commonly traded over the counter include:

interest rate options currency cross rate options, and Options on swaps or swaptions. Employee stock options are issued by a company to its employees as compensation.

Option styles

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Naming conventions are used to help identify properties common to many different types of options. These include:

European option - an option that may only be exercised on expiration. American option - an option that may be exercised on any trading day on or before expiration.

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

Options strategies

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

Bullish strategies

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

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

Bearish strategies

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

Neutral or non-directional strategies

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

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

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

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

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

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

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

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

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

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

Factors driving the growth of financial derivatives:

1. Increased volatility in asset prices in financial markets,

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

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

4. Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies, and

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

Development of derivatives market in India

The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws(Amendment) Ordinance, 1995, which withdrew the prohibition on options in securities. The market for derivatives, however, did not take off, as there was no regulatory framework to govern trading of derivatives. SEBI set up a 24–member committee under the Chairmanship of Dr.L.C.Gupta on November 18, 1996 to developappropriate regulatory framework for derivatives trading in India. The committee submitted its report on March 17, 1998 prescribing necessary pre–conditions for introduction of derivatives trading in India. The committee recommended that derivatives should be declared as ‘securities’ so that regulatory framework applicable to trading of ‘securities’ could also govern

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trading of securities. SEBI also set up a group in June 1998 under the Chairmanship of Prof.J.R.Varma, to recommend measures for risk containment in derivatives market in India. The report, which was submitted in October 1998, worked out the operational details of margining system, methodology for charging initial margins, broker net worth, deposit requirement and real–time monitoring requirements.

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

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

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

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

•On relative terms, volumes in the index options segment continues to remain poor. This may be due to the low volatility of the spot index. Typically, options are considered more valuable when the volatility of the underlying (in this case, the index) is high. A related issue is that brokers do not earn high commissions by recommending index options to their clients, because low volatility leads to higher waiting time for round-trips.

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

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

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

Instruments available in India

Financial derivative instruments:The National stock Exchange (NSE) has the following derivative products:Products Index Futures Index Options Futures on

IndividualSecurities

Options onIndividualSecurities

UnderlyingInstrument

S&P CNX Nifty S&P CNX Nifty 30 securitiesstipulated bySEBI

30 securitiesstipulated bySEBI

Type European American

Trading Cycle maximum of 3-month trading cycle.At any point in time,there will be 3contracts available :1) near month,2) mid month &3) far month duration

Same as indexfutures

Same as indexfutures

Same as indexfutures

Expiry Day Last Thursday of theexpiry month

Same as indexfutures

Same as indexfutures

Same as indexfutures

Contract Size Permitted lot size is200 & multiplesthereof

Same as indexfutures

As stipulated byNSE (not lessthan Rs.2 lacs)

As stipulated byNSE (not lessthan Rs.2 lacs)

Base Price-First day oftrading

previous day closingNifty value

Theoretical valueof the optionscontract arrived atbased on Black-Scholes model

previous dayclosing value ofunderlyingsecurity

Same as Indexoptions

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Base Price-Subsequent

Daily settlementprice

daily close price Daily settlementprice

Same as Indexoptions

Price Bands Operating ranges arekept at + 10 %

Operating rangesfor are kept at99% of the baseprice

Operatingranges are keptat + 20 %

Operatingranges for arekept at 99% ofthe base price

Quantity Freeze 20,000 units orgreater

20,000 units orgreater

Lower of 1% ofmarketwideposition limitstipulated foropen positionsor Rs.5 crores

Same asindividualfutures

Price Steps Re.0.05 Re.0.05

What is the regulatory framework of Derivatives markets in India?

With the amendment in the definition of 'securities' under SC(R)A (to include derivative contracts in the definition of securities), derivatives trading takes place under the provisions of the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992. Dr. L.C Gupta Committee constituted by SEBI had laid down the regulatory framework for derivative trading in India. SEBI has also framed suggestive bye-law for Derivative Exchanges/Segments and their Clearing Corporation/House which lay's down the provisions for trading and settlement of derivative contracts. The Rules, Bye-laws & Regulations of the Derivative Segment of the Exchanges and their Clearing Corporation/House have to be framed in line with the suggestive Bye-laws. SEBI has also laid the eligibility conditions for Derivative Exchange/Segment and its Clearing Corporation/House. The eligibility conditions have been framed to ensure that Derivative Exchange/Segment & Clearing Corporation/House provide a transparent trading environment, safety & integrity and provide facilities for redressal of investor grievances. Some of the important eligibility conditions are- Derivative trading to take place through an on-line screen based Trading System.

The Derivatives Exchange/Segment shall have on-line surveillance capability to monitor positions, prices, and volumes on a real time basis so as to deter market manipulation.

The Derivatives Exchange/ Segment should have arrangements for dissemination of information about trades, quantities and quotes on a real time basis through atleast two information vending networks, which are easily accessible to investors across the country.

The Derivatives Exchange/Segment should have arbitration and investor grievances redressal mechanism operative from all the four areas / regions of the country.The Derivatives Exchange/Segment should have satisfactory system of monitoring investor complaints and preventing irregularities in trading.

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The Derivative Segment of the Exchange would have a separate Investor Protection Fund.

The Clearing Corporation/House shall perform full novation, i.e., the Clearing Corporation/House shall interpose itself between both legs of every trade, becoming the legal counterparty to both or alternatively should provide an unconditional guarantee for settlement of all trades.

The Clearing Corporation/House shall have the capacity to monitor the overall position of Members across both derivatives market and the underlying securities market for those Members who are participating in both.

The level of initial margin on Index Futures Contracts shall be related to the risk of loss on the position. The concept of value-at-risk shall be used in calculating required level of initial margins. The initial margins should be large enough to cover the one-day loss that can be encountered on the position on 99% of the days.

The Clearing Corporation/House shall establish facilities for electronic funds transfer (EFT) for swift movement of margin payments.

In the event of a Member defaulting in meeting its liabilities, the Clearing Corporation/House shall transfer client positions and assets to another solvent Member or close-out all open positions.

The Clearing Corporation/House should have capabilities to segregate initial margins deposited by Clearing Members for trades on their own account and on account of his client. The Clearing Corporation/House shall hold the clients’ margin money in trust for the client purposes only and should not allow its diversion for any other purpose.

The Clearing Corporation/House shall have a separate Trade Guarantee Fund for the trades executed on Derivative Exchange / Segment. Presently, SEBI has permitted Derivative Trading on the Derivative Segment of BSE and the F&O Segment of NSE.

What are the various membership categories in the derivatives market?

The various types of membership in the derivatives market are as follows:Trading Member (TM) – A TM is a member of the derivatives exchange and can trade on his own behalf and on behalf of his clients.

Clearing Member (CM) –These members are permitted to settle their own trades as well as the trades of the other non-clearing members known as Trading Members who have agreed to settle the trades through them.

Self-clearing Member (SCM) – A SCM are those clearing members who can clear and settle their own trades only.

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What are the requirements to be a member of the derivatives exchange/ clearing corporation?

Balance Sheet Networth Requirements: SEBI has prescribed a networth requirement of Rs. 3 crores for clearing members. The clearing members are required to furnish an auditor's certificate for the networth every 6 months to the exchange. The networth requirement is Rs. 1 crore for a self-clearing member. SEBI has not specified any networth requirement for a trading member.

Liquid Networth Requirements: Every clearing member (both clearing members and self-clearing members) has to maintain atleast Rs. 50 lakhs as Liquid Networth with the exchange / clearing corporation.

Certification requirements: The Members are required to pass the certification programme approved by SEBI. Further, every trading member is required to appoint atleast two approved users who have passed the certification programme. Only the approved users are permitted to operate the derivatives trading terminal.

What are requirements for a Member with regard to the conduct of his business?

The derivatives member is required to adhere to the code of conduct specified under the SEBI Broker Sub-Broker regulations. The following conditions stipulations have been laid by SEBI on the regulation of sales practices:Sales Personnel: The derivatives exchange recognizes the persons recommended by the Trading Member and only such persons are authorized to act as sales personnel of the TM. These persons who represent the TM are known as Authorised Persons.

Know-your-client: The member is required to get the Know-your-client form filled by every one of client.

Risk disclosure document: The derivatives member must educate his client on the risks of derivatives by providing a copy of the Risk disclosure document to the client.

Member-client agreement: The Member is also required to enter into the Member-client agreement with all his clients.

What derivative contracts are permitted by SEBI?

Derivative products have been introduced in a phased manner starting with Index Futures Contracts in June 2000. Index Options and Stock Options were introduced in June 2001 and July 2001 followed by Stock Futures in November 2001. Sectoral indices were permitted for derivatives trading in December 2002. Interest Rate Futures on a notional bond and T-bill priced off ZCYC have been introduced in June 2003 and exchange traded interest rate futures on a notional bond priced off a basket of Government Securities were permitted for trading in January 2004.

What is the eligibility criteria for stocks on which derivatives trading may be permitted?

A stock on which stock option and single stock future contracts are proposed to be introduced is required to fulfill the following broad eligibility criteria:-

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The stock shall be chosen from amongst the top 500 stock in terms of average daily market capitalisation and average daily traded value in the previous six month on a rolling basis.

The stock’s median quarter-sigma order size over the last six months shall be not less than Rs.1 Lakh. A stock’s quarter-sigma order size is the mean order size (in value terms) required to cause a change in the stock price equal to one-quarter of a standard deviation.

The market wide position limit in the stock shall not be less than Rs.50 crores. A stock can be included for derivatives trading as soon as it becomes eligible. However, if the stock does not fulfill the eligibility criteria for 3 consecutive months after being admitted to derivatives trading, then derivative contracts on such a stock would be discontinued.

What is minimum contract size?

The Standing Committee on Finance, a Parliamentary Committee, at the time of recommending amendment to Securities Contract (Regulation) Act, 1956 had recommended that the minimum contract size of derivative contracts traded in the Indian Markets should be pegged not below Rs. 2 Lakhs. Based on this recommendation SEBI has specified that the value of a derivative contract should not be less than Rs. 2 Lakh at the time of introducing the contract in the market. In February 2004, the Exchanges were advised to re-align the contracts sizes of existing derivative contracts to Rs. 2 Lakhs. Subsequently, the Exchanges were authorized to align the contracts sizes as and when required in line with the methodology prescribed by SEBI.

What is the lot size of a contract?

Lot size refers to number of underlying securities in one contract. The lot size is determined keeping in mind the minimum contract size requirement at the time of introduction of derivative contracts on a particular underlying.For example, if shares of XYZ Ltd are quoted at Rs.1000 each and the minimum contract size is Rs.2 lacs, then the lot size for that particular scrips stands to be 200000/1000 = 200 shares i.e. one contract in XYZ Ltd. covers 200 shares.

What is corporate adjustment?

The basis for any adjustment for corporate action is such that the value of the position of the market participant on cum and ex-date for corporate action continues to remain the same as far as possible. This will facilitate in retaining the relative status of positions viz. in-the-money, at-the-money and out-of-the-money. Any adjustment for corporate actions is carried out on the last day on which a security is traded on a cum basis in the underlying cash market. Adjustments mean modifications to positions and/or contract specifications as listed below:

Strike pricePosition Market/Lot/ Multiplier The adjustments are carried out on any or all of the above based on the nature of the corporate action. The adjustments for corporate action are carried out on all open, exercised as well as assigned positions.

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The corporate actions are broadly classified under stock benefits and cash benefits. The various stock benefits declared by the issuer of capital are:

Bonus Rights Merger/ demerger Amalgamation Splits Consolidations Hive-off Warrants, and Secured Premium Notes (SPNs) among others The cash benefit declared by the issuer of capital is cash dividend.

What is the margining system in the derivative markets?

Two type of margins have been specified -1. Initial Margin - Based on 99% VaR and worst case loss over a specified horizon, which

depends on the time in which Mark to Market margin is collected.

2. Mark to Market Margin (MTM) - collected in cash for all Futures contracts and adjusted against the available Liquid Networth for option positions. In the case of Futures Contracts MTM may be considered as Mark to Market Settlement.

Dr. L.C Gupta Committee had recommended that the level of initial margin required on a position should be related to the risk of loss on the position. The concept of value-at-risk should be used in calculating required level of initial margins. The initial margins should be large enough to cover the one day loss that can be encountered on the position on 99% of the days. The recommendations of the Dr. L.C Gupta Committee have been a guiding principle for SEBI in prescribing the margin computation & collection methodology to the Exchanges. With the introduction of various derivative products in the Indian securities Markets, the margin computation methodology, especially for initial margin, has been modified to address the specific risk characteristics of the product. The margining methodology specified is consistent with the margining system used in developed financial & commodity derivative markets worldwide. The exchanges were given the freedom to either develop their own margin computation system or adapt the systems available internationally to the requirements of SEBI. A portfolio based margining approach which takes an integrated view of the risk involved in the portfolio of each individual client comprising of his positions in all Derivative Contracts i.e. Index Futures, Index Option, Stock Options and Single Stock Futures, has been prescribed. The initial margin requirements are required to be based on the worst case loss of a portfolio of an individual client to cover 99% VaR over a specified time horizon.

The Initial Margin is Higher of (Worst Scenario Loss +Calendar Spread Charges)OrShort Option Minimum ChargeThe worst scenario loss are required to be computed for a portfolio of a client and is calculated by valuing the portfolio under 16 scenarios of probable changes in the value and the volatility of the Index/ Individual Stocks. The options and futures positions in a client’s portfolio are required to be valued by predicting the price and the volatility of the underlying over a specified horizon so that 99% of times the price and volatility so predicted does not exceed the maximum and minimum price or volatility scenario. In this manner initial margin of 99% VaR

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is achieved. The specified horizon is dependent on the time of collection of mark to market margin by the exchange.The probable change in the price of the underlying over the specified horizon i.e. ‘price scan range’, in the case of Index futures and Index option contracts are based on three standard deviation (3σ ) where ‘σ ’ is the volatility estimate of the Index. The volatility estimate ‘σ ’, is computed as per the Exponentially Weighted Moving Average methodology. This methodology has been prescribed by SEBI. In case of option and futures on individual stocks the price scan range is based on three and a half standard deviation (3.5 σ) where ‘σ’ is the daily volatility estimate of individual stock.If the mean value (taking order book snapshots for past six months) of the impact cost, for an order size of Rs. 0.5 million, exceeds 1%, the price scan range would be scaled up by square root three times to cover the close out risk. This means that stocks with impact cost greater than 1% would now have a price scan range of - Sqrt (3) * 3.5σ or approx. 6.06σ. For stocks with impact cost of 1% or less, the price scan range would remain at 3.5σ. For Index Futures and Stock futures it is specified that a minimum margin of 5% and 7.5% would be charged. This means if for stock futures the 3.5 σ value falls below 7.5% then a minimum of 7.5% should be charged. This could be achieved by adjusting the price scan range. The probable change in the volatility of the underlying i.e. ‘volatility scan range’ is fixed at 4% for Index options and is fixed at 10% for options on Individual stocks. The volatility scan range is applicable only for option products. Calendar spreads are offsetting positions in two contracts in the same underlying across different expiry. In a portfolio based margining approach all calendar-spread positions automatically get a margin offset. However, risk arising due to difference in cost of carry or the ‘basis risk’ needs to be addressed. It is therefore specified that a calendar spread charge would be added to the worst scenario loss for arriving at the initial margin. For computing calendar spread charge, the system first identifies spread positions and then the spread charge which is 0.5% per month on the far leg of the spread with a minimum of 1% and maximum of 3%. Further, in the last three days of the expiry of the near leg of spread, both the legs of the calendar spread would be treated as separate individual positions. In a portfolio of futures and options, the non-linear nature of options make short option positions most risky. Especially, short deep out of the money options, which are highly susceptible to, changes in prices of the underlying. Therefore a short option minimum charge has been specified. The short option minimum charge is 3% and 7.5 % of the notional value of all short Index option and stock option contracts respectively. The short option minimum charge is the initial margin if the sum of the worst –scenario loss and calendar spread charge is lower than the short option minimum charge. To calculate volatility estimates the exchange are required to uses the methodology specified in the Prof J.R Varma Committee Report on Risk Containment Measures for Index Futures. Further, to calculate the option value the exchanges can use standard option pricing models - Black-Scholes, Binomial, Merton, Adesi-Whaley. The initial margin is required to be computed on a real time basis and has two components:-

The first is creation of risk arrays taking prices at discreet times taking latest prices and volatility estimates at the discreet times, which have been specified. The second is the application of the risk arrays on the actual portfolio positions to compute the portfolio values and the initial margin on a real time basis.

The initial margin so computed is deducted from the available Liquid Networth on a real time basis. What are the exposure limits in Derivative Products?

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It has been prescribed that the notional value of gross open positions at any point in time in the case of Index Futures and all Short Index Option Contracts shall not exceed 33 1/3 (thirty three one by three) times the available liquid networth of a member, and in the case of Stock Option and Stock Futures Contracts, the exposure limit shall be higher of 5% or 1.5 sigma of the notional value of gross open position. In the case of interest rate futures, the following exposure limit is specified:The notional value of gross open positions at any point in time in futures contracts on the notional 10 year bond should not exceed 100 times the available liquid networth of a member.

The notional value of gross open positions at any point in time in futures contracts on the notional T-Bill should not exceed 1000 times the available liquid networth of a member.

What measures have been specified by SEBI to protect the rights of investor in Derivatives Market?

The measures specified by SEBI include:Investor's money has to be kept separate at all levels and is permitted to be used only against the liability of the Investor and is not available to the trading member or clearing member or even any other investor.

The Trading Member is required to provide every investor with a risk disclosure document which will disclose the risks associated with the derivatives trading so that investors can take a conscious decision to trade in derivatives.

Investor would get the contract note duly time stamped for receipt of the order and execution of the order. The order will be executed with the identity of the client and without client ID order will not be accepted by the system. The investor could also demand the trade confirmation slip with his ID in support of the contract note. This will protect him from the risk of price favour, if any, extended by the Member.

In the derivative markets all money paid by the Investor towards margins on all open positions is kept in trust with the Clearing House/Clearing corporation and in the event of default of the Trading or Clearing Member the amounts paid by the client towards margins are segregated and not utilised towards the default of the member. However, in the event of a default of a member, losses suffered by the Investor, if any, on settled / closed out position are compensated from the Investor Protection Fund, as per the rules, bye-laws and regulations of the derivative segment of the exchanges.   The Exchanges are required to set up arbitration and investor grievances redressal mechanism operative from all the four areas / regions of the country.

Risk Management at Indian Exchanges

In the recent times, there have been quite a few advances in the study of financial markets especially with respect to risk. A new philosophy of risk containment has emerged as a

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felt need in almost all the financial markets in the world . Indian markets too caught up with it by introducing several changes in the trading system with a view to risk containment, and there is a comparative study of various models done using the S&P Nifty index data. One of the tools employed is the so called Value at Risk (VaR).

THE Securities and Exchange Board of India (SEBI) wants to introduce a margin system based on value-at-risk (VaR) model. What is VaR ? VaR is the maximum loss you are likely to incur on your portfolio during a certain period. Suppose your model throws up a one-day VaR of Rs 10,000 on your portfolio of Rs 5 lakh at a 95 per cent confidence level. This means your one-day loss will be not more than Rs 10,000 in 95 out of 100 trading days. VaR is only an estimate. This means there is a likelihood or probability of you losing not more than the VaR on most days. In the above example, we are 95 per cent likely to lose not more than Rs 10,000. This also means we are 5 per cent likely to lose more than Rs 10,000 on certain days. VaR, thus, depends on the confidence level. If you want to be more conservative in knowing your likely losses, you have to increase the confidence level to, say, 99 per cent. Suppose, the daily VaR at a 99 per cent confidence level is Rs 20,000 on the above portfolio, it means you are likely to lose not more than Rs 20,000 in 99 out of 100 trading days. Notice that VaR increases as you increase the confidence level. You decide on the confidence interval depending on what you want to measure. Suppose you want to measure your portfolio risk, a 95 per cent confidence level will suffice. Banks, on the other hand, will want to use a 99 per cent confidence level even for their investment portfolio because they need to adhere to the capital adequacy norms. How derivatives helps in reducing risk

Option is a product which offers non-linear payoff to the buyer and seller of the option contract. The buyer has only right and no obligation in addition to limited loss and unlimited profit potential, whereas the exact opposite scenario is true for the seller of an option. So it seems that rules of the game are tiled in favour of the buyer and not the seller. But the odds of wining are heavily in favour of the sellers and that makes the game equally attractive for buyers as well as sellers. Option is the only product which allows the trader to make profit by just taking a view on volatility of the market regardless of knowing anything about the direction. The most famous strategy to play with volatility is a Straddle.

StraddleBuying/Selling one call option and one put option of same strike price and same expiry.

1. Long Straddle

A trader expects the market to be extremely volatile in the near future with equal probability, will go and buy call and put option of the underlying asset with same strike price and expiry.

Payoff

In case if the market goes up in a big way, the call option will give profit and if the market goes down the put option will give profit. The maximum loss would be restricted to the total premium paid to buy both the options.

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2. Short Straddle

A trader with range bound expectation about the market will go for a short straddle. In this case if the market remains at the same level at expiry, the trader gets a maximum profit equal to the total premium received but if the market turns extremely volatile he may suffer unlimited loss.

In case of straddle we assume equal probability of the market to rise and fall in big way from our chosen strike price level. But a trader may have a biased view towards the market. For such traders two famous variants of straddle strategy have been created which have become very popular. Let us understand both of them.

I. Long Strap

A Strap is buying two call options and buying one put option of the same strike price.It is equivalent of buying one straddle and one extra call option. This extra call option shows traders bias towards upward movement in underlying. The bias in favour of upward market movement is 2/3rd compared to market moving downward is 1/3rd.

Illustration1

This strategy is formulated by using the last traded price of IDBI on 25th April 2007 option contracts with expiry on 31st May 2007. May Future Contract closed at Rs.89.50 on 25th April, 2007.

To create a Long Strap:

Buy 2 call options with strike price of Rs.90 @ Rs.5.10Buy 1 put option with strike price of Rs.90 @ Rs.5.40

Buy 2 call options 2 * 5.10 =10.20Buy 1 put option 1 * 5.40 = 5.40

InitialCashFlow(CF0) =15.60

High Risk – High Return with Substantial Upward Bias From the above table we can see that a trader will incur loss, if price stays anywhere between 74.40 and 97.80. Thus a trader should enter this strategy if he expects the stock price to make wild moves (rises more than 9% from current level, 89.5 to 97.8) by the end of May, to make the trade profitable. It’s a very high-risk strategy, but if price goes beyond 97.80 profit will shoot up as the profit earned will be from two call options.

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II. Long StripStrip buying two put options and buying one call option of the same strike price. It is an equivalent of buying one straddle and one extra put option. This extra put option shows traders bias towards downward movement in underlying. The bias in favour of downward market movement is 2/3rd compared to market moving upward is 1/3rd.

Illustration 2The strategy is formulated using last traded price of IDBI on 25th April 2007 option contracts with expiry on 31st May 2007. May future contract closed at Rs.89.50 on 25th April, 2007.To create a Long Strip:Buy 2 put option with strike price of Rs.90 @ Rs.5.40Buy 1 call option with strike price of Rs.90 @ Rs.5.10In RsBuy2 put options 2 * 5.40 = 10.80

Buy 1 call option 1 * 5.10 = 5.10

Initial Cash Flow (CF0) =15.90

High Risk – High Return with Substantial Downward BiasFrom the above table we can see that a trader will incur loss, if price stays anywhere between 82.50 and 105.90. Thus a trader should enter this strategy if he expects the stock price to make wild moves (falls more than 7% from current level, 89.50 to 82.00) by the end of May, to make the trade profitable. It’s a very high riskstrategy, but if price goes below 82.95, profit will shoot up as the profit earned will be from two put options.

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

Who should use and why to use?

An investor having a long position in a stock and feel that prices have already reached near to its peak but may still have some momentum to play in near term, at the same time he is afraid of some event in near future which may hit the stock badly and leads to erosion of wealth.

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INSURANCE INDUSTRY: AN OVERVIEW

There has been insurance business in India since 1818. Prior to 1912, the Indian Companies Act governed insurance companies. In 1912, the insurance Act was passed which sets down the rules and regulations specified to the insurance industry. Amendments to the act were made in 1919 and 1928 but the most fundamental shake up came in the year 1938 and many out of the rules introduced are still valid today.Till 1956, the insurance business was mixed and decentralized. There are a large number of companies (245 on the eve of nationalization) of different ages, sizes and patterns of organization, which conducted only life insurance business and there were some companies whose main business was general insurance but which did life insurance also.In 1956, the life insurance business of all companies was nationalized and a single monopolistic organization, LIC was set up by an act of parliament, with a capital contribution of Rs. 5 crores form government of India.

THE ROLE OF LIFE INSURANCE IN YOUR LIFE

Life insurance is a unique financial product. In some respect, it is an oxymoron in that it deals scientifically and precisely with variables that are emotional and, within the context of our own individual lives, completely unpredictable.

Perhaps the most important factor about life insurance is simply that it works. Since the 1850s, when the modern life insurance policy was created, insurance companies have consistently kept their contractual “promise to pay”. This in turn has made it possible for millions of men and women in this country to keep their promises to their families, building a plan of financial security on the foundation of life insurance protection.

INSURANCE AS INVESTMENT

Agreed, insurance may not be the best place to invest your hard earned money. But there are sufficient reasons for one to believe that it can be highly lucrative avenue to facilitate savings. People often talk about yield on investment and tend to compare their values with those available on various insurance schemes. This is particularly typical within the Indian sub-continent where one conveniently forgets the element of risk covered by life insurance.

It is extremely unfair to compare the performance of insurance against other investments without considering the core feature of insurance. The very essence of insurance is to protect your family from the uncertainty of your life. Hence it proves very logical to evaluate the costs involved towards this feature. Ask yourself this question.

When you pay insurance premium for your car, do you get anything if fortunately no mishap happens? This means that you spent the amount to secure a valuable property.Hence you must accept that out of total amount paid by you for your life insurance, a certain amount is used for providing the risk cover and the balance can be utilized as savings.

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In other words, the total premium you pay minus the amount evaluated, as the cost of insurance must be considered as the amount invested to get the maturity amount. If you calculate the yield from returns, you will be in for a surprise.

Secondly, we tend to think very unrealistically about our life. We often compare the results after say 10 years from an investment scheme, for instance PPF. And then we try to convince ourselves that PPF is providing a better yield than an insurance policy.

For instance, if you invest Rs. 10,000/- in PPF and after one year your money grows to Rs.11,100/- accruing a return of 11 percent. But what if your death occurs in the first year itself? Whereas Rs. 10,000/- can give you insurance cover up to an approximate sum of Rs. 12 lakhs (depending upon the plan, age, etc.) and this amount shall become available to the nominee of the policyholder as against the mere paltry Rs. 11,100/- that PPF shall pay.

Now how do you compare the yield in such a situation? Is it 100% or 1000% or more?

THINK OF INSURANCE AS A SAFETY NET

The function of insurance is to protect you against losses you can’t afford. Insurance transfers the risks of person, business, or organization (the insured) to an insurance company (the insurer). The insurer than reimburses the insured for “covered” losses i.e. those losses it pays for under the policy terms.

As the insurance consumer, you pay an amount of money, called a premium, to the insurer to transfer the risk. The insurer pools all its premiums into a large fund, and when a policyholder has a loss, the insurer draws fund from the pool to pay for the loss. Life is full of unexpected events that can create large financial losses. For example, whenever you drive, it is possible that you may have a costly accident. Risk affects you by causing worry about potential loss and how to deal with the consequences. Insurance reduces anxiety over a possible loss and absorbs the financial burnt of its consequences. However, while insurance coverage is essential, how much and what type of insurance people need differs with each individual. You must decide how much risk you are willing to tolerate without insurance. For example, benefit of disability policies typically begins after a waiting period of one to six months. Therefore, you should ensure that you have some form of coverage or financial resources before the policy period begin.

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INSURANCE INDUSTRY IN INDIA

Ensconced in a monopoly run from the nationalization days beginning in 1956, the insurance industry has indeed awakened to a deregulated environment in which several private players have partnered with multinational insurance giants. A successful passage of the IRDA Bill have cleared the way of private sector operators in collaboration with their overseas partner. With about a dozen players in the General Insurance Industry in India, the industry is gearing up for a period of rapid expansion and change.For a long time, the industry has been locked in an Ice Age when the basic industry structure has remained more or less fixed. The glacier is now melting, revealing new challenges as traditional distribution and customer management processes are not proving to be adequate for the new age.The shape of the insurance industry is being changed by developments in distribution. The main driver is the lowering cost of increasingly sophisticated technology, enabling new economics of scale and scope, which extend beyond national boundaries.It is likely to bring in a more professional and focused approach. Moreover the foreign players would bring sophisticated actuarial techniques with them, which would facilitate the insurer to effectively price the product.The touch point with the ultimate customer is the distributor and the role played by them in insurance markets is critical. It is the distributor who makes the difference in terms of the quality of advice for choice of product, servicing of policy post sale and settlement of claims. In the Asian markets, with their distinct cultural and social ethos, these conditions will play a major role in shaping the distribution channels and their effectiveness.The new companies have attempted appealing only to the middle, upper middle and elite classes in the major cities. Contrasted with Public sector insurance companies, with their offices across the country, the new companies have miles to go before they reach anywhere. They must overcome the mindset of the customer that life insurance is life Insurance Corporation of India (LIC) and general insurance in General Insurance Corporation of India (GIC) if they hope to grow in the market. Meanwhile, the public sector companies are going to great lengths to revamp their image to look and feel more contemporary. Both the public and new private sector companies are fighting their own battles from the perspective of customer perception management, In today’s scenario, Insurance companies must move from selling insurance to marketing an essential financial product. The distributors have become trusted financial advisors for the clients and trusted business associates for the insurance companies so this calls for leveraging multiple distribution channels in a cost effective and customer friendly manner.

PERFORMANCE OF THE INDIAN INSURANCE MARKET:-

The India Insurance Market despite having a highly elaborate history spanning almost two centuries, has come of age only in the last 50 years after the formation of the Life Insurance Corporation (LIC) of India in 1956 and the entry of private companies into the market in 2000.

Traditionally the Indian Insurance Market had centered on the life insurance until recently, a host of other insurance policies covering a diverse range of issues and objects like medical insurance, accident insurance, fire insurance, automobile insurance and other policies which fall under the category of general insurance are being provided by various private insurance companies.

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The following points will provide you an insight into the insurance market of India and its fast expanding prospects. The report is well supported by data based on detailed analysis that would help investors, financial service providers and global banking players to venture into the Indian insurance market.

Taking into account the changing socio-economic demographics, rate of GDP growth, behavior of consumers, and occurrences of natural calamities at regular intervals the market of Life Insurance in India is expected grow to the value of around US $ 41.44 billion by the year 2009. The Market is expected to grow at a compounded annual growth rate (CAGR) of more than 200 % year over year (YOY) from year 2006 onwards.

65 % of the general insurance market is controlled by private houses that already exist in the market.

However in automobile insurance, public sector covers a substantial 68 % of the total market value.

Among individual companies that are worthy of mentioning, ICICI Lombard enjoys a whopping 53 % market share in Accident Insurance while the remaining 47 % is shared by New India Assurance and United India Insurance , both belonging to the public sector .

The other key players of the market include:

In Public Sector:

Life Insurance Corporation (LIC) of India, National Insurance Company Limited, Oriental Insurance Limited, New India Assurance Company Limited and United India Insurance Company Limited.

In Private Sector:

Bajaj Allianz, ING Vysya, SBI Life, Tata AIG Life, HDFC Standard, ICICI Prudential Life Insurance, Birla Sunlife, Aviva Life Insurance, Kotak Mahindra Old Mutual, Max New York Life and Met Life

FINANCIAL CONDITION OF THE INDIAN INSURANCE MARKET

The gains are obvious for anyone who has been closely monitoring the Indian insurance scene. The total premium collected by the insurers both life and non-life in the year 2007-2008 is near about $41.44 billion, in 2003-2004 is Rs.82, 415 crores (Rs.66, 288 crores in life and Rs. 16,127 crores in non-life) compared to Rs. 44, 985 crores (Rs.34, 898 crores in life and Rs. 10,087 crores in non-life) during the year 2000-2001. This represents an 83% increase in the last three years over the base year 2000-01. This is what we have witnessed after the opening up of the sector. If we take the three year block prior to the opening of the sector, we find that the total premium collected in 1997-98 was Rs.27, 089 crores (life Rs.19354 crores; non-life Rs.7735 crores:) which has grown to Rs.44, 985 by 2000-2001 representing an increase of 66%. Insurance sector has obviously started growing at a rapid pace after the sector was

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opened up. The private sector accounts for nearly 13% of the first year premium market. The market share of the private players has to be seen in the context of this enlarged market. There is also evidence to show that the rate of growth of public sector undertakings had not shown any decline after the entry of the private sector companies. All of them are obviously having a share of a larger market. The Credit for enlarging the market should however, go to the private sector as they came up with an aggressive marketing strategy to establish their presence.

The total premium underwritten by life insurance companies in the country during FY2004 was Rs 18, 66,939.69 lakh ($4 billion) towards 286.26 lakh policies, recording a growth in premium and policies underwritten of 10.24 per cent and 12.83 per cent, respectively over the previous year.

The non life insurance market grew by about Rs 1,820 crore ($392.8 million) (13 per cent) to record a premium of Rs 16,130 crore ($3.4 billion), a lot of which was because of the Rs 1,700 crore ($367 million) (17 per cent) growth in the miscellaneous business such as motor, health, liability and aviation.

The spectacular premium driver, motor grew by Rs 1,020 crore ($220 million) (20 per cent); health by Rs 270 crore ($58.3 million) (27 per cent); liability by Rs 165 crore ($35.6 million) (100 per cent); aviation by Rs 90 crore ($19.4 million) (25 per cent).

The traditional fire business grew by Rs 195 crore ($42 million) (6.5 per cent) and engineering grew by Rs 36 crore ($7.7 million) (5 per cent).

Insurance distribution channels

At present the distribution channels that are being utilized are: Direct selling Corporate agents i.e. pushing the insurance product through the directors or partners of

a company Group selling Worksite marketing Brokers and cooperative societies

To this list can be added the number of alternate delivery channels –

Bancassurance: Bancassurance can be a sure fire way to reach a wider customer base, provided it is made use of sensibly. In India there is an extensive bank network established over the years. Insurance companies will have to take advantage of the customers' long-standing trust and relationships with banks. This is a mutually beneficial situation as banks can expand their range of products on offer to customers and earn more, while the insurance company profits from the exposure at the bank branches, and the security of receiving timely payments. The products that are likely to sell well through bancassurance are commoditized term and annuity products. Also, those products that combine insurance and banking needs help to create demand - such as loan cover, term assurance and simple products that can be sold over-the-counter at banks. Another advantage is that banks, with their network in rural areas, help to fulfill rural and social obligations stipulated by the Insurance Regulatory and Development Authority (IRDA).

Selling through employees or authorized officials of a corporate: Selling through employees can also be a lucrative prospect. But the full potential of this channel has not yet been utilized since selling is now permitted only through directors or partners of the company.

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Worksite marketing is inexpensive and provides the opportunity to market products to large groups of people simultaneously. Call centres: Call centres can be utilized for generating leads. As the market keeps expanding, call centres have the potential of becoming an important medium for customer relationship management (CRM) and up selling to the customers.

Cooperative societies and Brokers: Cooperative societies and brokers offer immense support to insurance companies to widen their reach. Private companies that are already appointing corporate agents, and non-banking financial corporations (NBFCs) with a sound retail network are in demand.

Marketing through mailers etc: Direct marketing through mailers, pamphlets etc. require customised simple products that can be purchased through such mediums, or through the Internet. Though the unavailability of good databases in India, and the high expenses to reach the target audience through direct mailers is a cause for concern, it is definitely a problem that can be solved through better management of resources, data collection etc. To sum up, it is apparent that multiple distribution channels will help an insurance company to offer a range of contact points to the customer, thereby increasing the chances of success. However, along with these distribution channels comes the challenge of 'relationship management'. Since most of the new channels involve collaboration with various entities whose demands and powers of negotiation are varied, it requires delicate skills on the part of the insurance company to manage these relationships. Effective management of channel conflict, and curtailing the costs of distribution will be of utmost importance.

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Insurance Company

InsuINSURANC

E INDUSTRY: AN OVERV

IEW

There has been insurance business in India since 1818. Prior to 1912, the Indian Companies Act governed insurance companies. In 1912, the insurance Act was passed which sets down the rules and regulations specified to the insurance industry. Amendments to the act were made in 1919 and 1928 but the most fundamental shake up came in the year 1938 and many out of the rules introduced are still valid today.Till 1956, the insurance business was mixed and decentralized. There are a large number of companies (245 on the eve of nationalization) of different ages, sizes and patterns of organization, which conducted only life insurance business and there were some companies whose main business was general insurance but which did life insurance also.In 1956, the life insurance business of all companies was nationalized and a single monopolistic organization, LIC was set up by an act of parliament, with a capital contribution of Rs. 5 crores form government of India.

THE ROLE OF LIFE INSURANCE IN YOUR LIFE

Life insurance is a unique financial product. In some respect, it is an oxymoron in that it deals scientifically and precisely with variables that are emotional and, within the context of our own individual lives, completely unpredictable.

Perhaps the most important factor about life insurance is simply that it works. Since the 1850s, when the modern life insurance policy was created, insurance companies have consistently kept their contractual “promise to pay”. This in turn has made it possible for millions of men and women in this country to keep their promises to their families, building a plan of financial security on the foundation of life insurance protection.

INSURANCE AS INVESTMENT

Agreed, insurance may not be the best place to invest your hard earned money. But there are sufficient reasons for one to believe that it can be highly lucrative avenue to facilitate savings. People often talk about yield on investment and tend to compare their values with those available on various insurance schemes. This is particularly typical within the Indian sub-continent where one conveniently forgets the element of risk covered by life insurance.

It is extremely unfair to compare the performance of insurance against other investments without considering the core feature of insurance. The very essence of insurance is to protect your family from the uncertainty of your life. Hence it proves very logical to evaluate the costs involved towards this feature. Ask yourself this question.

When you pay insurance premium for your car, do you get anything if fortunately no mishap happens? This means that you spent the amount to secure a valuable property.Hence you must accept that out of total amount paid by you for your life insurance, a certain amount is used for providing the risk cover and the balance can be utilized as savings.In other words, the total premium you pay minus the amount evaluated, as the cost of insurance must be considered as the amount invested to get the maturity amount. If you calculate the yield from returns, you will be in for a surprise.

Secondly, we tend to think very unrealistically about our life. We often compare the results after say 10 years from an investment scheme, for instance PPF. And then we try to convince ourselves that PPF is providing a better yield than an insurance policy.

For instance, if you invest Rs. 10,000/- in PPF and after one year your money grows to Rs.11,100/- accruing a return of 11 percent. But what if your death occurs in the first year itself? Whereas Rs. 10,000/- can give you insurance cover up to an approximate sum of Rs. 12 lakhs (depending upon the plan, age, etc.) and this amount shall become available to the nominee of the policyholder as against the mere paltry Rs. 11,100/- that PPF shall pay.

Now how do you compare the yield in such a situation? Is it 100% or 1000% or more?

THINK OF INSURANCE AS A SAFETY NET

The function of insurance is to protect you against losses you can’t afford. Insurance transfers the risks of person, business, or organization (the insured) to an insurance company (the insurer). The insurer than reimburses the insured for “covered” losses i.e. those losses it pays for under the policy terms.

As the insurance consumer, you pay an amount of money, called a premium, to the insurer to transfer the risk. The insurer pools all its premiums into a large fund, and when a policyholder has a loss, the insurer draws fund from the pool to pay for the loss. Life is full of unexpected events that can create large financial losses. For example, whenever you drive, it is possible that you may have a costly accident. Risk affects you by causing worry about potential loss and how to deal with the consequences. Insurance reduces anxiety over a possible loss and absorbs the financial burnt of its consequences. However, while insurance coverage is essential, how much and what type of insurance people need differs with each individual. You must decide how much risk you are willing to tolerate without insurance. For example, benefit of disability policies typically begins after a waiting period of one to six months. Therefore, you should ensure that you have some form of coverage or financial resources before the policy period begin.

INSURANCE INDUSTRY IN INDIA

Ensconced in a monopoly run from the nationalization days beginning in 1956, the insurance industry has indeed awakened to a deregulated environment in which several private players have partnered with multinational insurance giants. A successful passage of the IRDA Bill have cleared the way of private sector operators in collaboration with their overseas partner. With about a dozen players in the General Insurance Industry in India, the industry is gearing up for a period of rapid expansion and change.For a long time, the industry has been locked in an Ice Age when the basic industry structure has remained more or less fixed. The glacier is now melting, revealing new challenges as traditional distribution and customer management processes are not proving to be adequate for the new age.The shape of the insurance industry is being changed by developments in distribution. The main driver is the lowering cost of increasingly sophisticated technology, enabling new economics of scale and scope, which extend beyond national boundaries.It is likely to bring in a more professional and focused approach. Moreover the foreign players would bring sophisticated actuarial techniques with them, which would facilitate the insurer to effectively price the product.The touch point with the ultimate customer is the distributor and the role played by them in insurance markets is critical. It is the distributor who makes the difference in terms of the quality of advice for choice of product, servicing of policy post sale and settlement of claims. In the Asian markets, with their distinct cultural and social ethos, these conditions will play a major role in shaping the distribution channels and their effectiveness.The new companies have attempted appealing only to the middle, upper middle and elite classes in the major cities. Contrasted with Public sector insurance companies, with their offices across the country, the new companies have miles to go before they reach anywhere. They must overcome the mindset of the customer that life insurance is life Insurance Corporation of India (LIC) and general insurance in General Insurance Corporation of India (GIC) if they hope to grow in the market. Meanwhile, the public sector companies are going to great lengths to revamp their image to look and feel more contemporary. Both the public and new private sector companies are fighting their own battles from the perspective of customer perception management, In today’s scenario, Insurance companies must move from selling insurance to marketing an essential financial product. The distributors have become trusted financial advisors for the clients and trusted business associates for the insurance companies so this calls for leveraging multiple distribution channels in a cost effective and customer friendly manner.

PERFORMANCE OF THE INDIAN INSURANCE MARKET:-

The India Insurance Market despite having a highly elaborate history spanning almost two centuries, has come of age only in the last 50 years after the formation of the Life Insurance Corporation (LIC) of India in 1956 and the entry of private companies into the market in 2000.

Traditionally the Indian Insurance Market had centered on the life insurance until recently, a host of other insurance policies covering a diverse range of issues and objects like medical insurance, accident insurance, fire insurance, automobile insurance and other policies which fall under the category of general insurance are being provided by various private insurance companies.

The following points will provide you an insight into the insurance market of India and its fast expanding prospects. The report is well supported by data based on detailed analysis that would help investors, financial service providers and global banking players to venture into the Indian insurance market.

Taking into account the changing socio-economic demographics, rate of GDP growth, behavior of consumers, and occurrences of natural calamities at regular intervals the market of Life Insurance in India is expected grow to the value of around US $ 41.44 billion by the year 2009. The Market is expected to grow at a compounded annual growth rate (CAGR) of more than 200 % year over year (YOY) from year 2006 onwards.

65 % of the general insurance market is controlled by private houses that already exist in the market.

However in automobile insurance, public sector covers a substantial 68 % of the total market value.

Among individual companies that are worthy of mentioning, ICICI Lombard enjoys a whopping 53 % market share in Accident Insurance while the remaining 47 % is shared by New India Assurance and United India Insurance , both belonging to the public sector .

The other key players of the market include:

In Public Sector:

Life Insurance Corporation (LIC) of India, National Insurance Company Limited, Oriental Insurance Limited, New India Assurance Company Limited and United India Insurance Company Limited.

In Private Sector:

Bajaj Allianz, ING Vysya, SBI Life, Tata AIG Life, HDFC Standard, ICICI Prudential Life Insurance, Birla Sunlife, Aviva Life Insurance, Kotak Mahindra Old Mutual, Max New York Life and Met Life

FINANCIAL CONDITION OF THE INDIAN INSURANCE MARKET

The gains are obvious for anyone who has been closely monitoring the Indian insurance scene. The total premium collected by the insurers both life and non-life in the year 2007-2008 is near about $41.44 billion, in 2003-2004 is Rs.82, 415 crores (Rs.66, 288 crores in life and Rs. 16,127 crores in non-life) compared to Rs. 44, 985 crores (Rs.34, 898 crores in life and Rs. 10,087 crores in non-life) during the year 2000-2001. This represents an 83% increase in the last three years over the base year 2000-01. This is what we have witnessed after the opening up of the sector. If we take the three year block prior to the opening of the sector, we find that the total premium collected in 1997-98 was Rs.27, 089 crores (life Rs.19354 crores; non-life Rs.7735 crores:) which has grown to Rs.44, 985 by 2000-2001 representing an increase of 66%. Insurance sector has obviously started growing at a rapid pace after the sector was opened up. The private sector accounts for nearly 13% of the first year premium market. The market share of the private players has to be seen in the context of this enlarged market. There is also evidence to show that the rate of growth of public sector undertakings had not shown any decline after the entry of the private sector companies. All of them are obviously having a share of a larger market. The Credit for enlarging the market should however, go to the private sector as they came up with an aggressive marketing strategy to establish their presence.

The total premium underwritten by life insurance companies in the country during FY2004 was Rs 18, 66,939.69 lakh ($4 billion) towards 286.26 lakh policies, recording a growth in premium and policies underwritten of 10.24 per cent and 12.83 per cent, respectively over the previous year.

The non life insurance market grew by about Rs 1,820 crore ($392.8 million) (13 per cent) to record a premium of Rs 16,130 crore ($3.4 billion), a lot of which was because of the Rs 1,700 crore ($367 million) (17 per cent) growth in the miscellaneous business such as motor, health, liability and aviation.

The spectacular premium driver, motor grew by Rs 1,020 crore ($220 million) (20 per cent); health by Rs 270 crore ($58.3 million) (27 per cent); liability by Rs 165 crore ($35.6 million) (100 per cent); aviation by Rs 90 crore ($19.4 million) (25 per cent).

The traditional fire business grew by Rs 195 crore ($42 million) (6.5 per cent) and engineering grew by Rs 36 crore ($7.7 million) (5 per cent).

Insurance distribution channels

At present the distribution channels that are being utilized are:Direct selling Corporate agents i.e. pushing the insurance product through the directors or partners of a company Group selling Worksite marketing Brokers and cooperative societies

To this list can be added the number of alternate delivery channels –

Bancassurance: Bancassurance can be a sure fire way to reach a wider customer base, provided it is made use of sensibly. In India there is an extensive bank network established over the years. Insurance companies will have to take advantage of the customers' long-standing trust and relationships with banks. This is a mutually beneficial situation as banks can expand their range of products on offer to customers and earn more, while the insurance company profits from the exposure at the bank branches, and the security of receiving timely payments. The products that are likely to sell well through bancassurance are commoditized term and annuity products. Also, those products that combine insurance and banking needs help to create demand - such as loan cover, term assurance and simple products that can be sold over-the-counter at banks. Another advantage is that banks, with their network in rural areas, help to fulfill rural and social obligations stipulated by the Insurance Regulatory and Development Authority (IRDA).

Selling through employees or authorized officials of a corporate: Selling through employees can also be a lucrative prospect. But the full potential of this channel has not yet been utilized since selling is now permitted only through directors or partners of the company. Worksite marketing is inexpensive and provides the opportunity to market products to large groups of people simultaneously. Call centres: Call centres can be utilized for generating leads. As the market keeps expanding, call centres have the potential of becoming an important medium for customer relationship management (CRM) and up selling to the customers.

Cooperative societies and Brokers: Cooperative societies and brokers offer immense support to insurance companies to widen their reach. Private companies that are already appointing corporate agents, and non-banking financial corporations (NBFCs) with a sound retail network are in demand.

Marketing through mailers etc: Direct marketing through mailers, pamphlets etc. require customised simple products that can be purchased through such mediums, or through the Internet. Though the unavailability of good databases in India, and the high expenses to reach the target audience through direct mailers is a cause for concern, it is definitely a problem that can be solved through better management of resources, data collection etc. To sum up, it is apparent that multiple distribution channels will help an insurance company to offer a range of contact points to the customer, thereby increasing the chances of success. However, along with these distribution channels comes the challenge of 'relationship management'. Since most of the new channels involve collaboration with various entities whose demands and powers of negotiation are varied, it requires delicate skills on the part of the insurance company to manage these relationships. Effective management of channel conflict, and curtailing the costs of distribution will be of utmost importance

rance Company

Insurance Company

Agent

Bank

Agent

Agent

Broker

Agent CUSTOMERS

THE ROLE OF INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY

Protection of consumer interest,

To ensure financial soundness of the insurance industry and

To ensure healthy growth of the insurance market.

These objectives must be achieved with minimum government involvement and cost. IRDA’s functioning can be financed by levying a small fee on the premium income of the insurers thus putting zero cost on the government and giving itself autonomy.

Protection of Customer Interest

IRDA’s first brief is to protect consumer interests. This means ensuring proper disclosure, keeping prices affordable but also insisting on some mandatory products, and most importantly making sure that the insurers pay consumers.

Ensuring proper disclosure is called Disclosure Regulation. Insurance contracts are basically contingency agreements. They can be full of inscrutable jargon and escape clauses. An average consumer is likely to be confused by them. IRDA had instructed insurers to frame transparent contracts. Consumers should not have to wake up to unpleasant surprises, finding that certain contingencies are not covered.

The IRDA also has to ensure that prices of the products stay reasonable and certain mandatory products are sold. The job of keeping prices reasonable is relatively easy, since competition among insurers will not allow any one company to charge exorbitant rates. The danger often is that prices may be too low and might take the insurer dangerously close to bankruptcy. As for mandatory products, those that involve common and well known risks, certain standardization has been enforced. Furthermore, IRDA had insisted that for such products the prices also be standardized.

From the consumer point of view the most important function of IRDA is ensuring claim settlement. Quick settlement without necessary litigation was the norm. LIC in India has a claim settlement ratio of 97%, an impressive number by any standards.

If consumers have a complaint against an insurer they can go to a body formed by association of the insurers. The decision of such a body would be binding on the insurers, but not on the complainant. If the complainants are not satisfied they can go to court. Some countries such as Singapore have such a system in place. This system offers a first and quicker choice of settling out of court. IRDA can encourage the insurers to have such a grievances reprisal mechanism. This system can serve the function of adjudication, arbitration and conciliation.

The second area of IRDA’s activity concerns monitoring insurer behavior to ensure fairness. It is especially here that IRDA’s choice of being a bloodhound or a watchdog would have different implications. We think that an initial tough stance should give way to a more forbearing and prudential approach in regulating insurance firms. When the industry has a few firms there is some chance of collusion. IRDA has to be alert to the collusive tendencies and make sure that the prices charged remains reasonable. However, some cooperation among the insurance companies could be considered desirable. This is especially in lines where claim

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experience of any one company is not sufficient to make accurate forecasts. Collusion among companies on information sharing and rate setting is considered “fair”.

IRDA must have severe penalties in case of fraud or mismanagement. Since insurance business involves managing trust money, in some countries the appointment of senior managers and “key personnel” has to be approved by the insurance regulatory agency.

CURRENT SCENARIO OF THE INDUSTRY

India with about 200 million middle class household shows a huge untapped potential for players in the insurance industry. Saturation of the markets in many developed economies has made the Indian market even more attractive for the global insurance majors. The insurance sector in India has come to a position of very high potential and competitiveness in the market.

Innovative products and aggressive distribution have become the say of the day. Indians, have always seen life insurance as a tax saving device, BSLI can do much better by providing them new products and variety for their choice.

Life insurance industry is waiting for a big growth as many Indians and foreign companies are waiting in the line for the green signal to start their operations. The Indian consumers should be ready by now because the market is going to give them an array of products, different in price, features and benefits. How the customer is going to make his choice will determine the future of the industry.

CUSTOMER SERVICECustomers remain the most important centre of the insurance sector. After the entry of the foreign players the industry is seeing a lot of competition and thus improvement of the customer service in industry. Computerization of operations and updating of technology has become imperative in the current scenario. Foreign players are bringing in international best practices in the service through use of latest technologies. The one time monopoly of LIC and its agents are now going through a thorough revision and training programme to catch up with the other players. Though lot is being done for the increased customer service and adding technology to it but there is a long way to go and various customer surveys indicate that the standards are still below customer expectation levels.

NEED FOR INS. POLICY

Uncertainty is the only certainty in life. The instinct and need for security against such uncertainty (risks) is the motivating force for human behavior and action. The need for life insurance vary according to the contingencies provided according to the age, family size etc.

POLICY CLASSIFICATIONS

The need of people for life insurance can be classified as :

Family : Protection of the interest of the family against loss of income due to the death of the breadwinner.

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Children: Provision for education, marriages and start-in life.

Old-age: Post-retirement income for self and family/dependants.

Special needs: Disability, accidents, expenses for treatment of diseases, loss of income due to sickness etc.

BASIC ELEMENTS IN A LIFE INSURANCE PRODUCT

A life insurance product has, essentially two basic elements. Risk cover: Benefit payable in the event of death, also called Term Insurance Plans.

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

DIFFERENT TYPES OF POLICIES

1. Term Life Insurance2. Whole Life Insurance3. Endowment Type Plans,4. Combination of Whole Life and Endowment type Plans, and5. Annuity and Pension Plans

Term Life Insurance

In Term Life Insurance contract, the sum assured is payable only in the event of death during the term. In case of survival, the contract comes to an end at the end of the term. There is no refund of the premium. Here the premium is low and contract is simple.

Term Life Insurance Types

Straight-Term (Temporary) Insurance

Here the sum assured is payable only in the event of life assured’s death occurring within the insured period from the commencement of the policy. A single premium is required to be paid. The proposer is required to pay the medical examination fee. It does not have any surrender value. This plan cannot be converted into other plans.

Term Life Insurance Types

Renewable Term Policies

The policies are renewable at the expiry of the term for an additional period without medical examination, but the premium rate will be altered according to the age attained at the time of renewal

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Term Life Insurance Types

Convertible Term Policies

Here option to convert it into whole life or endowment policy is available provided it is in full force, into either a limited payment life policy or endowment assurance policy, without having to undergo fresh medical examination, at any time during the specified term except the last two years.

Term Assurance Plans from LIC

Two Year Temporary Assurance Policy The Convertible Term Assurance Policy Anmol Jeevan-I Amulya Jeevan-I Mortgage Redemption Assurance policy

Here the risk is covered for the entire life of the policyholder. The policy money and the bonus are payable only to the nominee or the beneficiary upon the death of the policyholder. The policyholder is not entitled to any money during his/her own life. Thus there is no survival benefit.

Important Whole Life Policies

Whole life policy (with profit) Whole life limited payment plan Whole life single Premium plan Convertible whole life plan

Whole life policy (with profit)

This is a policy at lower rates of premium. The premiums are payable through out the life time of the assured and sum assured becomes payable on the death of the life assured or attaining an age of 80 years whichever earlier. Bonus addition is at a higher rate compared to endowment policies.

Whole life limited payment plan

The payment of premium is limited to a certain period, although the amount secured until this plan is payable on the death of the policyholder. The amount of premium depends upon the number of annual premiums stipulated since premiums are payable for the selected period of years or until death if it occurs within this period. If the life assured survives the premium-paying period, the policy continues, provided all premiums have been paid, but not further premiums are required to be paid.

Whole life single premium plan

This plan is not very common. In this plan single premium needs to be paid at the start of the policy. The policy is available both with and without profit.

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Convertible whole life plan

The object of this plan is to provide maximum protection at minimum cost. It’s a whole life without profit plan, premiums payable up to age of 70 years of the assured. The premium charged is for the whole life hence it is low.After 5 years, the life assured has an option to convert it into an endowment with or without profit choosing the term without having to go for medical examination.

Whole life plans from LIC

The Whole Life Policy The Whole Life Policy- Limited Payment The Whole Life Policy- Single Premium Jeevan Anand Jeevan Tarang

Endowment type plan

Endowment policies cover the risk for a specified period, at the end of which SA (sum assured) is paid back to the policyholder, along with all the bonus accumulated during the term of the policy.

Endowment policies types

Pure Endowment PolicyOrdinary Endowment Assurance PolicyDouble endowment PolicyJoint Life Endowment PolicyMarriage Endowment Plan

Pure endowment policies

The sum assured is payable on the life assured’s surviving the endowment term. Paid-up and surrender values are allowed on this policy. It is a sort of compulsory saving for old age

Ordinary endowment assurance policy

The premiums under this plan are paid for a fixed term. In case the death takes place during the term, the sum assured along with accumulated bonus is paid to the policyholder. The plan offers the advantage of making a provision for the family of the life assured in case of his early death and also assures a lump sum money at any desired age. The plan is available with-profit and without-profit Ordinary endinary endowment assurance policy

With-Profit- Carries bonusWithout-profit – Does not carry bonus. Premium will be higher of “with-profit: as compared with “Without profit”. The premium paying term for without-profit plan is restricted to 25 years

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Double endowment policy

In this case, if the life assured dies during the endowment period, the basic sum assured is payable and if he survives to the end of the term, double of sum assured is paid. Premiums are payable throughout the endowment terms or till the death of the life insured

Joint life endowment plan

Under this plan, two lives can be insured under one contract. The sum assured is payable at the end of the endowment term on survival of both the lives insured, or on the earlier death of either of the two Married couples can take such policy covering the risk on both the lives, when both are having the income of their own. Partners in business can also do the same.

ENDOWMENT POLICIES FROM LIC

Endowment Assurance PlansThe Endowment Assurance Policy The Endowment Assurance Policy-Limited Payment Jeevan Mitra(Double Cover Endowment Plan) Jeevan Mitra(Triple Cover Endowment Plan) Jeevan Anand New Janaraksha Plan Jeevan Amrit

ENDOWMENT POLICIES FROM LIC

Children PlansJeevan AnuragKomal Jeevan CDA Endowment Vesting At 21 CDA Endowment Vesting At 18 Jeevan Kishore Child Career Plan Marriage Endowment Or Educational Annuity Plan Jeevan Chhaya Child Future Plan

COMBINATION OF WHOLE LIFE AND ENDOWMENT TYPE PLANS

In this plan a part of S.A (sum assured) is made payable periodically during the term of the policy. Notwithstanding the payments at periodic intervals, the S.A at risk (payable at death), continues to be the same till the end of the term. This policy helps those who may need a lump sum amount even before the expiry of the term of the policy. Money Back (with Profits) Scheme

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These are fixed term policies. The premium are paid till the end of the term or till the death of the policyholder whichever earlier. The risk cover continues for the full sum assured even the payment of installments to the policyholder. The bonus also is payable for the full term. The money back policy s useful for those who, besides desiring to provide for their own old age and family, feel the need for lump sum benefits at periodical intervals. Example for a money back policy for 20 years.

5 years 20% of sum assured.

10 years 20% of sum assured.

15 years 20% of sum assured.

20 years 40% of sum assured + bonus

Minimum age at entry 13 years and 14 years where return of payment is after 4 years.

Maximum age at entry 50 years

Minimum sum assuredRs. 40,000

Policy term 20 years fixed

Maximum sum assured

No limit (linked with income)

Maximum maturity age

70 years

Policy loan Nil

Housing loan Would depend upon the requirement and entitlement worked on the basis of income, age and repayment capacity.

Benefits

On maturity Balance survival benefit + bonus for 20 years

Natural death Sum assured + bonus accrued

Accidental death Double of sum assured + bonus accrued

Permanent disability Treated as death and claim accordingly amounting to incapacitating the insured.

Example for a money back policy for 25 years

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5 years 15% of sum assured.

10 years 15% of sum assured.

15 years 15% of sum assured.

20 years 15% of sum assured

25 years 40% of sum assured + bonus

Minimum age at entry 13 years and 14 years where return of payment is after 4 years

Maximum age at entry 45 years

Minimum sum assuredRs. 40,000

Policy term 25 years fixed

Maximum sum assured

No limit (linked with income)

Maximum maturity age

70 years

Policy loan Nil

Housing loan Would depend upon the requirement and entitlement worked on the basis of income, age and repayment capacity.

Benefits.

On maturity Balance survival benefit + bonus for 20 years

Natural death Sum assured + bonus accrued

Accidental death Double of sum assured + bonus accrued

Permanent disability Treated as death and claim accordingly amounting to incapacitating the insured.

Common plans of LIC which comes under the above mentioned plans are:Money Back PlansThe Money Back Policy-20 Years The Money Back Policy-25 Years Jeevan Surabhi-15 Years Jeevan Surabhi-20 Years Jeevan Surabhi-25 Years Bima Bachat CHILDREN’S ASSURANCE PLANS

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Since last few years, LIC started offering risk cover plans like limited payment whole life and an endowment assurance plan from the age of 12 years and money back plan from the age of thirteen years (completed). These new plans have been designed for children where the risk of the child starts much earlier say 7 years. Risk cover may not begin when the policy is issued. The date on which the risk may begin is called “deferred date” and the period between the deferred date and the date of commencement of policy is called “deferred period”. As children cannot enter into contract, policies on the lives of children are taken out by the elders. When the child becomes major and is competent to contract, the child may assume the ownership of the policy, either by specific action of doing so or automatically by virtue of the provisions of the policy. The policy is then said to “vest” in the child. The date on which this happens is called “testing date”. On the testing date, the life insured must have completed 18 years of age. This plan enables a parent or a legal guardian or a relative of the child to provide a sum for the child by way of a very low premium. It is an endowment assurance plan with profits the risk for which commences at a selected age. The policy is in two stages One covering the period from the date of the commencement of the policy to the deferred date (the date of commencement of risk on the child’s life) and other covering the period from the deferred date to the date on which policy emerges as a claim either by death or on the maturity of the policy.

ANNUITIES AND PENSION PLANS

a Annuity contract.:A contract providing for periodic payment during specified period is an Annuity contract. Annuity certain – when the period specified is fixed irrespective of the duration of life Life Annuity: When the period is fixed, related to life. A pension is also an annuity. When annuity is provided by an employer to the employees or their dependant in consideration of the service rendered, it is generally called pension.

If a person buys an annuity contract he pays the insurer a specified capital sum (Purchase Price), may be in installment and lump sum and in return the insurer promises to make a series of payments to him as long as he survives Reasons for necessity for pension

Improvement in longevity

The average longevity of an individual is improving and at the same time the capacity to earn a living is limited beyond a certain age called superannuation age. However income is necessary even after superannuation to pursue a normal life and at the same time provide for additional medical expenses at an old age.

Break-up of joint family system

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Joint family system in India is breaking up very fast and in big cities it has been eliminated to a great extent. As such the individual cannot expect much from children and other relations and he has to depend on his own.Employees of the state or private/public sector organizations may find that the pension provided by the employer is not sufficient. To supplement that they may like to have individual pension plans. Others who are not employees or whose employers do not have pension plans may also arrange for pensions on their own.

TYPES OF ANNUITIES

The types of annuities are broadly available in the following two categories. Immediate annuity Deferred annuity.

UNIT LINK INSURANCE PLAN (ULIP)

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1. Understand the concept of ULIPs:

Try to do as much homework as possible before investing in an ULIP. This way you will know what you are getting into and won’t be faced with unpleasant surprises at a later stage. Our experience suggests that many a time people do not realize what they are getting into (in fact we have been approached by several people who wanted to cancel the ULIPs they had been coerced into taking by unscrupulous agents). Gather information on ULIPs, the various options available and understand their working. Read the literature available on ULIPs on the websites and brochures circulated by insurance companies.

2. Focus on your requirement and risk profile:\Identify a plan that is best suited for you (in terms of allocation of money between equity and debt instruments). Your risk appetite should play an important role in the plan you choose. So if you have a high risk appetite, go in for a more aggressive investment option and vice-a-versa. Opting for a plan that is lop-sided in favors of equities when you are a risk-averse individual might spell disaster for you (this is true in most cases currently).

3. Compare ULIPs of different insurance companies:

Compare products of the leading insurance companies. Enquire about the premium payments as ULIPs work on minimum premium basis as opposed to sum assured in the case of conventional insurance policies. Check the fund’s performance over the past six months. Find out how the debt and equity schemes are performing and how steady the performance has been. Enquire about the charges you will have to pay. In ULIPs the costs involved are a big deciding factor.

Ask about the top-up facility offered by ULIPs i.e. additional lump sum investments you can make to increase the savings portion of your policy. The companies give you the option to increase thepremium amounts, thereby providing you with the opportunity to gainfully utilise surplus funds at your disposal. Enquire about the number of times you can make free switches (i.e. change the asset allocation of the money in your ULIP account) from one investment plan to another. Some insurance companies offer you free switches for a 2-Yr period while others do so only for 1 year.

4. Go for a experience Insurance advisors

Select an advisor who is not only professional and informed, but also independent and unbiased. Also enquire whether he has serviced clients like you. When your agent recommends a ULIP of X company ask him a few product-related questions to test him and also ask him why the other products should not be considered. Insurance advice at all times must be unbiased and independent and your agent must be willing to inform you about the pros and cons of buying a particular plan. His job should not just begin by filling the form and end after he deposits the cheque and gives you the receipt. He should keep a track of your plan and inform you on a regular basis. The key is to go for an advisor who will offer you value-added products. 

5. Does your ULIP offer minimum guarantee?

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In market linked product if your investment’s downside can be protected, it would be a huge advantage. Find out if the ULIP you are considering offers a minimum guarantee and what costs have to be borne for the same. This will enable you to make an informed choice.

Unit Linked Insurance Plan (ULIP) is a life insurance solution that Provide the Client with the benefit of protection and flexibility in the investment. It is a solution which provide for life insurance where the policy value at any time varies according to the value of the underlying assets at the time.

The investment is denoted as units and is represented by the value that it has attained called as net Asset Value (NAV).

into play in the 1960s and became very popular in Western Europe and America .The reason that is attributed to the wide spread popularity of ULIP is because of the transparency and the flexibility which it offer to the clients.As times progressed the plans were also successfully mapped along with life insurance need to retirement planning.

In today’s times ULIP provides solution for all needs of clients like insurance planning, financial needs, financial planning for children’s future and retirement planning.

ULIP provides multiple benefits to the consumer. The benefits include:

Life protection Investment and Savings Flexibility Adjustable Life Cover Investment Options Transparency Options to take additional cover against Death due to accident Disability Critical Illness Surgeries Liquidity Tax planning

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

Units in Funds

UnderlyingInvestment

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Unit Linked Insurance Policies

1 . C o n t r i b u t e d R e l a t e d C h a r g e s2 . A d m i n i s t r a t i v e C h a r g e s3 . F u n d s M a n a g e m e n t F e e4 . M o r t a l i t y C h a r g e s5 . R i d e r C h a r g e s6 . S u r r e n d e r C h a r g e s7 . B i d O f f e r C h a r g e s 8 . T r a n s a c t i o n S p e c i f i c c h a r g e s

C o n t r i b u t e d R e l a t e d C h a r g e s :

These are the charges that are represented as the percentage of the regular or single contribution paid. In case of a regular contribution plan, it is usually high in the first year to pay for the distribution cost. This charge pays for the issuance and for distribution commission. This is a charge to cover the running expenses of the policy. For single contribution plan this is levied once at the start of the policy. For regular Contribution plan s this will be charged on a regular uniform basis depending upon the frequency of payment.

Normally these charges are shown as percentage of the contribution. Allocation is another terminology used by the company in actually representing costs. Allocations are mathematically reverse of the charges. Thus mathematically;Allocation=1-Charges. Thus for example if the product has a 70% allocation in the first year, it means 1-.7=.3 or 30% charge.

A d m i n i s t r a t i v e C h a r g e s :

These are charges that are levied for the administration of the policy and the related cost of administration of the insurance company, itself. These costs are different from the issuance and the distribution related cost of the product. They are more related to the cost like the IT, operation, etc cost of continuing the policy.

There are a few prominent ways in which these cost are levied:

They can be levied as the percentage of the value of the investment (funds) in the account of the policyholder. These kinds of charges get adjusted in the Unit Value (NAV), as the NAV is declared after adjusting these costs.They can be levied as a flat charge with an option of increasing it by a certain percentage over the year.

F u n d s m a n a g e m e n t F e e :

All unit linked plans have underlying funds, which the policyholder chooses for their investments. These funds constitute of various financial instrument such as equity, bonds, money market instrument.

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The funds management fee is levied to pay for the charges of managing the investment, which basically involve the cost of buying and selling the various financial instrument for the various funds

These charges are expressed as the percentage of the Asset under Management of the insurance company. Interesting thing to know here is the factor on which the charges depend. The main factor being the fund composition.

For example, the cost of managing a bond is lesser than the cost of managing equity. Thus normally, the fund option which has a higher percentage of equity would have higher charges comparatively to other funds.

M o r t a l i t y C h a r g e s : This covers the cost of providing life protection for the insured and may be paid once at the start of the policy or a recurrent manner (for example). This charge is levied to provide the insurance cover under the plan. Normally these charges are 1-year charge and keep changing as per the age of the policyholder. These are normally expressed as per thousand of the sum assured and depend on the age of the policyholder. So, for example one would have the mortality charges as Rs1.50 per thousand of SA for a 30 year-old and Rs 1.55 for the age of 35 year. This means that the cost of insurance of Rs 1,000 at the age of 30 is 1.50, where the same insurance cover costs Rs 1.55 at the age of 35years.

R i d e r C h a r g e s :

Rider charges are similar in nature to the mortality charges as they levied to pay for the other protection benefit that thepolicyholder has chosen for-like the critical illness benefit or the accident benefit,etc.

S u r r e n d e r C h a r g e s :

When the policyholder decides to surrender the policy or partially withdraw some of the units for cash, a surrender charge may be apply. Usually the surrender charges only apply in the first few years after the units are invested and are usually on a decreasing scale. Surrender charges are used to cover initial expenses that have been incurred by the company but not yet recovered from the policyholder yet.These charges can either be expressed as a percentage of the value of the investments or as a fixed flat charge, depending on the structure of the product.

So, the policyholder may have charge of 2% of the unit value as the surrender charge or Rs 1,000 as the surrender penalty. Surrender charges usually apply to policies with high allocation, especially in the first few years.

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B i d O f f e r c h a r g e s :

In ULIP especially certain insurer might create a difference in the price at which they sell the unit and the price at which they buy the units. Investor’s contribution are used to buy units in the investment fund at the offer price and are sold when benefit are required at the bid price. The difference between the offer and the bid prices is known as the “bid-offer spread”, this is used to cover expenses when setting up the policy. Bid-offer spread is expressed as a percentage of the NAV’s and hence also become a percentage of the value of units. So for example a company has a bid-offer spread of 5%and has a offer price of Rs 10 per unit. This means that the bid price would be 5% less and hence 95% of the offer pricei.e95%*10=Rs 9.50. Hence, a policyholder having 100 units in his investment would get R s 9.5*100= Rs 950 as his value and if he t o b u t another 100 units he will have to pay Rs 10*100=Rs 1,000. This Rs 50 difference is the bid -offer spread. Any fund which has a bid-offer spread would have 2NAV’s-buying and selling, where as a fund which does not have bid-offer spread is a 1NAV fund-same for buying and selling.

Tr a n s a c t i o n a l S p e c i f i c c h a r g e s :

These charges are levied when the client does some specifics transaction like changing funds, topping up the investment component or withdrawals.

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GENERAL INSURANCE

What is General Insurance? Insurance other than ‘Life Insurance’ falls under the category of General Insurance. General Insurance comprises of insurance of property against fire, burglary etc, personal insurance such as Accident and Health Insurance, and liability insurance which covers legal liabilities. There are also other covers such as Errors and Omissions insurance for professionals, credit insurance etc.  Non-life insurance companies have products that cover property against Fire and allied perils, flood storm and inundation, earthquake and so on. There are products that cover property against burglary, theft etc. The non-life companies also offer policies covering machinery against breakdown,there are policies that cover the hull of ships and so on. A Marine Cargo policy covers goods in transit including by sea, air and road. Further, insurance of motor vehicles against damages and theft forms a major chunk of non-life insurance business.  In respect of insurance of property, it is important that the cover is taken for the actual value of the property to avoid being imposed a penalty should there be a claim. Where a property is undervalued for the purposes of insurance, the insured will have to bear a rateable proportion of the loss. For instance if the value of a property is Rs.100 and it is insured for Rs.50/-, in the event of a loss to the extent of say Rs.50/-, the maximum claim amount payable would be Rs.25/- ( 50% of the loss being borne by the insured for underinsuring the property by 50% ). This concept is quite often not understood by most insureds.  Personal insurance covers include policies for Accident, Health etc. Products offering Personal Accident cover are benefit policies. Health insurance covers offered by non-life insurers are mainly hospitalization covers either on reimbursement or cashless basis. The cashless service is offered through Third Party Administrators who have arrangements with various service providers, i.e., hospitals. The Third Party Administrators also provide service for reimbursement claims. Sometimes the insurers themselves process reimbursement claims.  Accident and health insurance policies are available for individuals as well as groups. A group could be a group of employees of an organization or holders of credit cards or deposit holders in a bank etc. Normally when a group is covered, insurers offer group discounts. Liability insurance covers such as Motor Third Party Liability Insurance, Workmen’s Compensation Policy etc offer cover against legal liabilities that may arise under the respective statutes— Motor Vehicles Act, The Workmen’s Compensation Act etc. Some of the covers such as the foregoing (Motor Third Party and Workmen’s Compensation policy ) are compulsory by statute. Liability Insurance not compulsory by statute is also gaining popularity these days. Many industries insure against Public liability. There are liability covers available for Products as well. There are general insurance products that are in the nature of package policies offering a combination of the covers mentioned above. For instance, there are package policies available for householders, shop keepers and also for professionals such as doctors, chartered accountants etc. Apart from offering standard covers, insurers also offer customized or tailor-made ones.  

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Suitable general Insurance covers are necessary for every family. It is important to protect one’s property, which one might have acquired from one’s hard earned income. A loss or damage to one’s property can leave one shattered. Losses created by catastrophes such as the tsunami, earthquakes, cyclones etc have left many homeless and penniless. Such losses can be devastating but insurance could help mitigate them. Property can be covered, so also the people against Personal Accident. A Health Insurance policy can provide financial relief to a person undergoing medical treatment whether due to a disease or an injury. Industries also need to protect themselves by obtaining insurance covers to protect their building, machinery, stocks etc. They need to cover their liabilities as well. Financiers insist on insurance. So, most industries or businesses that are financed by banks and other institutions do obtain covers. But are they obtaining the right covers? And are they insuring adequately are questions that need to be given some thought. Also organizations or industries that are self-financed should ensure that they are protected by insurance.  Most general insurance covers are annual contracts. However, there are few products that are long-term.  It is important for proposers to read and understand the terms and conditions of a policy before they enter into an insurance contract. The proposal form needs to be filled in completely and correctly by a proposer to ensure that the cover is adequate and the right one. 

General Insurance, India

Major insurance policies that are covered under General Insurance are:

1-HomeInsurance2-HealthInsurance3-MotorInsurance4-Travel Insurance

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Home Insurance, India

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

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

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

1. The Fire and Special Perils Cover

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

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

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

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

Insurance Cover for Contents Inside the Home

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

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

The Fire and Specials Perils Cover Earthquake Cover Burglary Loss / damage to contents due to burglary or an attempted burglary Loss of jewelry, gold ornaments, silver articles and precious stones kept under lock &

key All the contents are covered on the market value of the items. This means that if there is a loss, the claim would be paid on the value of purchasing a similar new item, minus depreciation

Health Insurance, India

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

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

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

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

Health insurance companies are offering innovative products to their customers these days. The latest product in this line is 'cashless hospitalization'. Here individuals do not have to pay for their hospital bills in case of hospitalization; the insurance company settles the bill directly. But certain conditions like the hospital needs to have a tie-up with the insurance company, the documents need to be in order etc. Have to be met.

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Motor Insurance, India

Legally, no motor vehicle is allowed to be driven on the road without valid insurance. Hence, it is obligatory to get the vehicle insured. Motor insurance policies cover against any loss or damage caused to the vehicle or its accessories due to the following natural and man made calamities. Natural Calamities: Fire, explosion, self-ignition or lightning, earthquake, flood, typhoon, hurricane, storm, tempest, inundation, cyclone, hailstorm, frost, landslide, rockslide. Man made Calamities: Burglary, theft, riot, strike, malicious act, and accident by external means, terrorist activity, and any damage in transit by road, rail, inland waterway, lift, elevator or air.

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

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

Travel Insurance, India

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

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

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

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GENERAL INSURANCE: QUESTIONS AND ANSWERS

 1. Can I take two policies and get claims under both of them?  In case of an indemnity cover (one that seeks to compensate the actual loss)--for instance, a policy that covers property, if there are two policies in vogue, the loss shall be shared by both the policies. In no case can an insured get more than the actual pecuniary loss he or she has incurred. On the other hand, in respect of benefit policies like the Personal Accident policy, where a fixed compensation is paid, no matter what the actual loss is, one may obtain more than one policy. 2. On what basis is claim paid? In indemnity policies, the upper limit of a claim is the sum assured and this usually applies for the period of the policy. Certain policies, however, allow for reinstatement of the Sum Insured by payment of proportionate premium for the remaining period of the policy. The actual claim will be the actual extent of financial loss as validated by documents like bills. If the property is underinsured, the insured shall bear a rate able proportion of the loss. There can be more than one claim in the policy period but the sum assured is usually the limit for the policy period unless reinstated.  Nowadays health insurance policies – which cover hospitalization costs – have also a cashless settlement of claims. That is, you don’t have to pay for the treatment at the hospital and then make a claim for reimbursement of the expenses. The insurance company has a service provider called the third party administrator (TPA) health services, who liaises with the hospitals and directly makes the payment for your treatment as per the terms of your policy and coverage. 3. What is the periodicity of premium payments? Most general insurance policies are annual and the premium payment is in advance. No risk commences unless you have paid the premium. In some long term policies companies have the facility of collecting premiums periodically.  4. Why do different people have different premiums? The premium is calculated on the extent and nature of the cover you want. A higher sum insured means a higher rate of premium. Similarly a higher risk will be charged a higher premium. An example of this is that an older person will have to pay a higher premium for health insurance for the same sum insured. Sometimes the risk is higher depending on the location of risks – for example in motor insurance in areas where accidents are higher. So the premium will vary according to the nature and severity of the risk. 5. If I buy a policy and don’t make a claim, it is a loss. So, why should I buy insurance?

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

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

MUTUAL FUND

HISTORY OF MUTUAL FUND:-

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

PHASE 1: - 1964-1987 (UTI Era)

1963- UTI Was established by an act of parliament. The first and still one of the largest scheme launched by the UTI was unit scheme 1964

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

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

1987 marked the entry of non-UTI public sector mutual funds. First non-UTI mutual fund was SBI mutual fund in November 1987. Then the following comes canbank mutual fund (9dec.),LIC mutual fund(1989),Indian

bank mutual fund (1990), and bank of India mutual fund, and GIC mutual fund, PNB mutual fund.

In this phase, the mutual fund industry expanded nearly 7times in term of asset under management.

Investor started shifted shifting away from bank deposits to mutual fund Market share of UTI was 80% and public sector fund was20%

PHASE 3: - 1993-1996

In 1993, private players were granted permission to enter the mutual fund market. They introduced largest product innovation, investment management technique, and

investor servicing technology.

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During 1993-94, five private sector mutual funds launched their schemes, followed by 6 other private sector mutual funds in the year 1994-95.

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

Comprehensive set of regulation for all mutual funds in India was introduced with SEBI Mutual fund regulation Act 1996.

1999- union government budget exempted all mutual fund dividends from income tax. 1999- beginning of anew phase in the history of mutual fund industry in India in term

of both amount mobilized from investor and asset under management. From 1999-2000, there has been a growth of 60%in asset under management

Concept of mutual fund

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

Advantages of Mutual Funds

1. Portfolio Diversification : - Enables the investor to hold a diversified investment portfolio even with a small amount of investment that would otherwise require big capital.

2. Professional Management : - An investor is benefited from the professional management skill brought in by the fund in the management of the investor portfolio, which along with the needed research into available investment option; ensure a much better return than what an investor can manage on his own.

3. Reduction / Diversification of Risks: - An investor in a mutual fund acquire a diversified portfolio, no matter how small his investment, which reduces the risk of loss.

4. Reduction of Transaction Cost: - When going through a fund, an investor has the benefit of economies of scale; the fund pays lesser costs because of large volume.

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

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

Disadvantages of Mutual Funds

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1. No Control over Cost: - An investor pays investment management fees as long as he remains with the fund in return for the professional management and research, he also pays fund distribution costs, which he would not, incurs in direct investing.

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

3. Managing a Portfolio of Funds: - Availability of large number of funds can actually mean too many advices for investor, he may again need advice on how to select a fund to achieve his objective.

Types of Mutual Funds

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

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

Load and NO Load

Charges made by the fund manager to the investor to cover the distribution/sales/marketing expensed are called as “load”

Load charged to the investor at the time of his entry into a scheme is called a Front-end or Entry Load.

Load amount charged to the scheme over a period is called a “Deferred load” Load that the investor pays at the time of his exit is called a” Back end or Exit load”

Funds charging Front-end, Back-end or Deferred load are called Load Fund. Funds that make no such charges or load for sale expenses are called No-load fund.Some fund charges only entry load, and some charges only exit load they are called Partial Load Funds.

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

Tax – exempt Vs Non-Tax Exempt

When a fund invests in tax-exempt securities, it is called a tax-exempt. In India after 1999, Union government budget, all the dividend income received form any of the mutual fund is tax

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free in the hands of the investor. Funds other than equity funds have to pay a distribution tax, before distributing income to investors. Equity mutual fund schemes are tax-exempt investment avenue while other funds are taxable for distribution income.

Indian mutual funds currently offer tax-free income, any capital gain arising out of the sale of fund unit are taxable. All these tax consideration are important in the decision on where to invest as the tax exemption or concession alter the return obtained from these investments.

Specific Types of Mutual Funds

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

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

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

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

Money Market Funds

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

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

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

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target capital appreciation look for high current income, and so distribution to investor.

Diversified Debt fund Focused Debt Funds. High yield Funds. Assured return Fund. Fixed term plan series.

Diversified Debt Fund:- These funds invest in all available type of debt securities, issued by entities across all industries and sector. They offer high income and less risk than equity funds. These funds have the benefit of risk reduction through diversified and sharing of any default related losses by a large number of investor.

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

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

Assured return funds(an Indian variant):- Assured return or guaranteed monthly income plans are essentially Debt/Income funds. They reduce the risk level considerably as compared to all other debt or equity funds but only to the extent that the guaranteed has the required financial strength.

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

EQUITY FUNDS

As investors more from debt funds category to equity funds, they face increased risk level. Equity funds invest a major portion of the corpus in equity shares issued by companies acquired directly in IPO or through the secondary market. These funds would be exposed to the equity price fluctuation, risk at the market level, at the industry or sector level and at the company specific level. Their NAV fluctuates with all these price movement. These price movements are caused by all kinds of external factors, political or social as well as economical. These funds offer the greatest potentials for growth in capital

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A. Aggressive growth funds:- These funds target maximum capital appreciation, invest in less researched or speculative shares and may adopt speculative investment strategies to attend there objective of high return for the investor. Consequently, they tend to be more volatile and riskier than other funds

.B. Growth Funds:- These funds invest in companies whose earning is expected to

rise at an above average rate. These companies may be operating in sectors as if technology considered having a growth potential, but not entirely unproven and speculative. Their primary objective is capital appreciation over 3-5 years of span. So they are less volatile than funds that target aggressive growth

.C. Specially Funds:- They have a narrow portfolio orientation and invest in only

companies that meet pre defined criteria. Most specialty funds tend to be concentrated funds.

Sector Funds :- Consists of the investment only in industry or sector of the market. Such as IT, Pharmaceutical or FMCG. They carry a higher level of sector and company specific risk than diversified equity funds.

Offshore Funds:- Invest in equity in one or more foreign countries thereby achieving diversification across the country borders. Therefore, they also have additional risk such as foreign exchange rate risk or many countries.

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

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

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

Equity Index Fund:- Tracks the performances of a specific market index. The objective is to match the performance of the stock market by tracking an index that represents the overall market. This fund takes only the overall market risks which reducing the sector and stock specific risk through diversification.

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

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

Hybrid Funds-Quasi Equity/Quasi Debt:-

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

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

Growth and Income Funds:- Seeks to strike a balance between capital appreciation and income for the investor. Their portfolios are a mix between companies with good dividend paying record and those with potential of capital appreciation.

Asset Allocation Fund:- Follows variable asset allocation policies and more in an out of an asset class depending upon their outlook specific market. Their objective is similar to balanced fund and real estate securities in addition to debt instruments, convertible securities, and preference and equity shares.

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

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

Tax Aspects: -

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

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

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

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

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

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

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

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

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

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

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

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

2. What is the tax status of capital gains?

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

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

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

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

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

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

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SECTION- II

Company profile

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

Mr. Subhash Chand Aggarwal Mr. Mahesh Chand Gupta

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

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CORE VALUES

VISION

To be a global major in providing complete investment solutions, with relentless focus on investor care, through superior efficiency and complete transparency.

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PRODUCTS & SERVICES

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

Mutual Funds. Investor Education Programs through Regular Seminars & Conferences. Web based Accounting.

MEMBERSHIPS & REGISTRATIONS

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

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FACTS & FIGURES

Commanding the faith of over 4,50,000 satisfied investors More than 4400 trading terminals of NSE, BSE, F&O, NCDEX and MCX installed Highly dedicated workforce of 1800+ employees, 6000+ financial advisors in SMC

network Trading Valume crossed of $175 billion in the first 9 months of FY 2007-2008 as

against $105 billion in the FY 2006-2007 (full year)

Strong presence in the business with a rich experience of over 20 years Commanding more than 3% of the total market share in the Indian equities and

derivatives market, over 4% in the Indian commodities market and more than 10% in Dubai gold and commodities exchange

Handling more than 2,50,000 trades per day Taking care of over 1,50,000 DP clients Dedicated arbitrage wing of more than 300 arbitragers, doing risk-free arbitrage

between capital market & futures in both equity and commodity markets Equipped with hi-tech in-house Research wing and technological resources providing

complete research solution Fast, Transparent and easy to use Online Internet Trading Platform .Special advisory

services to HNIs and Corporates Clearing member to 68 trading members in NSE F&O, BSE F&O and DGCX i.e. 28 in

NSE, 38 in BSE and 2 in DGCX

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ACHIEVEMENT

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

ISO 9001:2000 certified DP for both shares and commodities 4th largest broking house of India in terms of trading terminals (Source: Dun and

Bradstreet, 2008 5th largest sub-broker network in the country (Source: Dun and Bradstreet, 2007) 5th largest distributors of IPO in Retail. (Source: Prime Data Rankings) Awarded the Fastest Growing Retail Distribution Network (Source: Business Sphere,

2008)

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

One of the first financial firms in India to expand operations in the lucrative gulf market, by acquiring valuable license for trading and clearing with Dubai gold and commodities exchange (DGCX)

Amongst a Elite group of brokers having proprietary desk for doing risk-free arbitrage in commodities

First trade on DGCX for silver and First currency trade for rupee-dollar Awarded the Major Volume Driver by BSE for the Third year in a row i.e. 2006-07,

2005-06 and 2004-05 (Awarded to top 10 Brokers)

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THE GROWTH STORY

Fast growing company with 90% growth in revenue from $18.38 million in 2005-06 to $34.33 million in 2006-07.

Dedicated and highly motivated workforce of more than 1500 professionals and over 6000 financial advisors.

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BOARD OF DIRECTORS MEMBER- SMC

Mr. S.C. AGGARWAL : Chairman & Managing Director Mrs. Sushma Gupta : whole time Director Mr. Rakesh Gupta : Director Mr. Pradeep Aggarwal : Director

SMC Insurance Brokerage (P) Ltd.

Mr. Mahesh C Gupta : ChairmanMr. Ajay Garg :DirectorMrs. Anuradha Goel : Director

LIST OF COMPANY UNDER SHEAD OF SMC:-

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

INVESTMENT & SERVICES:-

Equity & Derivative Trading

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

Clearing Services

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

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Commodity Trading

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

Distribution of Mutual Funds & IPOs

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

Online back office support

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

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

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LIFE INSURANCES GENERAL INSURANCE

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

ARBITRAGE

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

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Section III

Research Methodology

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RESEARCH DESIGN OR METHODOLOGY

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

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

An ideal design deign should have some factors:A. Identifying the problems of SMC.B. The process of obtaining information or data.

Sources and method of Data collection

I. Primary dataII. Secondary Data

III. Survey ResearchIV. Questionnaires design

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

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

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

o Personal Interviewo Telephonic Interviewo Mail Survey

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

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Research Instruments:

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

Sampling Techniques:

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

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

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

Limitation during Survey:

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

Most respondents were didn’t like to spent time in filling the questionnaire as it was immaterial to them.

Many people I approached refused to waste their valuable time. Some Insured didn’t know the policy they had, though a few recalled the name of the

Insurers especially in rural areas. A few people know in detail about the private insurers. The ratings given by the respondent didn’t base on their knowledge but their feelings

towards the Companies as they are not very much aware of all the attributes for the given insurers.

Most of the people in rural areas can not understand English so I had design my questionnaires in a way that was suitable for both urban and rural respondents. Some times I had translated my questionnaires in local languages for extract information from them.

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Section- IV

Data Analysis and Interpretation

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Data Analysis and Interpretation

1. What is your opinion about insurance?

22%

17%

4%

57%

Investment

Tax Waiver

Expenditure

Savings

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

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ranking of insurers

4% 5% 7%

1%

83%

BSLI

ICICI

BAJAJ

HDFC

LIC

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

3-Are you insured?If yes then which is/are your insured company?

people insured

4%

96%

Yes

No

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% OF INSURED RESPONDENTS

68%

12%

9%5% 3% 2%1% LIC

IPLIC

BALIC

HSLIC

BSLIC

TALIC

MNLIC

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

4-Are you aware about unit linked plans?

AWARENESS OF ULIPS

38%

62%

yes

no

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

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5- Which type of insurance plan you have taken?

16%

76%

8%

ULIP

TRADITIONAL

BOTH

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

TYPES INSURANCE POLICIES

6%

38%

35%

11%4% 6% TERM

ENDOWMENT

MONEY BACK

WHOLE LIFE

CHILDREN

PENSION

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

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

features influenced the most

13%10%

28%24%

9%

12% 4%

efficient earnings

different investment fundoption

tax free withdrawal

loan against policy

flexible withdrawal system

availability of different rider

all the feature

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

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

INSURANCE POLICIES OFFERS THEM

High return15%

Savings29%

Flexibility6%

Safety50%

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

respondents form of savings

58%18%

10%

9% 5%bank deposits

post office deposits

mutual fund

shares and securities

others

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

8-Are you aware about SMC?

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

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

Sex

90%

10%

Male

Female

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

AGE

0%

36%

31%

22%

11%

Under1818-3031-4041-5051&Above

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Marital Status

67%

33%Married

Single

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

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

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Annual Income

42%

30%

17%

6%

0%

5%

Less than Rs1,00,000

Rs1,00,001-Rs2,00,000

Rs2,00,001-Rs,300,000

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

Rs4,00,001-Rs5,00,000

Above Rs5,00,000

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

Occupation

8%3%

3%

39%47%

Student

Service

Business

Housewife

Unemployed

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

MARKET SURVEY

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

1. What is your view about insurance?An investment An expenditureA tax waiver A saving instrument

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

A. Birla sun life___________B. ICICI Prudential________C. Bajaj Allianz _________

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D. HDFC Standard Life ___________E. LIC__________________

5. Are you insured?

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

And what type of benefits are you getting from your insurance policy?a. safety c. high returnb. flexibility d. savingsIf no then why_________________________________________________________________

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

a. Bank deposits b. post office deposits e. if any other……………..c. Mutual funds d. shares and securities

6. Are you aware about unit linked plans?Yes No

7. If yes, then have you taken this plan? Yes No If yes, then go to question no -8

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

9. Which type of unit linked plans are you having? Term policy Endowment policy

Money back policy Whole life plan Children plan Pension plan

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

Tax free withdrawal Loan against policy

Flexible premium payment option Flexible withdrawal system Availability of different rider option all the features

If any other reason please specify______________________________________________

11. Please rank the following Life Insurance Policies.

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

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

12. Are you aware about SMC? Yes No Please specify the reason ---------------------------------------------------------------------

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

DEMOGRAPHY

1. Name ______________________________________________________________

Address ______________________________________________________________ ______________________________________________________________

Contact no ________________________ E mail I’d. _______________________

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

3. Please specify your sex. Male Female

4. Please specify your marital status.

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Married Single

5. Please mention your educational qualification. Intermediate Graduate Post graduate M.B.B.S Engineer If Other, please specify__________________________________________________

6. Please mention your occupation. Service Business student House wife Unemployed

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

6. Please mention your income per annum.

Less than 1,00,000 1,00,001 to 2,00,0002,00,001 to 3,00,000 3,00,001 to 4,00,000 4,00,001 to 5,00,000 Above 5,00,000

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Section V

Findings, Conclusion and Suggestions

FINDINGS

The survey was carried out at various rural places within the rural areas, among them all there

was something common found every where for which the rural insurance suffer a great set

back. These causes are as follows.

Ignorance:

People in these areas are not educated largely and hence the rate of illiteracy in the rural

areas is very high as compared to that of the urban habitation. So people of these areas are

ignorant about various products and scheme introduced by SMC from time to time. The

education level is very low among them for which they cannot follow the schemes or

insurance products offered by the company and they could not think of the benefits that

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they would receive on occurring of any mishap if they are insured. Unless and until

someone make them thoroughly understand the merits of investing with SMC they are not

going to do so.

Affordability

There are people in the rural area are people who are just able to earn their livelihood and

some of them also fail to do so. Hence people do not have much surplus earnings which

can be diverted to savings. So poverty is also a major hindrance in the way growth of

insurance sector in the urban as well as rural areas.

Lack of publicity/ Advertisement by SMC

Lack of advertisement is also a factor which declines the sale of financial products in

market. The people living in the villages are unknown about the availability of various

types of policies which could fulfill their needs. SMC should take a major step to make the

customer aware through various Medias about the availability of various products in the

markets both in urban as well as rural areas in order to tap the customers from the market.

Claim settlement:

The villagers usually prefer to keep their money in the banks or post office rather than

taking up a life insurance policy because of the lengthy process of settlement of claim for

which the people cannot get the coverage at the time when they require it.

Credibility:

One of the major factors influencing the marketing of insurance is the credibility of the

insurers. In the past, there were cases of financial frauds, which affected the faith of the

rural population adversely. Confidence building exercises need to be carried out, and the

government and the IRDA need to join hands with the insurers in this regard.

When we look at the insurance sector, the major reasons for the failure and shortcomings in

their products and services can be summarized as follows:

Lack of popular and mass appeal in marketing strategy.

High variation between services provided and consumer’s expectations.

Expensive policies and high premiums.

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Product differentiation and innovations are not in conformity with the requirements of the

rural population..

Professional style of working has failed to generate confidence and goodwill as rural

population prefers personalized approach and that too in accordance with regional culture.

CONCLUSION

After analyzing the existing facts and relevant inferences, we can conclude that there is a

significant requirement of change in products and services and marketing strategy to be

adopted by SMC for penetrating into the these market.

Following steps may provide for significant increase in the rural market share as well as tap the

lower middle class segment in urban areas for ULIP as compared to other private players of

these sectors.

Policies must be designed in such a manner so as to have low premiums and the

payment schedule must match to the earnings.

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Policies that may have risk coverage up to actual/estimated losses as high assured sums

are not much preferred by rural consumers and also result in high premium payments.

Risk coverage must be designed in conformity with the incidents experienced in rural

area and in agriculture which causes losses.

Consideration must be given to specific items of rural area and agriculture considered

as assets while formulating the insurance policies.

‘Loans against policies’ feature must be present and procedure for credit granting must

be kept simple.

Simple policies without any riders must be provided for rural consumers as they give

more weight age to low premium rather than extra benefits.

Private insurers are learning from failures and drawbacks of LIC. LIC’s advantage is the

monopoly it enjoyed so far, the long standing goodwill - its asset as also its huge established

network of agents while private insurers have only made a beginning and has a long way to go.

It is too early for private insurers to take on a giant as the LIC. But it is certain that competition

will increase and in course of time innovative, never-before insurance products will hopefully

be rolled out. And the ultimate winner will be the consumer.

SUGGESTIONS

NOVEL WAY TO INVAST PEOPLE BY SMC

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

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

levels of penetration.

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

manner. The experience in the countries where it is working in full-fledged manner is

extraordinary. It has emerged as a cost effective tool for distribution of insurance products.

In Orissa where selling insurance could be a challenging job. With the spread of bank

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branches in majority of the villages and towns tie-ups with them should help increase in

penetration.

Tie-ups with NGOs/SHGs:The Non-Governmental Organizations and the Self Help

Groups could play a major role in increasing the penetration levels. These are informal

groups, which provide avenue for insurance selling through the mechanism of group

insurance schemes. Group insurance provides greater reach with low operation costs and

fewer rates.

Media Exercises

Company should give advertisement in monthly and weekly women magazines.

Now-a-days television is an important media of communication. So company can come

up with emotional advertisements, which can give a better impact to the prospective

customers.

Company should come out with more products with an affordable price. So that the

rural people as well as the lower middle class segment can enjoy the facility of Unit

Linked products.

Company can go for street folks, which help them to make people aware of the

products and increase their market penetration in rural areas.

SUGGESTIONS FOR INVESTOR

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

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

Calculation of Unit Allocation on the basis of NAV

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

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

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

Let the premium = Rs. 5800(-) Front End Load = Rs. 400 (An assumption that it being a normal not the first year to understand the concept) Balance = Rs. 5400

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

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

Up front cancellation of units for month – 1For cost of insurance risk coverage and administrative expenses let the monthly charge required is Rs. 60/-. Then NAV at Rs 12/ to generate Rs. 60/- five units needed to be cancelled.

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

Up Front canceling of units for month – 2If the NAV is Rs. 13/- on the second month, to generate a cost of Rs. 60/- the no of units to be cancelled are 4.62.

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The remaining no of units = 445 – 4.61 = 440.38 units.The process continues like this.

Calculation of returns:

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

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

= 18.18%

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

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

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

=18.18%Annualized Return = (18.18/375) x 365

= 17.7%In present scenario when market in volatile best investment suggestion---

Long term investment Energy, Infrasector , Real state are good for investment ULIP--

For general per pose – BIRLA SURAL JIVAN For pension plan --- ICICI PRU, LIFE STAGE PENSION For child plan-- BIRLA & RELIANCE

The mantra of a successful investor

Investing successfully in equity market demands a great deal of knowledge about the market apart from large sum of money. This market is driven by a number of forces and the mechanics of the same is quite difficult to understand. More often than not, a common investor misjudges the prospects of the scrip’s and consequently ends up short of what he had invested. Another constraint in his way to success is his miniscule investible fund, as compared to the large volume of transactions of the stock market, which restricts his diversification across a broad cross-section of industries and sectors. He may also find himself helpless, in investing in large-cap scrip’s. above all these even if he invests in a well diversified portfolio of high-grade stocks, success Is not guaranteed. For him, to be a successful investor, it is required to learn the

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mantra of market timing. It is often seen that the odd lotter enters when the market tops and exits at its bottoms and makes some intelligent investors a bit richer during the process. So, the question here is “what is the way out?” the best way for him to get rid of all these shortcomings of direct investment in equity market is to invest in Mutual Funds. By investing in mutual funds, he will get the services of experienced and skilled professionals, backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investment options at right time. But even now the exact problem is not solved as he may end up in losses as NAVs of mutual fund can also decline and if right timing is not done an investor may end up losing his money. Not long back, the markets were touching new highs with passing day. This was in the first quarter of year 2000, when Info Tech sector was booming. The result of a stock market boom was that the NAV of equity funds were touching dizzy heights. Annualized returns jacked up to astronomical levels. At this stage, some investors, who had invested prior to the market frenzy, withdrew form the peaking market having made a bounty. However, consider the plight of people who got in to the funds at such high levels. Because the markets have since then been engulfed in a turmoil rarely seen, the NAVs have been spiraling downwards for most funds. Under these conditions, some investors, not having the nerves of steel, succumbed to the pressures of depreciating investments and redeemed under losses. What had then appeared to be a necessary correction in the overhead market robbed many such investors of hard-earned money.

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

TERMINOLOGY

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

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

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

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

Debt Market and Mutual Funds: - Banks are the largest player in the debt market. Debt instruments can be classified as:-

Instruments issued by the government like T-Bills and Bonds. Instruments issued by other companies like corporate sector, FI’s Long-term investment e.g. bonds and debentures. Short –term investment e.g. CP’s and CD’s. Secured instruments like secured corporate debenture. Unsecured instruments like bonds Instruments paying periodic interest e.g. coupons, and discounted instruments like zero

coupons.

Wholesale debt market (WDM) segment of the NSE is a nationwide platform for trading indebt market.

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

Portfolio:- A group of investment held by an institution or an individual. The process of choosing which investment goes into a portfolio is known as portfolio management or asset allocation and decision are based on whether the investment objective is income, growth, or a balance of the two.

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

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

SIP: - Systematic Investment Plan. Investing a fixed sum, regularly in a mutual fund. Allows one to buy units in a particular scheme on a given date every month.

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Similar to regular savings schemes like a recurring deposit. Start with an initial investment. Invest a fixed sum every month. Minimum investment – Rs. 1000 per month. Post-dated cheques/standing instructions to the bank. Investments happen on the preset date in the specified scheme every month.

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

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

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

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

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

BIBLIOGRAPHY

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BOOKS:-

Gupta S. L., financial derivatives,Thearty,concepts and problem, prentice hall of India, New Delhi-2005

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

WEBSITES:-

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

MAGAZINES:-

Business world Market talks Security mantras Money wise

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