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					SUMMER INTERNSHIP PROJECT REPORT COMPARATIVE ANALYSIS OF INVESTMENT OPTIONS AVAILABLE IN THE MARKET

SUBMITTED TO: INDIAN BUSINESS ACADEMY, BANGALORE
(In the partial fulfillment of the requirements of Post Graduate Programme in Management)

SUBMITTED BY: MR. ASHIM CHANDRA FPB0810/033

UNDER THE GUIDANCE OF:
PROF. ANANTHAMURTHY MENTOR INDIAN BUSINESS ACADEMY MR. SUKANTA CHATTERJEE COMPANY GUIDE TATA-AIG LIFE INSURANCE

TABLE OF CONTENTS:

TOPICS

PAGE NUMBER

Introduction Company profile Mission & Vision statements TATA-AIG organizational chart SWOT analysis of insurance industry INVESTMENT OPTIONS FIXED DEPOSITS List of banks and their fixed deposit rates Fixed deposits of Post Offices Company fixed deposits STOCK MARKET Advantages of shares MUTUAL FUNDS Benefits of mutual funds Mutual fund risks Recent trends in mutual funds Schemes of mutual funds INSURANCE Advantages Products Annuities SURVEY REPORT RECOMMENDATION BIBLIOGRAPHY

7 8,9,10,11 12,13 14 15

19,20 20 21

24

29,30 30 31 32

35,36 36,37,38,39,40 40 45,46,47,48 49 50

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CEO’s certificate

This is to certify that Mr. Ashim Chandra is a bonafide student if Indian Business Academy, Bangalore and is presently pursuing a Post Graduate Program in Management.

Under my guidance, he has submitted his project report titled “comparative analysis of investment options available in the market” in partial fulfillment of the requirement for the summer internship project during the Post Graduate Program in Management.

This report has not been previously submitted as part of any other degree or diploma of another Business School or University.

Mr. Manish Jain CEO, Indian Business Academy

INDIAN BUSINESS ACADEMY Lakshmipura, Thataguni Post Kanakapura Main Road, Bangalore-560062 INDIA Tel:+91-80-28435931/32/33/34

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Dean’s certificate

This is to certify that Mr. Ashim Chandra is a bonafide student if Indian Business Academy, Bangalore and is presently pursuing a Post Graduate Program in Management.

Under my guidance, he has submitted his project report titled “comparative analysis of investment options available in the market” in partial fulfillment of the requirement for the summer internship project during the Post Graduate Program in Management.

This report has not been previously submitted as part of any other degree or diploma of another Business School or University.

Dr. Subhash Sharma Dean, Indian Business Academy

INDIAN BUSINESS ACADEMY Lakshmipura, Thataguni Post Kanakapura Main Road, Bangalore-560062 INDIA Tel:+91-80-28435931/32/33/34

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Mentor’s certificate

This is to certify that Mr. Ashim Chandra is a bonafide student if Indian Business Academy, Bangalore and is presently pursuing a Post Graduate Program in Management.

Under my guidance, he has submitted his project report titled “comparative analysis of investment options available in the market” in partial fulfillment of the requirement for the summer internship project during the Post Graduate Program in Management.

This report has not been previously submitted as part of any other degree or diploma of another Business School or University.

Prof. Ananthmurthy Mentor, Indian Business Academy

INDIAN BUSINESS ACADEMY Lakshmipura, Thataguni Post Kanakapura Main Road, Bangalore-560062 INDIA Tel:+91-80-28435931/32/33/34

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Student declaration

I, Mr. Ashim Chandra, the undersigned, a student of Indian Business Academy, Bangalore, declare that this project report titled “comparative analysis of investment options available in the market” is submitted in partial fulfillment of the requirement for the Summer Internship project during the Post Graduate Program in Management, a prestigious Post Graduate Diploma awarded by Indian Business Academy, Bangalore.

This is my original work and has not been previously submitted as a part of another degree or diploma of another Business School or University.

The findings and conclusions of this report are based on my personal study and experience, during the tenure of my Summer Internship.

Mr. Ashim Chandra PGPM, 2008-10

INDIAN BUSINESS ACADEMY Lakshmipura, Thataguni Post Kanakapura Main Road, Bangalore-560062 INDIA Tel:+91-80-28435931/32/33/34

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ACKNOWLEDGEMENT

It is not enough that we lay the super structure of the building, but the most important part is the base of the building. Similarly, this project would be incomplete without mentioning the real people who have guided, supported, and me realize the corporate culture through which the long cherished dream of implementing a quality program in this esteemed organization could be realized.

First of all, I would like to express my gratitude to my project guide Mr. Sukanta Chatterjee, Assistant Business Development Manager, TATA-AIG Life Insurance Co. Ltd. (Kankurgachi Branch, Kolkata), who supported and guided me throughout the project and gave me all necessary facilities and inputs to make this project a successful one and also made me as energetic and enthusiastic like him.

I would also like to thank Mr. Amit Ganguly, Training Manager, TATA-AIG Life Insurance Co. Ltd. (Kankurgachi Branch, Kolkata), who provided me enough training and skills so that I can go into the market. I also have the foremost duty of thanking Mr. Rajpratim Bose, Branch Manager, TATA-AIG Life Insurance Co. Ltd. (Kankurgachi Branch, Kolkata), who had extended a lot of help in the planning the overall procedure and application for this project.

I would like to thank Mr. Manish Jain, CEO, Indian Business Academy, Bangalore, for providing me the opportunity to have such a good experience of an internship program, Dr. Subhash Sharma, Dean, Indian Business Academy, Bangalore and of course my faculty guide Prof. Ananthmurthy, the guiding source of light in this vast journey of learning experience while doing the project that really made me learn the real application and management principles of the project. His continuous advice has really transformed me into a much mature personality.

And last but not the least, I would like to thank all the staffs of TATA-AIG Life Insurance Co. Ltd. (Kankurgachi Branch, Kolkata), for helping me to complete this project successfully and a very special thanks to Mrs. Ankana Basu, Provisional Business Associate, TATA-AIG Life Insurance Co. Ltd. (Kankurgachi Branch, Kolkata), for giving me some really very special inputs about the Insurance Industry.

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INTRODUCTION

Savings form an important part of the economy of any nation. With savings are invested in many forms of investment options available, the money acts as the driver for growth of the country. Indian financial scene too presents a plethora of avenues to the investors.

We, Indians work hard for our entire life to earn our living. Out of that we save some part in a hope that it will be used for our future to make it happy and reliable. These savings are generally invested with a hope to get good returns from it. So, this invested money earns us profit in a regular course. These profit margins depend upon the different investment options available in the market. Below are mentioned some of the basic and most opted for investment options to suit all financial situations.

Investment options: We can divide investment options in two categories. They are mainly, real investments and financial investments. Real investments include investments made to buy house, car or machinery which are real assets. Financial investments include investing funds in buying some shares, mutual funds or bonds which are financial assets. In a more generalized form there are the below mentioned investment options available.
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PERSONAL INVESTMENTS: These are a type of financial investments wherein we can save our money as savings in a bank and get interest on the invested amount. These are very general form of investments. STOCK MARKET INVESTMENTS: In these form of investments we can invest our money in stocks and earn profits or make losses depending on the stock's performance in the market. It is a complex form of investment wherein we are continuously required to keep an eye on the market performance. REAL ESTATE INVESTMENTS: These are a type of property investments wherein we can invest our money in buying a house or a piece of land. We can use the real estate for personal residential or commercial use or can rent or lease it for commercial or residential purposes. Here we get a good profit margin and at the same time our assets are increased. BUSINESS INVESTMENTS: We can invest our money in our own business instead of investing it with some other source. This is a good method of investing our money and at the same time setting something for ourselves.

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COMPANY PROFILE

There are many companies and advisors to guide people regarding the selection of a particular investment option. They analyze the market situation and refer a suitable investment option for people. People can take their help if they want to reduce their risks and increase their profits. There are even many investment brokers and investment analysts to help people with the process of investment.

About the Tata Group: The Tata Group comprises 98 operating companies in seven business sectors: information systems and communications; engineering; materials; services; energy; consumer products; and chemicals. The Group was founded by Jamsetji Tata in the mid 19th century, a period when India had just set out on the road to gaining independence from British rule. Consequently, Jamsetji Tata and those who followed him aligned business opportunities with the objective of nation building. This approach remains enshrined in the Group's ethos to this day.

The Tata Group is one of India's largest and most respected business conglomerates, with revenues in 2006-07 of $28.8 billion (Rs129,994 crore), the equivalent of about 3.2 per cent of the country's GDP, and a market capitalization of $72.8 billion as on January 10, 2008. Tata companies together employ some 289,500 people. The Group's 27 publicly listed enterprises — among them stand out names such as Tata Steel, Tata Consultancy Services, Tata Motors and Tata Tea — have a combined market capitalization that is the highest among Indian business houses in the private sector, and a shareholder base of over 2.9 million. The Tata Group has operations in more than 85 countries across six continents, and its companies export products and services to 80 countries.

The Tata family of companies shares a set of five core values: integrity, understanding, excellence, unity and responsibility. These values, which have been part of the Group's beliefs and convictions from its earliest days, continue to guide and drive the business decisions of Tata companies. The Group and its enterprises have been steadfast and distinctive in their adherence to business ethics and their commitment to corporate social responsibility. This is a legacy that has earned the Group the trust of many millions of stakeholders in a measure few business houses anywhere in the world can match.

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About American International Group, Inc. (AIG)

American International Group, Inc. (AIG), a world leader in insurance and financial services, is the leading international insurance organization with operations in more than 130 countries and jurisdictions. AIG companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In addition, AIG companies are leading providers of retirement services, financial services and asset management around the world. AIG's common stock is listed on the New York Stock Exchange, as well as the stock exchanges in Paris, Switzerland and Tokyo.

About Tata Aig Life Insurance Company Ltd. Tata AIG Life Insurance Company Limited, which is a joint venture between Tata Group and American International Group, Inc. (AIG), offers a number of standard and custom-made life insurance policies. Tata is one of the oldest and leading business groups of India. Tata Group has had a long association with India's insurance sector being the largest insurance company in India prior to the nationalization. American International Group, Inc (AIG) is the leading U.S. based international insurance and financial services organization.

Tata AIG General Insurance Company Limited (Tata AIG General) is a joint venture company, formed by the Tata Group and American International Group, Inc. (AIG). Tata AIG General combines the Tata Group’s pre-eminent leadership position in India and AIG’s global presence as the world’s leading international insurance and financial services organization. The Tata Group holds 74 per cent stake in the insurance venture with AIG holding the balance 26 percent. Tata AIG General Insurance Company, which started its operations in India on January 22, 2001, offers complete range of general insurance for motor, home, accident & health, travel, energy, marine, property and casualty, liability as well as several specialized financial lines.

According to The Economic Times, Tatas are more reputed than Google, Microsoft (published on 11th May, 2009 in The Economic Times). They are at 11th position in the trust factor, way ahead of Disney (21th), Google (23rd), SBI (29th), Microsoft (30th), INFOSYS (39th), Nokia (45th), L&T (47th), Maruti Suzuki (49th), Hindustan Unilever (70th), & ITC (96th).

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The list is made on the basis of admiration, trust and good feeling that consumers have towards a company. Other Indian companies that are in the list of top 200 are Canara Bank, HPCL, Wipro, Reliance, M&M, and Bharti Airtel, BPCL, Punjab National Bank. The report revealed that corporate trust is higher in the emerging markets, while companies in industrialized markets are trusted less.

Tata-AIG Life Insurance Company is a joint venture between the Tata Group (74% equity stake) and American International Group Inc. (AIG) (26% equity stake). The company offers a broad range of life insurance products to individuals and groups. The products offered to individuals are variations of term life with or without a savings element, e.g., endowment policies and money back policies. Tata-AIG Life has been in operation since April 2001 (incorporated on Aug 23, 2000). While the company itself is relatively new, the Tata group is widely known in Indian households.

The Tata Group is one of the oldest and largest industrial conglomerates in India. Established in 1868, it has interests in engineering, consumer products, chemicals, financial services, hotels, information technology and telecommunications. With over 80 companies, and with revenues close to 1.8% of the country’s GDP, the Tata brand is very well respected across the socioeconomic classes. Most importantly, it manufactures a large variety of goods that are highly visible to low-income households, like consumer goods, trucks and automobiles that bear the Tata logo. Having been around for over a century, the name Tata introduces immediate credibility in its micro insurance operations. Agents selling micro insurance products are able to assure potential clients that such a large conglomerate would have little interest in stealing their miniscule (in relative terms) premiums.

AIG is the one of the world’s largest insurers. Aside from its massive pool of in-house technical capacity, it has experience working on micro insurance in Uganda.7 Although Tata is the largest shareholder in Tata-AIG; AIG manages the company with strategic guidance from AIG’s Hong Kong office. Tata-AIG was among the few private sector insurance players to have a well-known, reputable local brand, but it did not have a strategic banking alliance with domestic banks or branch presence in smaller towns that could enable it to promote micro insurance sales. As a result, its micro insurance strategy had to be developed around other partner organizations to enable the insurer to penetrate rural areas. Rural India comprises of over 650 000 villages with over half of them having a population of less than 500. Even the state relies on NGOs to provide services to remote and poorly connected locations. For Tata-AIG’s rural programme, it was evident that the main partners would need to be NGOs. Fortunately, Tata has the reputation of having contributed to community development over the years. Substantial parts of the group’s profits go into a trust and several social organizations across the country receive grants and assistance from these trusts. The link with Tata helped to create a climate in which many NGOs were favorably disposed towards Tata-AIG.

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Although AIG was forced to find a local partner to get a license to do business in India, the choice of Tata, with its excellent reputation in the development community, made it an invaluable partnership. This was especially significant in India where many multinational corporations have faced significant difficulties in entering the India market.

Tata-AIG embraced micro insurance as an opportunity, rather than purely as a cost of doing business in India. Ian Watts, the CEO, envisioned a need for a separate rural and social strategy and created a separate department, the de facto micro insurance division. The importance of micro insurance is reflected in the organizational chart. The CEO had the foresight to recognize that micro insurance was not simply a matter of selling existing policies cheaply, but required new products and distribution mechanisms. Crucially the CEO approved of the distribution of resources towards micro insurance and the hiring of a specialized micro insurance team. He gave it space to think creatively about how the sustainable promotion and servicing of micro insurance products might work. The CEO has been supportive of the micro insurance programme for a variety of reasons. Most obviously, the insurer is compelled to meet the rural and social sector obligations. That said, many insurers have simply seen the obligations as a cost of doing business in India. They have responded to the obligations by essentially selling only the required quantity of policies, and there are reports that those have been poorly serviced. Tata-AIG could have responded in this way, but instead saw micro insurance as a marketing opportunity. Although micro insurance would not make much profit (if any) initially, it helps get Tata-AIG’s brand name out into the market place. With India’s high growth rate, it is possible that today’s micro insurance policyholder will be tomorrow’s high value client. In particular, research by the National Council of Applied Economic Research has predicted rising levels of overall wealth in both the rural and urban areas of India, The IRDA is very concerned with the promotion of micro insurance. By engaging so positively with micro insurance, Tata-AIG was able to strengthen its relationship with the regulator. Its micro insurance programme has generated considerable publicity for Tata-AIG because it is innovative. Much of the media in India is hostile or at least suspicious of the multinational corporations. The micro insurance activities helped promote a positive image of Tata-AIG.

Core Values: Integrity: We must always conduct our business with fairness, honesty and transparency, so that we can at all times stand public scrutiny. We will never undermine the heritage of trust that comes with the Tata brand. Entrepreneurship: we would encourage innovative ideas for individual and organizational development. This thinking would be fostered, encouraged and recognized for enhancing business. We would take delight in stretching our goals and each of us would have a sense of ownership and responsibility for all our business dealings.

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Agility: We will encourage an organizational culture and structures that has capacity for change. Flexibility and adaptability will be critical to our operations. We will aim for nimble, flexible and customized responses at all times to all our stakeholders. Excellence: All our activities must be driven by a passion for excellence. We must strive, uncompromisingly, to achieve the highest standards in our daily work and in the quality of the goods and services we offer. We would endeavor to achieve 'best in class' status in all our processes and results. Unity: We must work cohesively with our colleagues, customers and partners around the world, leveraging synergies and building strong networks based on collaboration and mutual cooperation.

Mission: To be a competitive value provider in international business for Group companies and all our partners.

Vision: Become a globally networked enterprise seizing opportunities worldwide to generate USD 25 million annual profits by. Vivid Description of Vision:
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Achieved aggressive and profitable growth of our 5 core businesses and initiated new businesses Become a cohesive, integrated and synergized global entity providing horizontal and vertical reach and infrastructure to all our partners worldwide Consistently achieved customer delight by focusing on value adding activities throughout our value chain Achieved best partner status with Group Companies in international business on a sustained basis A strong global supply base for world class goods and services Become a learning and knowledge rich organization acknowledged as thought leaders in international business Institutionalized Tata Business Excellence Model and achieved best in class status Effective and responsive systems and processes that will underpin our business decisions to manage risks Become an exciting organization which attracts and retains best talent worldwide for global competitiveness

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Become a proactive, integral and responsible member of our environment and communities

Resources: Besides company funds, the micro insurance team has been able to harness external funds. In September 2002, DfID put out the bidding process for its Financial Deepening Challenge Fund, a matching grant for which the private sector could bid based on innovative ideas to each the poor. TataAIG bid for an assistance of £89 500 ($168 620) and committed matching funds to the tune of £104 000 ($195 520). The FDCF grant is being used for product development, capacity building, and physical and communication infrastructure like vans and the Internet portal. Profit allocation and distribution: Tata-AIG is private company and all profits generated by the company go to its owners (shareholders). The exception to this is with endowment policies where regulations require that 90% of profits must be returned to policyholders. Partnerships: Tata-AIG has NGO partnerships with over 50 NGOs. Over 40% of its 35 000 social sector policies were sold through the partner-agent model. In this model, the NGO/MFI partner performs the sales and servicing functions, primarily for its current microfinance clients. The two other models, the business associate model and the CRIG model, account for the remaining 60% of the new business and are described in more detail below.

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TATA-AIG organizational chart:

Source: official website

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SWOT analysis of insurance industry:

STRENGTHS    Premium rates are increasing and so are commissions The variety of products are increasing Customers expects more services from their brokers   

WEAKNESS Companies are slow respond to changing needs Increasing trend of financial weakness among the companies More competitors for agencies to compete with banks & internet players

OPPORTUNITIES   Ability to cross sell financial services barely being tapped Technology is improving to that point that paperless transactions are available Client’s increasing need for insurance consultant can open new ways to service the client and generate income 

THREATS Increasing cost and need for insurance might hit a point where a backlash will occur Increasing expenses and lower profit margins can hit smaller agencies and insurance companies

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INVESTMENT OPTIONS

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There are many investment options available for the people in the market, but there are mainly five investment options, which are considered to be as most popular and most effective investment options available in the current market scenario. In general, almost 95-98% people do invest in these, since the Expected Rate of Return is much higher than any other investment options, irrespective of the amount of risk is very high in some of the cases. These investment options are:

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FIXED DEPOSITS:

This investment option is most popular and safest option available in the market. With almost every working people invest in fixed deposits; this investment option leads the chart of four investment options because of its safety and popularity. Though the amount of return is much lesser than the other three options, this option heads the table as it has almost no risk of losing the invested amount. Also, it is the oldest among the other three, so the trust factor of people is very high.

There are mainly three types of fixed deposits available in the market, namely, viz. 1. Fixed deposits offered by Banks 2. Fixed deposits offered by Post Offices 3. Company fixed deposits

Now, we’ll see these three fixed deposit schemes in details.

1. Fixed deposits offered by Banks: Considered as the safest of all options, banks have been the roots of the financial systems in India. Promoted as the means of social development, banks in India have indeed played an important role in not only urban areas, but also in rural upliftment. For an ordinary person though, banks have acted as the safest avenue wherein a person deposits money and earns interest on it. The two main modes of investment in banks, savings accounts and fixed deposits have been effectively used by one and all.

However, today the interest rate structure in the country is headed southwards, keeping in line with global trends. With the banks offering just above in their fixed deposits for one year, the yields have come down substantially in recent times. Add to this, inflammatory pressure in the economy and we have a position where the savings are not earning. The inflation is creeping up almost 8% at times, this means the value of money saved goes down instead of going up. This effectively mars any chance of gaining investments from the banks.

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Banks in India can be categorized into non-scheduled banks and scheduled banks. Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000 branches of Scheduled banks spread across India. During the first phase of financial reforms, there was a nationalization of 14 major banks in 1969. As far as the present scenario is concerned the banking industry is in a transition phase. The Public Sector Banks (PSBs), which are the foundation of the Indian Banking system account for more than 78 per cent of total banking industry assets. On the other hand the Private Sector Banks in India is witnessing immense progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. On the other hand the Public Sector Banks are still facing the problem of unhappy employees. There has been a decrease of 20 percent in the employee strength of the private sector in the wake of the Voluntary Retirement Schemes (VRS).

List of the banks and their fixed deposit rates:

Name of the Banksnnn ABN AMRO Bank Allahabad Bank Andhra Bank Axis Bank Bank of Baroda Bank of India Barclays Bank Canara Bank Citi Bank Corporation Bank Dena Bank Deutsche Bank Dhanalakshmi Bank Federal Bank HDFC Bank Hongkong Sanghai Banking Corp. Ltd. ICICI Bank IDBI Bank Indian Overseas Bank Indusind Bank

Fixed deposit rates 5-6.75% 5.5-6% 5.5-6% 6.5-7.3% 6-7% 6.75-7% 5-5.5% 7-7.5% 4.25-4.5% 5-5.5% 6.75-7.5% 3-4.5% 6.5-8% 6.5-7.5% 5.5-7% 8-8.75% 5.25-7.5% 7-7.75% 6-7.5% 7-8.25% 20

ING Vysya Bank Jammu and Kashmir Bank Karnataka Bank Karur Vysya Bank Kotak Mahindra Bank Oriental Bank of Commerce Punjab National Bank SBI Standard Chartered Bank State Bank Of B&J State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Travankore Syndicate Bank UCO Bank Union Bank of India United Bank Of India Vijaya Bank YES Bank

5.75-7.75% 5.5-6% 7-8% 7-8.25% 6-7% 5.5-6% 5.5-6.5% 6.25-7% 4.5-7.25% 6.75-7.5% 6.5-7.5% 6.75-7.5% 6.5-7.25% 4.25-5.75% 7-7.5% 6.5-7% 5.50% 6.5-7.5% 5.5-6% 7.25-7.75%

Source: various bank’s websites 2. Fixed deposits offered by Post Offices: Just like banks, post offices in India have a wide network. Spread across the nation, they offer financial assistance as well as serving the basic requirements of communication. Among all saving options, Post office schemes have been offering the highest rates. Added to it is the fact that the investments are safe with the department being a Government of India entity. So the two basic and most sought features, those of return safety and quantum of returns were being handsomely taken care of.

Though certainly current market position is not the most efficient systems in terms of service standards and liquidity; these have still managed to attract the attention of small, retail investors. However with the government investing its intention of reducing the interest rates in small savings options, this avenue is expected to lose some of the investors. Public Provident Funds act as options to save for the post retirement period for most people and have been considered good option largely due to the fact that returns were higher than most other options and also helped people gain from tax benefits under various sections. This option too is likely to lose some of its sheen on account of reduction in the rates offered.

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3. Company fixed deposits: Another oft-used route to invest has been the fixed deposit schemes floated by companies. Companies have used fixed deposit schemes as a means of mobilizing funds for their options and have paid interest on them. The safer a company is rated, the lesser the return offered has been the thumb rule. However, there are several potential roadblocks are there. Firstly, of all the danger of financial positions of the company not being understood by the investor lurks. The investors rely on intermediaries who more often than not, don’t reveal the entire truth. Secondly, liquidity is a major problem with the amount being received months after the due dates. Premature redemption is generally not entertained without cuts in the returns offered and though they present a reasonable option to counter interest rate risk (especially when the economy is headed for a low interest regime), the safety of amount has been found lacking. Many cases like the Kuber Group and DCM Group fiascoes have resulted in low confidence in this option.

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STOCK MARKET:

Now let us look at the Indian Stock Market in details. The Indian Stock Market is also the other name for Indian Equity Market or Indian Share Market. The forces of the market depend on the monsoons, global funding flowing into equities in the market and the performance of various companies. The market of equities is transacted on the basis of two major stock indices, National Stock Exchange of India Ltd. (NSE) and The Bombay Stock Exchange (BSE), the trading being carried on in a dematerialized form. The physical stocks are in liquid form and cannot be sold by the investors in any market. The equity indexes are correlated beyond the boundaries of different countries with their exposure to common calamities like monsoon which would affect both India and Bangladesh or trade integration policies and close connection with the foreign investors. From 1995 onwards, both in terms of trade integration and FIIs India has made an advance. Indian Equity Market at present is a lucrative field for the investors and investing in Indian stocks are profitable for not only the long and medium-term investors, but also the position traders, short-term swing traders and also very short term intra-day traders. In terms of market capitalization, there are over 2500 companies in the BSE chart list with the Reliance Industries Limited at the top. The SENSEX today has rose from 1000 levels to 8000 levels providing a profitable business to all those who had been investing in the Indian Equity Market. There are about 22 stock exchanges in India which regulates the market trends of different stocks. Generally the bigger companies are listed with the NSE and the BSE, but there is the OTCEI or the Over the Counter Exchange of India, which lists the medium and small sized companies.

In the Indian market scenario, the large FMCG companies reached the top line with a double-digit growth, with their shares being attractive for investing in the Indian stock market. Such companies like the Tata Tea, Britannia, to name a few, have been providing a bustling business for the Indian share market. Other leading houses offering equally beneficial stocks for investing in Indian Equity Market, of the SENSEX chart are the two-wheeler and three-wheeler maker Bajaj Auto and second largest software exporter Infosys Technologies. Thus, the growing financial capital markets of India being encouraged by domestic and foreign investments is becoming a profitable business more with each day. If all the economic parameters are unchanged Indian Equity Market will be conducive for the growth of private equities and this will lead to an overall improvement in the Indian economy. Now apart from all these, the first question that comes in our mind is, 23

Why do so many people invest in shares? Simply put, you want to invest in order to create wealth. While investing is relatively painless, its rewards are plentiful. To understand why you need to invest, you need to realize that you lose when you just save and do not invest. That is because the value of the rupee decreases every year due to inflation. Historically shares have outperformed all the other investment instruments and given the maximum returns in the long run. In the twenty-five year period of 1980-2005 while the other instruments have barely managed to generate returns at a rate higher than the inflation rate (7.10%), on an average shares have given returns of about 17% in a year and that does not even take into account the dividend income from them. Were we to factor in the dividend income as well, the shares would have given even higher returns during the same period. [Inflation: general rise in prices and wages caused by an increase in the money supply and demand for goods, and resulting in a fall in the value of money. Inflation occurs when most prices rise by some degree across the economy.]

Investment options Stock market Bank fixed deposits Gold

Returns per annum 17% 9% 5.7%

17% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Stock Market

9% 5.70%

Bank Fixed Deposits Returns per annum

Gold

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Advantages of investing in shares: There are lots of advantages of investment in share market. Some of these are: Dividend income: investments in shares are attractive as much for the appreciation in the share prices as for the dividends their companies pay out. Tax advantages: shares appear as the best investment option if you also consider the unbeatable tax benefits that they offer. First, the dividend income is tax-free in the hands of investors. Second, you are required to pay only a 10% short term capital gains tax on the profits made from investments in shares, if you book your profits within a year of making the purchase. Third, you don't need to pay any longterm capital gains tax on the profits if you sell the shares after holding them for a period of one year. The capital gains tax rate is much higher for other investment instruments: a 30% short-term capital gains tax (assuming that you fall in the 30% tax bracket) and a 10% long-term capital gains tax. Easy liquidity: shares can also be made liquid anytime from anywhere (on sharekhan.com you can sell a share at the click of a mouse from anywhere in the world) and the gains can be realized in just two working days. Considering the high returns, the tax advantages and the highly liquid nature, shares are the best investment option to create wealth.

How people earn from the investment in shares? Shares can give us returns in two forms. A. Appreciation in share prices: You buy shares with the belief that their price will increase and that when this happens you will be able to sell off your shares and earn profit. For example, if you bought a share for Rs100 three years ago and it is Rs500 today, then you have earned Rs400 in three years. B. Dividend: when a company makes profits, it can choose to share part of its profits with its shareholders by paying out dividend. This dividend is paid as a percentage of the face value of the share. For example, a company may declare a dividend of 25%. Then if the face value of its share is Rs10 you will get Rs2.50 for every share you own of that company, irrespective of the market price. In itself this might not be much, but over a longer period of time or if you have a lot of shares, you could earn quite a bit from the dividend itself. The best thing about dividends is that they are tax-free in the hands of investors. Dividend yield stocks are known to give returns higher than fixed deposits [dividend yield = (dividend per share / market price of the share) x 100]. What are the expenses during transaction? Every share transaction attracts some tax or the other. Some of the main expenses are as follows. A. Capital gains tax: If you purchase a share and sell it at a price higher than the purchase price and if this sale is within a year of the purchase, then a 10% capital gains tax is levied on the profit that you make. For example, if you bought a share for Rs100 on January 1, 2005 and sold it for Rs150 on July 1, 25

2005, then you have to pay a tax of 10% on the Rs50 profit that you make. If you sell after a year of purchase, there is no tax on the long-term gains. B. Securities transaction tax: Securities transaction tax (STT) is levied by the government on every transaction you do on a stock exchange. You don’t have to pay this separately; it’s collected by your broker. As per the Union Budget 2005 the STT will be 0.10% on delivery-based transactions and 0.02% on intra-day transactions. C. Brokerage: Brokers get a commission on every trade that they do for you. This commission varies from broker to broker; at sharekhan.com the brokerage is 0.5% for delivery-based transactions and 0.10% for intraday transactions. On the brokerage amount you are required to pay a service tax to the government (to be collected by the broker). The brokerage varies depending on the service that the broker provides you. Some brokers, such as Sharekhan, offer its clients regular updates on companies, multiple means to transact and customer service support. D. Depository fees: Since most of the shares exist in a dematerialized form, every time you buy or sell shares the transactions are being noted by your DP. The DPs normally levy a charge which is an annual charge or a charge on each transaction. Risks ---the only disadvantage in investing in shares: There are two types of risk associated with this kind of investment: company specific risk and market risk. Set of risks that deals with a company and its sector are referred to as company specific risk. Examples of company specific risk: bad management, bad marketing strategies, sector disturbances that have an impact on industry etc. External factors (economic, global factors) that affect the market as a whole are referred to as market risk. Examples of market risk: political instability, high inflation, rupee depreciation, rising interest rates, global incidents like wars and disasters that throttle the nation's economy etc.

How company specific risk can be identified? With careful scrutiny and proper homework, it might be easy to identify and be forewarned of the risks a company may be carrying. Specifically check out for the mergers and acquisitions that do not have a real synergy or are a nightmare after reconciliation (A O L - Time Warner, Hewlett Packard-Compaq). Also is suspicious of diversifications that do not really add value to a company's core offering. A third kind of risk would be with the companies that have bet their stakes on a single product offering and are high on debt. Likewise companies that depend on research could be prone to higher risk, if the research doesn't come to fruition. 26

How to identify sector driven risk? If steel prices rise, auto companies get affected. If low cost Chinese products invade the country's market, then local fast moving consumer goods companies might find no takers for their products. The changing nature of the industry itself may lead to dipping stock prices; a print publication may see revenue loss if everyone moves to reading on the Internet. How to predict market risk? It is difficult to predict market risks. The only thing we can say here is that start noticing all the small signs early. If the election results are feared to lead to a fall in the stock market, notice the signals beforehand. Read Sebi's bulletins and track companies whose shares prices are very volatile. How people can minimize their risk and maximize their return? Buy when stocks are falling, sell when these are rising. This works well when you are a long-term investor and there is an extended bear or Bull Run. Don't try to second guess or predict that the market will fall today and rise tomorrow. Even seasoned investors cannot do that! 2. Don't try to guess the market's favorites Your instincts might tell you that pharma or technology stocks are hot due to certain policies or events, but remember millions of investors have already guessed that and bought these stocks. The prices of these stocks would therefore be at a higher level when you buy them. Instead focus on the long term and don't get swayed by short-term events. 3. Aim for the long haul Short-term investing is prone to higher risks. When investing in stocks, aim to get good returns after a period of three to five years at the minimum. Also churn your portfolio periodically and based on the progress that a company makes in a quarter or in six months, decide whether to hold the stock or get out of it. 4. Avoid hot tips You may have overheard some news about a stock or your friend may advise that a particular stock is all geared to move up. Avoid such tips like the plague and your investments will remain safe. 5. Blue-chips are safe bets Blue-chip companies are there because they have done well in the past and have a high market capitalization. It is a likely guess that they will maintain their track record and give you higher returns even in future. Therefore invest in companies that have a good track record. 6. Slow and steady stream of investments Set aside a certain portion of your earnings every month and invest that sum in shares irrespective of the market conditions. This way, over a period of time you can amass a substantial number of shares of the stocks in your portfolio. 27

7. Think portfolio Don't put all your earnings in a single stock. Try to have a diverse portfolio of stocks. This way even if one stock doesn't do well, you are still well protected. Also invest across sectors, since any problem in one sector would affect all stocks in the sector. As a thumb rule, if you have investments of up to Rs50, 000 invest in two to three stocks. For about Rs150, 000 invest in three to five stocks, for around Rs500, 000 have five to seven stocks and around ten stocks for higher amounts. 8. Don’t invest all your savings Always maintain a core set of reserves. You should never touch these reserves for investing, so that even in the worst case you still have some money. Typically these reserves should be your salary of about six months. 9. Be level-headed Invest wisely, don't get swayed by rumors and allow Sharekhan to be your guide at all times. Investment success won't happen overnight, so avoid overreacting to short term market swings.

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Mutual funds:

Mutual Funds are essentially investment vehicles where people with similar investment objective come together to pool their money and then invest accordingly. Each unit of any scheme represents the proportion of pool owned by the unit holder (investor). Mutual Funds in India are financial instruments. These funds are collective investments which gather money from different investors to invest in stocks, short-term money market financial instruments, bonds and other securities and distribute the proceeds as dividends. The Mutual Funds in India are handled by Fund Managers, also referred as the portfolio managers. The Securities Exchange Board of India regulates the Mutual Funds In India. The share value of the Mutual Funds in India is known as net asset value per share (NAV). The NAV is calculated on the total amount of the Mutual Funds in India, by dividing it with the number of shares issued and outstanding shares on daily basis. Mutual funds in India – advantages:
    

The Mutual Funds in India offer flexibility by means of dividend reinvestment, systematic investment plans and systematic withdrawal plans. These funds are available in small units, so they are affordable to the small investors. The fees charged for to the custodial, brokerage and others services are very low in case of Mutual Funds in India. These funds have the option of redeeming or withdrawing money at any point of time. The Mutual Funds in India have low risk as it is managed professionally.

Like most developed and developing countries the mutual fund cult has been catching on in India. The important reasons for this interesting occurrence are:
 

Mutual funds make it easy and less costly for investors to satisfy their need for capital growth, income and/or income preservation. Mutual fund brings the benefits of diversification and money management to the individual investor, providing an opportunity for financial success that was once available only to a select few.

Understanding Mutual funds is easy as it's such a straightforward concept. A mutual fund is a company that pools the money of many investors, its shareholders to invest in a variety of different securities. Investments may be in stocks, bonds, money market securities or some combination of these. For the individual investor, mutual funds propose the benefit of having someone else manage your investments and diversify your money over many different securities that may not be available or affordable to you otherwise. A mutual fund, by its very nature, is diversified -- its assets are invested in 29

many different securities. Beyond that, there are many different types of mutual funds with different objectives and levels of growth potential, furthering your odds to diversify. Benefits of mutual funds: Investing in mutual has various benefits, which makes it an ideal investment avenue.

Professional investment management : One of the primary benefits of mutual funds is that an investor has access to professional management. A good investment manager is certainly worth the fees you will pay. Good mutual fund managers with an excellent research team can do a better job of monitoring the companies they have chosen to invest in than you can, unless you have time to spend on researching the companies you select for your portfolio. That is because Mutual funds hire full-time, high-level investment professionals. Funds can afford to do so as they manage large pools of money. The managers have real-time access to crucial market information and are able to execute trades on the largest and most cost-effective scale. When you buy a mutual fund, the primary asset you are buying is the manager, who will be controlling which assets are chosen to meet the funds' stated investment objectives.

Diversification : A crucial element in investing is asset allocation. It plays a very big part in the success of any portfolio. However, small investors do not have enough money to properly allocate their assets. By pooling your funds with others, you can quickly benefit from greater diversification. Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security. Mutual fund unit-holders can benefit from diversification techniques usually available only to investors wealthy enough to buy significant positions in a wide variety of securities. Low Cost : A mutual fund let's you participate in a diversified portfolio for as little as Rs.5, 000, and sometimes less.

Convenience and Flexibility : Investing in mutual funds has its own convenience. While you own just one security rather than many, you still enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers decide what securities to trade collect the interest payments and see that your dividends on portfolio securities are received and your rights exercised. It also uses the services of a high quality custodian and registrar. Another big advantage is that you can move your funds easily from one fund to another within a mutual fund family.

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Liquidity : In open-ended schemes, you can get your money back promptly at net asset value related prices. Transparency : Regulations for mutual funds have made the industry very transparent. You can track the investments that have been made on your behalf and the specific investments made by the mutual fund scheme to see where your money is going. In addition to this, you get regular information on the value of your investment. Variety : There is no shortage of variety when investing in mutual funds. You can find a mutual fund that matches just about any investing strategy you select. There are funds that focus on blue-chip stocks, technology stocks, bonds or a mix of stocks and bonds. The greatest challenge can be sorting through the variety and picking the best for you.

Mutual fund risks: Having understood the basics of mutual funds the next step is to build a successful investment portfolio. Before you can begin to build a portfolio, one should understand some other elements of mutual fund investing and how they can affect the potential value of your investments over the years. The first thing that has to be kept in mind is that when you invest in mutual funds, there is no guarantee that you will end up with more money when you withdraw your investment than what you started out with. That is the potential of loss is always there. Even so, the opportunity for investment growth that is possible through investments in mutual funds far exceeds that concern for most investors. Here's why. At the cornerstone of investing is the basic principal that the greater the risk you take, the greater the potential reward. Risk then, refers to the volatility -- the up and down activity in the markets and individual issues that occurs constantly over time. This volatility can be caused by a number of factors -interest rate changes, inflation or general economic conditions. It is this variability, uncertainty and potential for loss, that causes investors to worry. We all fear the possibility that a stock we invest in will fall substantially. Different types of mutual funds have different levels of volatility or potential price change, and those with the greater chance of losing value are also the funds that can produce the greater returns for you over time. You might find it helpful to remember that all financial investments will fluctuate. There are very few perfectly safe havens and those simply don't pay enough to beat

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inflation over the long run. Number of available options:  Diversification  Professional Management  Potential of returns  Liquidity

Besides these important features, mutual funds also offer several other key traits. Important among them are: Well Regulated Transparency Flexible, Affordable and a Low Cost affair Structure of the Indian mutual fund industry: The Indian mutual fund industry is dominated by the Unit Trust of India, which has a total corpus of Rs. 700bn collected from more than 20 million investors. The UTI has many schemes in all categories i.e. equity, balanced, income etc with something open ended and some being closed ended. The unit scheme 1964 commonly referred to as US 64, which is a balanced fund, is the biggest scheme with a corpus of about Rs. 200bn. UTI was floated by financial institution and is govern by a special act of parliament. Most of its investors believe that the UTI is government owned and controlled, which, while legally uncorrected, is true for all practical purposes. Recent trends in mutual fund industry: The most important trend in the mutual fund industry is the aggressive expansion of the foreign owned mutual fund companies and the decline of the companies floated by nationalized banks and smaller private sector players. Many nationalized banks got into the mutual fund business in the early nineties and got off to a good start due to the stock market boom prevailing them. These banks did not really understand the mutual fund business and they just viewed it as another kind of banking activity. Few hired specialized staff and generally chose to transfer staff from the parent organizations. The performance of most of the schemes floated by these funds was not good. Some schemes had offered guaranteed returns and their parent organizations had to bail out these AMCs by paying large amounts of money as the difference between the guaranteed and actual returns. The service levels were also very bad. Most of these AMCs have not been to retain staff, float new schemes etc, and it is doubtful whether, barring a few exceptions, they have serious plans of continuing the activity in a major way. The foreign owned companies have deep pockets and have come in here with the expectation of a long haul. They can be credited with introducing many new practices such as new product innovation, sharp Improvement in service standards and disclosure, usage of technology, broker education and support 32

etc. In fact, they have forced the industry to upgrade itself and service levels of organizations like UTI have improved dramatically in the last few years in response to the competition provided by these. Schemes of a Mutual Fund: • The asset management company shall launch no scheme unless the trustees approve such scheme and a copy of the offer document has been filed with the Board. • Every mutual fund shall along with the offer document of each scheme pay filing fees. • The offer document shall contain disclosures which are adequate in order to enable the investors to make informed investment decision including the disclosure on maximum investments proposed to be made by the scheme in the listed securities of the group companies of the sponsor A close-ended scheme shall be fully redeemed at the end of the maturity period. “Unless a majority of the unit holders otherwise decide for its rollover by passing a resolution”. Rules Regarding Advertisements: • The offer document and advertisement materials shall not be misleading or contain any statement or opinion, which are incorrect or false. Investment Objectives and Valuation Policies: • The price at which the units may be subscribed or sold and the price at which such units may at any time be repurchased by the mutual fund shall be made an available to the investors. Restrictions on Investments: • A mutual fund scheme shall not invest more than 15% of its NAV in debt instrument issued by a single issuer, which are rated not below investment grade by a credit rating agency authorized to carry out such activity under the Act. Such investment limit may be extended to 20% of the NAV of the scheme with the prior approval of the Board of Trustees and the Board of Asset Management Company. • A mutual fund scheme shall not invest more than 10% of its NAV in unrated debt instruments issued by a single issuer and the total investment in such instruments shall not exceed 25% of the NAV of the scheme. All such investments shall be made with the prior approval of the Board of Trustees and the Board of Asset Management Company. • No mutual fund under all its schemes should own more than ten percent of any company’s paid up capital carrying voting rights. • Such transfers are done at the prevailing market price for quoted instruments on spot basis. The securities so transferred shall be in conformity with the investment objective of the scheme to which such transfer has been made.

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INSURANCE:

Introduction to insurance: The business of insurance is related to the protection of the economic values of the assets. Every asset has a value. The asset would have been created through the efforts of the owner. The asset is valuable to the owner, because he expects some benefits from it. It is a benefit because it meets some of his needs. But every asset is expected to last for a certain period of time during which it will provide the benefits. After that the benefit may not be available. The owner is aware of this and he can so manage his affairs that by the end of that period or life-time, a substitute made available. Thus he makes sure that the benefit isn’t lost. Here comes the thought of insurance. Purpose and needs of insurance: Assets are insured, because they are likely to be destroyed or made non-functional before the expected life time, through accidental occurrences are called perils. Fire, floods, breakdowns, lightning, and earthquakes such things are called perils. If such perils can cause damage to the assets, we say that the asset is exposed to that risk. Perils are the events. Risks are the consequential losses or damages. The risk only means that there is a possibility of loss or damage. The damage may or may not happen, but the word ‘possibility’ implies uncertainty. Insurance is relevant only if there are uncertainties. If there is no uncertainty about the occurrence of an event, it can’t be insured against. Insurance doesn’t protect the asset. It does not prevent its loss due to the peril. The peril can’t be avoided through the insurance. The risk can sometimes be avoided, through better safety and damage control measures. Insurance only tries to reduce the impact of the risk on the owner of the asset and those who depend on that asset. They are the ones who benefit from the asset and therefore, would lose, when the asset is damaged. Insurance only compensates for the losses-and that too, not fully. Classification of risks: Risks are classified in various ways. One classification is based on the extent of the damage likely to be caused. They are, a) Critical or catastrophic risks: this may lead to the bankruptcy of the owner. b) Important risks: may not spell doom, but may upset family or business finances badly, require a lot of time to recover. c) Unimportant risks: like temporary illness or accidents. 34

d) Financial risks e) Non-financial risks f) Dynamic risks: caused by perils which have national consequence, like inflation, technology etc. g) Static risks: caused by perils which have no consequence on the national economy, like a fire or theft. h) Fundamental risks: that affects large populations. I) Particular risks: affects only specific persons. j) Pure risks k) Speculative risks An example of how insurance works: In a village, there are 4000 houses, each valued at Rs.20000. Every year, on an average, 4 houses get burnt, resulting into a total loss of Rs.80000.if all the 400 owners come together and contribute Rs.200 each, the common fund would be Rs. 80000. This would be enough to pay Rs.20000 to each of the 4 owners whose houses got burnt. Thus the loss of Rs.20000 each of 4 owners is shared by 400 houseowners of the village, bearing Rs.200 each. This works out to 1% of the value of the house, which is the same as the probability of risk (4 out of 400 houses). The business of insurance: Insurance companies are called insurers. The business of insurance is to,    Bring together persons with common insurance interests (sharing the same risks) Collect the share or contribution (called premium) from all of them Pay out compensations (called claims) to those who suffer from the risks.

The premium is determined on the same lines, but with further refinements. In India, insurance business is classified primarily as life and non-life or general. Life insurance includes all risks related to the lives of human beings and general insurance covers the rest. General insurance has 3 classifications viz. fire (dealing with all fire related risks), marine (dealing with all transport related risks and ships) and miscellaneous (dealing with all others like liability, fidelity, motor, crop, etc). Personal accident and sickness insurance, which are related to human beings, is classified as ‘non-life’ in India but is classified as ’life’, in many other countries. What is ‘non-life’ in India is termed ‘property and casualty’ in some other countries. In India, the IRDA has, in 2005, issued regulations enabled micro insurance (broadly meaning insurance for small sums assured, like 5-50 thousands) to be done by both life and general insurers on the basis of mutual tie-ups. A policy may be issued by a life insurer covering both life and non-life risks, but premium

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on account of the non-life business will be passed on to a general insurer and the claim amount collected from the latter. Trustee: The insurer is in the position of a trustee as it is managing the common fund, for and on behalf of the community of policyholders. It has to ensure that nobody is allowed to take undue advantage of the arrangement. That means that the management of the insurance business requires care to prevent entry (into the group) of people whose risks are not of the same kind as well as playing claims on losses that are not accidental. The decision to allow entry is the process of underwriting of risk. Underwriting includes assessing the risk, which means, making an evaluation of how much is the exposure to risk. The premium to be charged depends on this assessment of the risk. Both underwriting and claim settlements have to be done with great care. Reinsurance: Insurance companies are taking risks they have to pay claims as and when they occur. They cannot be sure when the claim will occur and how big the claim may be. This is so because of the very nature of the perils. Insurers normally are financially sound enough to be able to pay claims. But there are limits. An event like the tsunami or hurricane may generate claims amounting of crores of rupees, which may put a very heavy strain on the reserves of the insurer. Insurers protect themselves from such situations, which may be beyond their capacity, by reinsuring the risk with other insurers. If there is a claim, the burden is shared by the primary insurer and the reinsurers. Advantages of life insurance: Life insurance has no competition from any other business. Many people think that life insurance is an investment or a means of saving. This is not the correct view. When a person saves, the amount of fund available at any time is equal to the amount of money set aside in the past, plus interest. This is so in the fixed deposit in a bank, in national savings certificate, in mutual funds or any other savings instruments. If the money is invested in buying shares and stocks, there is the risk of the money being lost in the fluctuations of the stock market. Even if there is no loss, the available money at any time is the amount invested plus appreciation. In life insurance, however, the fund available is not the total of the savings already made (premiums paid), but the amount one wished to have at the end of the savings period (which is next 20/30 years). The final fund is secured from the very beginning. One is paying for it over the years, out of the savings. One has to pay for it only as long as one life or for a lesser period, if so chosen. The assured fund is not affected. There is no other scheme which provides this kind of benefit. Therefore life insurance has no substitute. A comparison with other forms of savings will show that life insurance has the following advantages:  In the event of death, the settlement is easy. The heirs can collect the moneys quicker, because of the facility of nomination and assignment. The facility of nomination is now available for some bank accounts, provident fund etc…

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    

There is a certain amount of compulsion to go through the plan of the savings. In other forms, if one changes the original plan of savings, there is no loss. In insurance, there is a loss. Creditors can’t claim the life insurance moneys. They can be protected against the attachments by courts. There are tax benefits, both in income tax and in capital gains. Marketability and liquidity are better. A life insurance policy is property and can be transferred or mortgaged. Loans can be raised against the policy. It is possible to protect a life insurance policy from being attached by debtors. The beneficiaries’ interest will remain secure.

The following tenets help agents to believe in the benefits of the life insurance. Such faith will enhance their determination to sell and their perseverance.           Life insurance is not only the best possible way for family protection. There is no other way. Insurance is the only way to safeguard against the unpredictable risks of the future. It is unavoidable. The terms of life are hard. The term of insurance is easy. The value of human life is far greater than the value of any property. Only life insurance can preserve it. Life insurance is not surpassed by any other savings or investment instrument, in terms of security, marketability, stability of value or liquidity. Insurance, including life insurance, is essential for the conservation of many businesses, just as it is in the preservation of homes. Life insurance enhances the standards of living. Life insurance helps people live financially solvent lives. Life insurance perpetuates life, life, liberty and the pursuit of happiness. Life insurance is a way of life.

Life insurance products: There are various products available in the market. Life insurance products are usually referred to as ‘plans’ of insurance. These plans have two basic elements. One is the ‘death cover’ providing for the benefit being paid on the death of the insured person within a specific period. The other is the ‘survival benefit’ providing for the benefit being paid on survival of a specific period. Plans of insurance that provide only death cover are called ‘term assurance ’plans. Those that provide only survival benefits are called ‘pure endowment’ plans. All traditional life insurance plans are combinations of these two basic plans. A term assurance plan with an unspecified period is called a ‘whole life policy’ under which the sum assured is paid on death, whenever it may occur.

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In recent times, ‘linked’ policies have become popular. These are very different from the traditional plans of insurance. Some popular plans: The cheapest form of assurance is the term assurance plan. Under this, the SA is payable on the death of the insured during the specified period. If death doesn’t occur, there is no payment from the insurer. The SA may be kept constant throughout the period, or be made to increase or decrease during the period. Term assurances, by themselves, are not very popular, as there is no saving content. Surviving policyholders feel that they got nothing out f the policy. They are useful only when death cover is required and other arrangements are available for survival benefits. Term assurances form part of linked policies. In a whole life plan, the SA becomes payable only on death whenever it may occur. But unlike a term assurance plan, some payment will be made at some time. Although n case of whole life policies, the sum assurance is payable on death, some insurers pay the sum assured, when the life assured completes say, 80 years. In an endowment plan, the sum assured is payable on survival to the end of term on earlier death. A marriage endowment plan has nothing to do with the contingency of the marriage. It only stipulates the date on which the sum assured will be paid, even if the life insured dies early. That date can be chosen to coincide with the age of a son or daughter, for whose marriage the sum assured would come in handy. Similarly, the educational annuity plan is not an annuity. It is an ordinary endowment plan, which states that the sum assured would be paid on installments, commencing from a date, which may be chosen as the likely date when the child may be old enough for higher education. An interesting plan is a term assurance plan for a specified term, at the end of which the premiums paid till date is refunded, but cover continues indefinitely thereafter. To a layman, this looks like a free cover being granted gratis. In effect, the premium is calculated in such a way that the interest accumulated on the premium during the term, is enough to meet the single premium cost of the extended cover. Convertible plans: Convertible plans of assurance are plans, which provide, in its terms and conditions, that it can be changed to another plan after, or within, a certain period after commencement. For example, a convertible term assurance plan can be converted into a whole life policy or an endowment policy, within a period specified in the original plan. The advantage of convertible plan is that, when the right of conversion is exercised, there would be no further underwriting decision to be made. There would be no medical examination at that time. So, even if the insured has an adverse medical condition at that time, the policy of his choice will not be 38

denied to him. Such policies usually taken by persons in the early stages of their careers, who expect their financial conditions to improve soon, but would not like to delay the benefits of insurance till then. With profit and without profit plans: ‘Without profit’ or ‘non-participating’ policies are not entitled to bonuses, which are declared after actuarial valuations. ‘With profit’ or ‘participating’ policies pay a slightly higher premium for the right to participate in the progress of the insurer. Participating policies are popular as the bonuses are expected to be more than the extra premium paid. Participating policies, where the premium is payable for a limited period, will continue to participate even after the premium have ceased. Joint life policies: 2 or more life can be covered under 1 policy. Such policies usually cover married couples or partners. The sum assured paid on the death of any of the insured persons during the term or at the end of the term. Some plans also provide payment of sum assured, on the death of one life and the policy is continued to cover the second life till maturity, without payment of further premium. Children plans: Insurance can be taken on the lives of children, who are minors. The proposal will have to make by a parent or guardian. In these plans, risk on the life of the insured child will begin only when the child attains a specific age. The time gap between the date of commencement of the policy and the commencement of the risk is called the ‘deferment period’. There is no insurance cover during the deferment period. If the child dies during the deferment period, the premiums will be returned. Risk will commence automatically on the deferred date, without any medical examination. The main advantage of these plans is that the premium would be relatively low and cover will be obtained irrespective of the state of health of the child. These policies have conditions whereby the title will automatically pass on to the insured child, on his attaining to the age of majority. This process is called ‘vesting’. The policy anniversary after attaining the age of majority that is the age of 18, or any later date may be chosen will be the ‘vesting date’. After vesting, the policy becomes a contract between the insurer and the insured person. The vesting date cannot be earlier than 18. This is because there cannot be a valid contract with a minor. The deferred date however, can be fixed without such limitation. The vesting date and the deferred date need not be the same.

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Industrial assurance plans: Industrial assurance plans are designed for the workers with low incomes. The policies are issued for small sum assures, with weekly premiums. The arrangements are that the agents will visit the house or place of work of the policy holder to collect the premiums for every week. The administrative costs are high for this. Agents have to remunerate differently because they are expected to visit every policyholder every week, to collect the premium. Salary savings scheme (sss) policies: Sss policies, sometimes also called ‘payroll insurance’, are also intended to cater to the needs of the working classes. The insurer arranges with the employer to deduct the premium from the salary of the worker policyholder and remit the same to the insurer’s office every month. This scheme benefits,   To the policyholder, because the premium is deducted, making premium payment easy and without a default. The insurer, as he is assured of the premium without a default and receives in one remittance the premium of many workers in that establishment. This makes for lesser administrative costs, and therefore, the extras, any for monthly modes are not charged although the collections made monthly. The agent, because the chances of lapses are less and he can be assured of his renewal commission coming regularly.



Because of these benefits, the sss is popular. The amount to be deducted from the salary is worked out by calculating the premium without adding extras for monthly mode. The employer makes deduction on the basis of an authority letter signed by the employee, who is collected with the proposal and is sent to the employer by the insurer, when the policy is accepted. An added advantage of sss is that there is a group pressure to buy life insurance, making the job of an agent slightly easier. The resistance would be less and the relationship with the group can be strong. Riders: A rider is a clause or condition that is added on to a basic policy providing an additional benefit, at the choice of the proposer. For example, a provision that in the event of death of the life assured by accident, the sum assured would be double can be a rider of an endowment policy. This rider can be added on to a policy under any plan. Some of the riders offered by insurers in India are as follows:    Increased death benefit, being twice or even bigger multiple of the survival benefit. Accident benefit allowing double the sum assured if death happens due to the accident. Permanent disability benefits, covering loss of limbs, eyesight, hearing, speech etc.

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 

    

Premium waiver, which would be useful in the case of children’s assurances, if the parent die before vesting date or in the case of permanent disability or sickness. Dreaded disease or critical illness cover, providing additional payments, if the life insured requires medical attention because of specified ailments like cancer, cardiac or cardiovascular surgeries, stroke, kidney failure, major organ transplants, major burns, total blindness caused by illness or accidents etc. Cover to meet major surgical expenses. Guaranteed increase in cover at specified periods or annually. Cover to continue beyond maturity age for same sum assured or higher sum assured. Option to increase cover within specified limits or dates. Option to cover spouse without medical examination.

As per the regulations made by IRDA in April 2002 and amended in October 2002,    The premium in all the riders relating to health or critical illnesses, in the case of term or group products shall not exceed 100% of the premium of the main policy. The premiums on all the riders put together should not exceed 30% of the main policy. The benefits arising under each of the riders shall not exceed the sum assured under the basic product.

Annuities: Annuities are practically same as the pensions. Pensions provide regular periodical payments (usually every month) to employees, who have retired. They are paid as long as the recipient is alive. Sometimes the pension is also paid to the dependents after the pensioner’s death. Annuities are also periodical payments, not necessarily monthly, and are not related to employment. Annuities are also called ‘reverse’ of life insurance. In annuity contracts, a person agrees to pay to the insurer a specified capital sum in return for a promise from the insurer to make a series of payments to him so long as he lives, while in insurance, the insured pays a series of payments in return for a promise of a lump sum on his death. Annuities are paid by insurers in monthly, quarterly, half-yearly or annual installments, as may be preferred by the annuitant. An annuity can be made payable    During the life time of the annuitant, in which case it ceases on his death. This is called a ‘life annuity’ or ‘annuity for life’ During the life time of the annuitant or his spouse, whichever is longer For a fixed number of years like 5, 10, 15, 20 or 25 years and thereafter, as long as the annuitant is alive. This is called an ‘annuity certain’.

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   

For a fixed number of years and thereafter till the death of the annuitant or the annuitant’s spouse As long as the annuitant lives and thereafter, at 50% to the spouse as long as the spouse lives. Annuity for life and return of premium on annuitant’s death On any of the above terms, but with the annuity increasing every year by a fixed rate or amount

The annuity may commence immediately after the contract is concluded. Such annuity is called ‘immediate annuity’. The purchaser of an immediate annuity pays the purchase price in lump sum. The first installment will start at the end of the month, quarter, and half year or at the end of the year as the case may be. The alternative of an immediate annuity is called ‘deferred annuity’. In this case, the annuity payment will start after the lapse of a specified period, called the deferment period. The purchase price can be paid as a single premium at the commencement or may be paid in installments during the deferment period. The annuity will commence at the end of the deferment period, which is called the vesting date. The amount due on that date can be used to buy annuities at the rate prevalent on that date, from the same or another insurer. The annuitant may have the option to receive as a lump sum, a certain portion of the amount due on that date and use only the balance for the purchase of annuity. This is called commutation. The lump sum is called the commuted value. Group insurance: Group insurance is a plan of insurance, which provide cover to large number of individuals under a single policy called the ‘master policy’. Salient Features: 1. GIS-05 provides a life insurance cover as given in table below to Officers, Airmen and NCs(E) respectively. Disability insurance cover would be half of life cover for 100% disability and reduces proportionately up to 20%. 2. With the increased cover, the amount of monthly contribution has also been increased correspondingly. Thus Officers/Airmen/NCs (E) pay a basic contribution of Rs. 1365/-, Rs. 700/- and Rs. 250/- per month respectively. Additional Contribution will be recovered from aircrew as “Flying Extra”. 3. The Survival Benefit under GIS-05 will consists of Saving Element and Interest. 4. The facility of final withdrawal from Survival Benefit to meet any financial commitment before their retirement is available provided the individual is a member of GIS-05 Scheme.

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Insurance Cover and Monthly Contribution: The amount of insurance cover and monthly contribution are indicated below;Category of members Flying branch officers (i) serving up to 20 years (ii) serving above 20 years but up to 30 years Flying branch officers with more than 30 years of service and ground duty officers Airmen NCs (E) Covers (Rs. In lacs) Risk element Flying extra Saving element Total subs

22 22

330 330

635 170

1035 1035

2000 1535

22

330

nil

1035

1365

11 4.40

160 64

nil nil

540 186

700 250

Recovery of Contribution: The scheme will be effective from 01 Nov 2005. Contribution for the first month will be recovered through IRLA from the pay and allowances for the month of Oct 2005. Death Benefit: Death benefit includes the cover assured and accumulated balance of Saving Element of contribution up to the month of death together with interest and bonus as applicable. Disability Benefit: Member who is invalidated out of Indian Air Force by an Invalidating Medical Board (NOT the Released Medical Board held at the time of retirement/release) on account of a disability, whether attributable to service or not, will be eligible for disability benefit at half the life insurance cover for 100% disability. The disability benefit will be reduced proportionately depending upon the percentage of disability. In case of disability of less than 20%, a member will not be eligible for any disability benefit. Disability benefit is in 43

addition to accumulated balance of saving element, together with interest and bonus, payable on invalidment from service. Members invalidated out of Indian Air Force due to reasons mentioned below will not be entitled to any disability benefit, irrespective of percentage of their disability:(a) Alcoholism (b) Drug addiction (c) Self inflicted injuries. (d) Disability as a result of attempted suicide. (e) Any disability arising out of intentional acts resulting in criminal conviction. (f) Invalidment within one year of enrolment due to disability, which is not attributable to service. No disability benefit is admissible, if the individual with disability is retained in service till their completion of term of engagement, dismissal, superannuation, release on own request or is released from service on his refusal to accept a change in Branch/ Trade. Survival Benefit: Survival Benefit constitutes the saving element of contribution and the interest earned on it as per the rates declared by the Society every year. The rate declared at the beginning of each year will be as approved by BoT of AFGIS based on the likely interest earnings of the Society for the year and its requisite allocation. The scheme does not cater for the concept of refund of contribution or the saving element along with interest whichever is higher as survival benefit. Survival Benefit accumulated under the earlier schemes will be retained by the Society till such time the same is repayable to the members on account of his death/ retirement/ release. The Survival Benefit (excluding Bonus) accumulated under the old schemes will continue to earn interest as applicable to GIS-05. Bonus: after requisite allocation to various funds and payment of the interest on saving element as declared at the beginning of the year, if the society generates excess income by way of interest earnings during the year the same will be distributed to members as Bonus for the year. The quantum of such surplus available will decide the quantum/rate of bonus to be paid to the members. The bonus will be admissible to all those who were members of the scheme on the last day of year. Bonus does not earn any interest since the effort of the society will be to maximize interest on Saving Element. Separate letter will be issued by AFGIS as and when bonus for a year is approved by Board of Trustees. Withdrawals from Survival Benefit: GIS-05 Scheme provides the facility of periodical withdrawal of accumulated Survival Benefit (including the old schemes but excluding FPLI and Bonus) by members, without assigning any reason. 44

Only members of GIS-05 scheme are eligible for withdrawal facility. Any final withdrawal from Survival Benefit restricts your quantum of loan from AFGIS. Individuals applying for Final Withdrawal should not have any AFGIS loan outstanding. Re-employed Personnel: Re-employed personnel who are member of GIS-97 Scheme shall automatically be made members of the GIS-05 Scheme. Personnel who are reemployed after introduction of the scheme will have the option to become member, in which case, they will have to refund the survival Benefit element paid to them at the time of release from regular employment along with the contribution due for the period from the date of retirement / cessation of reemployment to the date of re-employment. Nomination: In the event of death of a member, the death benefit will be payable to the beneficiaries nominated by the member for his/ her Provident Fund. In the absence of valid nomination, the beneficiaries would be wife, minor children and major unmarried daughters. 50% of the share will be paid to the wife and the balance will be shared equally between minor children and major unmarried daughters. In the case wife has pre-deceased, the amount will be equally shared by minor children and major unmarried daughters. In case of minor children the amount will be payable to the guardian appointed by the court. In the absence of such family members, the beneficiaries would be father and mother in that order. In all other cases a Succession Certificate from a court of competent jurisdiction would be required to determine the beneficiary. Nomination by Exception: Members who avail House Building Advance from specified Financial Institutions may execute nomination (AFGIS 225) up to 100% of death/ disability/ survival benefit in favor of the organization advancing the loan. A member can also nominate any person other than beneficiaries nominated in DSOP/AFPP Fund by executing AFGIS 223 up to 100% of death benefits. Prescribed beneficiaries who can be nominated are:(a) Male Members: Wife, Parent(s), children, minor brother(s), Unmarried sister(s), deceased son’s widow and children, paternal grandparent (when no parent of member is alive).

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Survey report:

I had conducted a survey (online) of sample size 54 and got the following results: Age Sl No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 NAME Gaurav Amit Biswajit Bharat Mitali Kaberi Chaitali Divya Kavya Amrit Fazal Parv Sujit Anil Udit Siddharth Monica Prajna Ekta Neha Niharika Praful Anil Rajesh Nitin Sumit Suraj Sameer Pankaj Atul Achal 18-24 y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y 46 y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y Y y Y 24-30 30-40 40 and above fixed deposits y Investment Options stock market y y y

mutua insurance l funds Y Y y Y

y y

y y

y y

y

32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54

Heena Wesley Ashay Pradeep Aman Mandeep Sanchoy Avi Mayank Shagun Vinayak Tanu Nandini Palash Tamal Rahul Prashant Supriya Sneha Richa Saloni Moiz Nitya

y y y y y y y y y y y y y y y y y y y y y y y

y y y y y y y y y y y y y y y y y y y y y y y y y y y y y y

y y y y y y y y y

y y y

So, after decorating the above data age wise and choice of investment option wise, we get the following table: age no of people fixed deposit 18-24 24-30 30-40 40 & above total 14 12 16 12 54 7 8 3 8 26 investment options stock market

mutual funds 10 6 13 8 37 7 4 5 5 21

insurance

3 4 6 5 18

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So, if we draw a graph of table-2, then we get,
most prefered investment option

40 35 number of people 30 25 20 15 10 5 0 fixed deposit stock market mutual funds insurance investment options

Therefore, we can easily see from the chart that majority of people like to invest in the stock market, even though market situation is not so good and there is so much risk available.

Now, if we see what % of people like to invest in which investment option in the following pie chat, then,

% of people's preference

insurance 18% mutual funds 21%

fixed deposit 25%

stock market 36%

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So, we can see from the above pie chart that 36% people like to invest in the stock market, irrespective of the volatility of the market. Then comes fixed deposit with 25% people likes to play safe, as it is the safest option available in the market. Now, let us see which age group is more prone to play safe, which is, like to invest in fixed deposits.
investment in fixed deposit

7 6 number of people 5 4 3 2 1 0 18-24 24-30 age group 30-40 40 above

Therefore, we can see from the above chart that people of age group 24-30 and above 40 years don’t like to take much risk may be because these are the settlement periods of their life. Now, let us see which age group likes to take the highest possible risk in the following chart.
investment in stock mrket

6 number of people 5 4 3 2 1 0 18-24 24-30 age group 30-40 40 above

49

So, we can see from the above chart that people of age group 30-40 likes to take more risk, as they became more financially stable by that age and have fewer responsibilities. Now, we will see that which age group likes to take moderate risk in the following chart.
investment in mutual funds

40 above age group 30-40 24-30 18-24 0 1 2 3 number of people 4 5 6

So, we can see that people of age group 18-24 like to invest in mutual fund, as it has moderate risk. Lastly, in the following chart, we will see that which age group likes to take very less risk and wants higher return in the long term.
investment in insurance

7 6 number of people 5 4 3 2 1 0 18-24 24-30 age group 30-40 40 above

50

So, we can see from the above chart that people of age group 30-40 more likely to invest in insurance, as by that time they think about the future and long term return.

Conclusions & Recommendations: Therefore from the survey, whatever I got, here is the gist of all of them:    People are more inclined to invest in the stock market, irrespective of the market scenario and the level of risk. Majority of the people wants higher return in short period of time that is why they prefer to invest in stock markets and mutual funds rather than any other form of investments. People between ages 30-40 think about long term returns as well as higher return in short period of time that is why they invest in stock market for short period of time and in insurance for long term return. People between ages 18-24 don’t have much money to invest and they can’t take higher risk, so they invest in mutual funds which are of moderate risk. People between ages 24-30 wants to be financially stable that is why they don’t like to take risk at all. So, they invest in the bank’s fixed deposit scheme which has almost no risk and lower return.

 

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Bibliography:        www.tata-aig-life.com www.moneycontrol.com www.investsmartindia.com www.insurancejournal.com www.irdaindia.org IRDA book Various bank’s websites

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