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 MR.

SUKANTA CHATTERJEE

MENTOR COMPANY GUIDE

INDIAN BUSINESS ACADEMY

TATA-AIG LIFE INSURANCE
TABLE OF CONTENTS:

TOPICS PAGE NUMBER

Introduction 7
Company profile 8,9,10,11
Mission & Vision statements 12,13
TATA-AIG organizational chart 14
SWOT analysis of insurance industry 15
INVESTMENT OPTIONS
FIXED DEPOSITS
List of banks and their fixed deposit rates 19,20
Fixed deposits of Post Offices 20
Company fixed deposits 21
STOCK MARKET
Advantages of shares 24
MUTUAL FUNDS
Benefits of mutual funds 29,30
Mutual fund risks 30
Recent trends in mutual funds 31
Schemes of mutual funds 32
INSURANCE
Advantages 35,36
Products 36,37,38,39,40
Annuities 40
SURVEY REPORT 45,46,47,48
RECOMMENDATION 49
BIBLIOGRAPHY 50

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

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

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

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
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
INTRODUCTION

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.

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:
COMPANY PROFILE

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.

• 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.
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.
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).

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.

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.
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:

• 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
 • 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. Tata-AIG 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.
TATA-AIG organizational chart:
Source: official website
SWOT analysis of insurance industry:
STRENGT
• Premium rates are
increasing and so are
commissions
• The variety of products are
increasing
• Customers expects more
services from their brokers
OPPORTUNITI
ES
• 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
WEAKNES
• 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
THREAT
S
• 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
INVESTMENT OPTIONS
FIXED DEPOSITS:

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:

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.

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 Fixed deposit

rates

ABN AMRO Bank 5-6.75%

Allahabad Bank 5.5-6%

Andhra Bank 5.5-6%

Axis Bank 6.5-7.3%

Bank of Baroda 6-7%

Bank of India 6.75-7%

Barclays Bank 5-5.5%

Canara Bank 7-7.5%

Citi Bank 4.25-4.5%

Corporation Bank 5-5.5%

Dena Bank 6.75-7.5%

Deutsche Bank 3-4.5%

Dhanalakshmi Bank 6.5-8%

Federal Bank 6.5-7.5%

HDFC Bank 5.5-7%

Hongkong Sanghai Banking 8-8.75%

Corp. Ltd.

ICICI Bank 5.25-7.5%

IDBI Bank 7-7.75%

Indian Overseas Bank 6-7.5%

Indusind Bank 7-8.25%

ING Vysya Bank 5.75-7.75%

Jammu and Kashmir Bank 5.5-6%

Karnataka Bank 7-8%

Karur Vysya Bank 7-8.25%

Kotak Mahindra Bank 6-7%

Oriental Bank of Commerce 5.5-6%

Punjab National Bank 5.5-6.5%

SBI 6.25-7%

Standard Chartered Bank 4.5-7.25%

State Bank Of B&J 6.75-7.5%

State Bank of Hyderabad 6.5-7.5%

State Bank of Indore 6.75-7.5%

State Bank of Mysore 6.5-7.25%

State Bank of Travankore 4.25-5.75%

Syndicate Bank 7-7.5%

UCO Bank 6.5-7%

Union Bank of India 5.50%

United Bank Of India 6.5-7.5%

Vijaya Bank 5.5-6%

YES Bank 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.

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.
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,

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 Returns per annum

Stock market 17%

Bank fixed deposits 9%

Gold 5.7%
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 long-
term 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, 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.
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.

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.
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 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.

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 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 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.
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.

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
house-owners 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 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…
• 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.

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 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.

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.
• 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’.
• 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.

Insurance Cover and Monthly Contribution:

The amount of insurance cover and monthly contribution are indicated below;-

Category of Covers (Rs. Risk Flying extra Saving Total subs

members In lacs) element element

Flying
branch
officers

(i) serving 22 330 635 1035 2000

up to 20
years

(ii) serving 22 330 170 1035 1535

above 20
years but
up to 30
years

Flying 22 330 nil 1035 1365

branch
officers with
more than
30 years of
service and
ground duty
officers

Airmen 11 160 nil 540 700

NCs (E) 4.40 64 nil 186 250

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 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.

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:
Survey report:

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).

I had conducted a survey (online) of sample size 54 and got the following results:

Age Investm
ent
Options

Sl No NAME 18- 24-30 30-40 40 fixed stock mut insuran

24 and deposi market ual ce
abov ts fund
e s

1 Gaurav y y y

2 Amit y y Y

3 Biswaji y y Y
t
 4 Bharat y y

5 Mitali y y Y

6 Kaberi y y y

7 Chaitali y y y

8 Divya y y y y

9 Kavya y y Y

10 Amrit y y y

11 Fazal y y y

12 Parv y y Y

13 Sujit y y

14 Anil y y y

15 Udit y y y

16 Siddha y y y
rth

17 Monica y y y y

18 Prajna y y y

19 Ekta y y y

20 Neha y y y

21 Niharik y y
a

22 Praful y y y y y

23 Anil y y

24 Rajesh y y y

25 Nitin y y

26 Sumit y y y
27 Suraj y y y

28 Samee y y y
r

29 Pankaj y y y

30 Atul y y y

31 Achal y y y

32 Heena y y

33 Wesley y y y

34 Ashay y y

35 Pradee y y y y
p

36 Aman y y y

37 Mande y y
ep

38 Sancho y y
y

39 Avi y y y

40 Mayan y y y y
k

41 Shagun y y

42 Vinaya y y y
k

43 Tanu y y y

44 Nandin y y y
i

45 Palash y y y

46 Tamal y y
 47 Rahul y y

48 Prasha y y y
nt

49 Supriy y y y
a

50 Sneha y y y

51 Richa y y

52 Saloni y y y y y

53 Moiz y y y

54 Nitya 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 investment
people options

fixed stock market mutual insuran

deposit funds ce

18-24 14 7 10 7 3

24-30 12 8 6 4 4

30-40 16 3 13 5 6

40 & 12 8 8 5 5
above

total 54 26 37 21 18
So, if we draw a graph of table-2, then we get,

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,

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.

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.

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.

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.

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.
Bibliography:

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