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Ohio University Christ College Academy For Management Education, Bangalore
KOTAK MAHINDRA OLD MUTUAL LIFE INSURANCE LTD.
Internship Report
Mehnaz QureshiPID NO. P001066435
In Partial fulfillment of the Masters Program in Business Administration, Ohio University, Athens, USA
OHIO University Christ College Academy For Management EducationChrist College Campus,
Hosur Road, Bangalore-29
MARCH 2007
Ohio University Christ College Academy For Management Education, Bangalore
DECLARATION
I Mehnaz Qureshi, studying in Ohio University Christ College Academy For Management
Education Bangalore, do hereby declare that this project titled How does the Indian
mutual fund industry compare vis a vis global standards and what should be our
future expectations from it ?, has been prepared by me, under the guidance of Dr.
Amalendu Jyotishi, Assistant Director (Special Projects) and Mr. Mayur Ankolekar,
Regional Manager South Zone. This is after undergoing the training in Kotak Mahindra
Old Mutual Life Insurance Ltd., which is in partial fulfillment of Masters Program in
Business Administration, Ohio University, Athens, USA.
I further declare that this project report has not been submitted earlier to any other
University or Institute for the award of any degree or diploma.
Date: Mehnaz Qureshi
Place:
Ohio University Christ College Academy For Management Education, Bangalore
Acknowledgement
The satisfaction and euphoria that accompany the successful completion of any task
would be incomplete without mentioning the people who made it possible, whose
consistent guidance and encouragement crowned the efforts with success.
I would consider it my privilege to express my gratitude and respect to Mr. Mayur
Ankolekar and Mr. Thakur Bhaskar for having accorded me the opportunity to learn in
their organization.
I cannot forget the contribution of the staff of Kotak Mahindra Old Mutual Life Insurance
Ltd., as I troubled them through my queries at every stage of their work and I really
appreciate the patience with which they resolved my doubts amidst their busy schedule,
I express my sincere thanks to all of them.
I would also like to thank my director Prof Shivprakash, Ohio University Christ College
For Management Education for his motivation and guidance, which were pivotal in
completion of the project.
I would express my thanks and gratitude to my project guides Dr. Amalendu Jyotishi
and Prof Girish M for their able guidance and support throughout the tenure of the
project.
Ohio University Christ College Academy For Management Education, Bangalore
Executive Summary
The Indian Life Insurance Company has seen a remarkable shift since the time of
establishment of the first company, Oriental Life Insurance Company in 1823. At the
time of Independence and thereafter, there were more than 200 companies operating in
India and not all of them on sound ethical principles. Many factors combined together to
prompt the then Government to nationalize the life insurance industry in 1956 to form
the Life Insurance Corporation of India.
Insurance sector was once a monopoly, with LIC as the only company, a public sector
enterprise. But nowadays the market opened up and there are many private players
competing in the market. There are thirteen private life insurance companies who has
entered the industry.
The study in the first part gives detail information on the on-job training provided, the
competitive analysis of product of Kotak Mahindra Old Mutual Life Insurance Ltd. with
ICICI Prudential Life Insurance. Also, analysis of financial statements.
In the second part, is a project on How does the Indian mutual fund industry compare
vis a vis global standards and what should be our future expectations from it ?
The paper begins by analyzing the current scenario in the industry characterized by
problems with distribution, low investor awareness and concentration of corporate
investors. In the next section, a comparison of the Mutual Fund Industry with global
standards reveals that the industry still compares unfavorably with developed countries
in terms of penetration, investor awareness and diversity of products and the extent of
use of risk management techniques. Further comparison reveals that the attitude of
regulator towards investor protection and the governance of mutual funds are at par
with global standards. The paper then analysis the future expectations from the mutual
fund industry in terms of increased investor awareness, product diversity and
improvement in penetration and distribution. In the end I recommend certain steps that
SEBI and AMCs should take in order to build investor confidence and trust.
Ohio University Christ College Academy For Management Education, Bangalore
TABLE OF CONTENTS
Chapter 1. Objective of Study
Chapter 2. Industry ProfileHistory of InsuranceWhat is Life Insurance ?Mutual FundsEquitiesDerivatives
Chapter 3. Company ProfileHistory of Kotak Mahindra Old Mutual Life InsuranceJourney so farAbout Old Mutual Plc.Organization Structure
Chapter 4. Products Major CompetitorsCompetitive AnalysisOn Job TrainingSWOT Analysis
Chapter 5. Financials
Chapter 6. Project : How does the Indian mutual fund industry compare vis a vis global standards and what should be our future expectations from it?
Conclusion
References
Ohio University Christ College Academy For Management Education, Bangalore
Objective of Study
Title of the study
"How does the Indian mutual fund industry compare vis-a vis global standards and what
should be our future expectations from it?".
Objective
- Analyzing the current scenario in the industry characterized by problems with
distribution, low investor awareness and concentration of corporate investors.
-Comparison of MF industry with global standards in terms of penetration, investor
awareness, diversity of products, extent of use of risk management techniques.
- Attitude of regulator towards investor protection and governance of MF.
- Future expectations from MF industry in terms of increased investor awareness,
product diversity and improvement in penetration & distribution.
- Recommendations.
Ohio University Christ College Academy For Management Education, Bangalore
Industry Profile
The insurance industry has faced many challenges over the last decade including:
Globalization is pushing companies to operate in different continents forcing them to
enter into new partnerships in order to improve efficiencies
Competition between the various players has resulted in increased merger and
acquisition activities driving industry convergence and value chain decomposition
The customer is more knowledgeable and demanding than ever before and this is
forcing companies to perform process integration, operational restructuring and
technology upgrades
Insurance companies are moving beyond their traditional business models and are
searching for the right combination of technology and processes to remain profitable.
Companies are investing more in information technology in order to alter their business
models and processes.
History of insurance
In some sense we can say that insurance appears simultaneously with appearance of
human society. We know of two types of economies in human societies: money
economies (with markets, money, financial instruments and so on) and non-money or
natural economies (without money, markets, financial instruments and so on). The
second type is a more ancient form than the first. In such an economy and community,
we can see insurance in the form of people helping each other. For example, if a house
burns down, the members of the community help build a new one. Should the same
thing happen to one's neighbour, the other neighbours must help. Otherwise,
neighbours will not receive help in the future. This type of insurance has survived to the
present day in some countries where modern money economy with its financial
Ohio University Christ College Academy For Management Education, Bangalore
instruments is not widespread (for example countries in the territory of the former
Soviet Union).
Turning to insurance in the modern sense (i.e., insurance in a modern money economy,
in which insurance is part of the financial sphere), early methods of transferring or
distributing risk were practiced by Chinese and Babylonian traders as long ago as the
3rd and 2nd millennia BCE, respectively. Chinese merchants traveling treacherous river
rapids would redistribute their wares across many vessels to limit the loss due to any
single vessel's capsizing. The Babylonians developed a system which was recorded in
the famous Code of Hammurabi, c. 1750 BCE, and practiced by early Mediterranean
sailing merchants. If a merchant received a loan to fund his shipment, he would pay the
lender an additional sum in exchange for the lender's guarantee to cancel the loan
should the shipment be stolen.
Achaemenian monarchs were the first to insure their people and made it official by
registering the insuring process in governmental notary offices. The insurance tradition
was performed each year in Norouz (beginning of the Iranian New Year); the heads of
different ethnic groups as well as others willing to take part, presented gifts to the
monarch. The most important gift was presented during a special ceremony. When a gift
was worth more than 10,000 Derrik (Achaemenian gold coin weighing 8.35-8.42) the
issue was registered in a special office. This was advantageous to those who presented
such special gifts. For others, the presents were fairly assessed by the confidants of the
court. Then the assessment was registered in special offices.
The purpose of registering was that whenever the person who presented the gift
registered by the court was in trouble, the monarch and the court would help him.
Jahez, a historian and writer, writes in one of his books on ancient Iran: "Whenever the
owner of the present is in trouble or wants to construct a building, set up a feast, have
his children married, etc. the one in charge of this in the court would check the
registration. If the registered amount exceeded 10,000 Derrik, he or she would receive
an amount of twice as much."
Ohio University Christ College Academy For Management Education, Bangalore
A thousand years later, the inhabitants of Rhodes invented the concept of the 'general
average'. Merchants whose goods were being shipped together would pay a
proportionally divided premium which would be used to reimburse any merchant whose
goods were jettisoned during storm or sinkage.
The Greeks and Romans introduced the origins of health and life insurance c. 600 AD
when they organized guilds called "benevolent societies" which cared for the families
and paid funeral expenses of members upon death. Guilds in the Middle Ages served a
similar purpose. The Talmud deals with several aspects of insuring goods. Before
insurance was established in the late 17th century, "friendly societies" existed in
England, in which people donated amounts of money to a general sum that could be
used for emergencies.
Separate insurance contracts (i.e., insurance policies not bundled with loans or other
kinds of contracts) were invented in Genoa in the 14th century, as were insurance pools
backed by pledges of landed estates. These new insurance contracts allowed insurance
to be separated from investment, a separation of roles that first proved useful in marine
insurance. Insurance became far more sophisticated in post-Renaissance Europe, and
specialized varieties developed.
Toward the end of the seventeenth century, London's growing importance as a center
for trade increased demand for marine insurance. In the late 1680s, Mr. Edward Lloyd
opened a coffee house that became a popular haunt of ship owners, merchants, and
ships captains, and thereby a reliable source of the latest shipping news. It became the
meeting place for parties wishing to insure cargoes and ships, and those willing to
underwrite such ventures. Today, Lloyd's of London remains the leading market (note
that it is not an insurance company) for marine and other specialist types of insurance,
but it works rather differently than the more familiar kinds of insurance.
Insurance as we know it today can be traced to the Great Fire of London, which in 1666
devoured 13,200 houses. In the aftermath of this disaster, Nicholas Barbon opened an
Ohio University Christ College Academy For Management Education, Bangalore
office to insure buildings. In 1680, he established England's first fire insurance company,
"The Fire Office," to insure brick and frame homes.
The first insurance company in the United States underwrote fire insurance and was
formed in Charles Town (modern-day Charleston), South Carolina, in 1732.
Benjamin Franklin helped to popularize and make standard the practice of insurance,
particularly against fire in the form of perpetual insurance. In 1752, he founded the
Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. Franklin's
company was the first to make contributions toward fire prevention. Not only did his
company warn against certain fire hazards, it refused to insure certain buildings where
the risk of fire was too great, such as all wooden houses.
In the United States, regulation of the insurance industry is highly Balkanized, with
primary responsibility assumed by individual state insurance departments. Whereas
insurance markets have become centralized nationally and internationally, state
insurance commissioners operate individually, though at times in concert through a
national insurance commissioners' organization. In recent years, some have called for a
dual state and federal regulatory system for insurance similar to that which oversees
state banks and national banks.
In the state of New York, which has unique laws in keeping with its stature as a global
business center, Attorney General Eliot Spitzer has been in a unique position to grapple
with major national insurance brokerages. Spitzer alleged that Marsh & McLennan
steered business to insurance carriers based on the amount of contingent commissions
that could be extracted from carriers, rather than basing decisions on whether carriers
had the best deals for clients. Several of the largest commercial insurance brokerages
have since stopped accepting contingent commissions and have adopted new business
models.
Ohio University Christ College Academy For Management Education, Bangalore
Life Insurance
What is Life Insurance ?
A human being is an income generating asset. Ones manual labour, professional skills
and business acumen are the assets. This asset also can be lost through unexpectedly
early death or through sickness and disabilities caused by accidents. Accidents may or
may not happen. Death will happen, but the timing is uncertain. If it happens around
the time of ones retirement, when it could be expected that the income will normally
cease, the person concerned could have made some other arrangements to meet the
continuing needs. But if it happens much earlier when the alternate arrangements are
not in place, there can be losses to the person and dependents. Insurance is necessary
to help those dependent on the income.
A person, who may have made arrangements for his needs after his retirement, also
would need insurance. This is because the arrangements would have been made on the
basis of some expectations like, likely to live for another 15 years, or that children will
look after him. If any of these expectations do not become true, the original
arrangement would become inadequate and there could be difficulties. Living too long
can be as much a problem as dying too young. Both are risks, which need to be
safeguarded against. Insurance takes care.
Basic Principles of Life Insurance :
a) Insurable Interest : Ordinarily, the proposer of a life insurance contract should have
an insurable interest in the life of the life insured. The law of life insurance on insurable
interest in India is in a state of chaos. Though the roots of the doctrine of insurable
interest lie in the English law but at the same time, various developments taking place
in other parts of the world also have to be looked into and the changing social
conditions have to be taken into account to redefine the doctrine of insurable interest.
Ohio University Christ College Academy For Management Education, Bangalore
Based on these excerpts, it is clear that insurable interest depends upon the facts of
each case no clear legal framework exists to define insurable interest. Whether a
relationship as proposer life assured creates an insurable interest has to be seen
viewed whether this familial affection will provide adequate social and legal safeguards
against premeditated homicide by the proposer to procure substantial life insurance
proceeds. That is, no moral hazard should exist when a life insurance contract is
intended to be purchased.
Examples of relationships where insurable interest exist between proposer and life
assured are : self proposing on his / her life, parent child, husband wife. Trust
trustee, employer employee and creditor debtor.
b). Utmost Good Faith : A life insured knows about the state of his / her health better
than anyone else. What may not be unraveled in a medical examination may well be in
the know of the life insured. Hence, life insurance contracts are postulated on the belief
that the life insured will reveal all the relevant particulars in utmost good faith when
applying for an insurance contract. That is, non disclosure of material facts that may
have guided the insurer to decline or offer on different terms an insurance contract, will
give the right to an insurer to repudiate an insurance claim when the insured event
occurs.
Parties to a Life Insurance Contract :
a) Proposer : The proposer, also known as the premium payer or the policyholder, pays
the premium. For determining whether future premiums can be paid to keep the
contract alive, ability of the proposer is considered. All tax benefits as well as maturity
proceeds are available to the proposer.
b) Life Assured : The life assured, as known as the life insured, is the person on whose
life the policy is taken. Mortality or risk premium is charged based on the age of the life
assured. As stated above, an insurable interest should exist between the proposer and
life assured.
Ohio University Christ College Academy For Management Education, Bangalore
c) Nominee : Where the proposer and life assured are the same persons, it is mandatory
to nominate a person to receive the benefits of the insurance policy in the event the
proposer deceased before the policy matures. A nominee has to be a real person, i.e.
artificial bodies like company and trust cant become nominee.
d) Appointee : If the nominee is a minor, an appointee is required to act on behalf of
the nominee till he / she attains majority.
e) Assignee : An insurance policy can be assigned to another person (real persons and
artificial bodies are acceptable as assignees) who then becomes the owner of the policy
and is entitled to receive policy benefits. As a result of an assignment, an assignee
supersedes the policyholder who has assigned the policy.
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 a correct view. When a
person saves, the amount of funds available at any time is equal to the amount of
money set aside in the past, plus interest. This is so in a fixed deposit in the bank, in
national savings certificates, in mutual funds and all 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 funs
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 the next 20 or 30 years).
The final fund is secured from the very beginning. One is paying for it later, out of the
savings. One has to pay for it only as long as one lives or for a lesser period if so
chosen. There is no other scheme which provides this kind of benefit. Therefore life
insurance has no substitute.
Ohio University Christ College Academy For Management Education, Bangalore
Even so, 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.
There is a certain amount of compulsion to go though the plans of savings. In other forms, if one changes the original plan of savings, these is no loss. In
insurance, there is a loss.
Creditors cannot claim the life insurance moneys. They can be protected against 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.
Ohio University Christ College Academy For Management Education, Bangalore
Mutual Funds
Introduction
Different investment avenues are available to investors. Mutual funds also offer good
investment opportunities to the investors. Like all investments, they also carry certain
risks. The investors should compare the risks and expected yields after adjustment of
tax on various instruments while taking investment decisions. The investors may seek
advice from experts and consultants including agents and distributors of mutual funds
schemes while making investment decisions.
What is a Mutual Fund?
Mutual fund is a mechanism for pooling the resources by issuing units to the investors
and investing funds in securities in accordance with objectives as disclosed in offer
document.
Investments in securities are spread across a wide cross-section of industries and
sectors and thus the risk is reduced. Diversification reduces the risk because all stocks
may not move in the same direction in the same proportion at the same time. Mutual
fund issues units to the investors in accordance with quantum of money invested by
them. Investors of mutual funds are known as unit holders.
The profits or losses are shared by the investors in proportion to their investments. The
mutual funds normally come out with a number of schemes with different investment
objectives which are launched from time to time. A mutual fund is required to be
registered with Securities and Exchange Board of India (SEBI) which regulates securities
markets before it can collect funds from the public.
Ohio University Christ College Academy For Management Education, Bangalore
What is the history of Mutual Funds in India and role of SEBI in mutual funds
industry?
Unit Trust of India was the first mutual fund set up in India in the year 1963. In early
1990s, Government allowed public sector banks and institutions to set up mutual funds.
In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The
objectives of SEBI are to protect the interest of investors in securities and to promote
the development of and to regulate the securities market.
As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual
funds to protect the interest of the investors. SEBI notified regulations for the mutual
funds in 1993. Thereafter, mutual funds sponsored by private sector entities were
allowed to enter the capital market. The regulations were fully revised in 1996 and have
been amended thereafter from time to time. SEBI has also issued guidelines to the
mutual funds from time to time to protect the interests of investors.
All mutual funds whether promoted by public sector or private sector entities including
those promoted by foreign entities are governed by the same set of Regulations. There
is no distinction in regulatory requirements for these mutual funds and all are subject to
monitoring and inspections by SEBI. The risks associated with the schemes launched by
the mutual funds sponsored by these entities are of similar type.
Ohio University Christ College Academy For Management Education, Bangalore
ORGANISATION OF A MUTUAL FUND
There are many entities involved and the diagram below illustrates the organizational
set up of a mutual fund:
ADVANTAGES OF MUTUAL FUNDS
The advantages of investing in a Mutual Fund are:
Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulated
Ohio University Christ College Academy For Management Education, Bangalore
How is a mutual fund set up?
A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset
management company (AMC) and custodian. The trust is established by a sponsor or
more than one sponsor who is like promoter of a company. The trustees of the mutual
fund hold its property for the benefit of the unit holders. Asset Management Company
(AMC) approved by SEBI manages the funds by making investments in various types of
securities. Custodian, who is registered with SEBI, holds the securities of various
schemes of the fund in its custody. The trustees are vested with the general power of
superintendence and direction over AMC. They monitor the performance and compliance
of SEBI Regulations by the mutual fund.
SEBI Regulations require that at least two thirds of the directors of trustee company or
board of trustees must be independent i.e. they should not be associated with the
sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are
required to be registered with SEBI before they launch any scheme.
What is Net Asset Value (NAV) of a scheme?
The performance of a particular scheme of a mutual fund is denoted by Net Asset Value
(NAV).
Mutual funds invest the money collected from the investors in securities markets. In
simple words, Net Asset Value is the market value of the securities held by the scheme.
Since market value of securities changes every day, NAV of a scheme also varies on day
to day basis. The NAV per unit is the market value of securities of a scheme divided by
the total number of units of the scheme on any particular date. For example, if the
market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund
has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the
fund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis -
daily or weekly - depending on the type of scheme.
Ohio University Christ College Academy For Management Education, Bangalore
What are the different types of mutual fund schemes?
Schemes according to Maturity Period:
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme
depending on its maturity period.
Open-ended Fund/ Scheme
An open-ended fund or scheme is one that is available for subscription and repurchase
on a continuous basis. These schemes do not have a fixed maturity period. Investors
can conveniently buy and sell units at Net Asset Value (NAV) related prices which are
declared on a daily basis. The key feature of open-end schemes is liquidity.
Close-ended Fund/ Scheme
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund
is open for subscription only during a specified period at the time of launch of the
scheme. Investors can invest in the scheme at the time of the initial public issue and
thereafter they can buy or sell the units of the scheme on the stock exchanges where
the units are listed. In order to provide an exit route to the investors, some close-ended
funds give an option of selling back the units to the mutual fund through periodic
repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two
exit routes is provided to the investor i.e. either repurchase facility or through listing on
stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.
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Schemes according to Investment Objective:
A scheme can also be classified as growth scheme, income scheme, or balanced scheme
considering its investment objective. Such schemes may be open-ended or close-ended
schemes as described earlier. Such schemes may be classified mainly as follows:
Growth / Equity Oriented Scheme
The aim of growth funds is to provide capital appreciation over the medium to long-
term. Such schemes normally invest a major part of their corpus in equities. Such funds
have comparatively high risks. These schemes provide different options to the investors
like dividend option, capital appreciation, etc. and the investors may choose an option
depending on their preferences. The investors must indicate the option in the application
form. The mutual funds also allow the investors to change the options at a later date.
Growth schemes are good for investors having a long-term outlook seeking appreciation
over a period of time.
Income / Debt Oriented Scheme
The aim of income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate
debentures, Government securities and money market instruments. Such funds are less
risky compared to equity schemes. These funds are not affected because of fluctuations
in equity markets. However, opportunities of capital appreciation are also limited in such
funds. The NAVs of such funds are affected because of change in interest rates in the
country. If the interest rates fall, NAVs of such funds are likely to increase in the short
run and vice versa. However, long term investors may not bother about these
fluctuations.
Ohio University Christ College Academy For Management Education, Bangalore
Balanced Fund
The aim of balanced funds is to provide both growth and regular income as such
schemes invest both in equities and fixed income securities in the proportion indicated in
their offer documents. These are appropriate for investors looking for moderate growth.
They generally invest 40-60% in equity and debt instruments. These funds are also
affected because of fluctuations in share prices in the stock markets. However, NAVs of
such funds are likely to be less volatile compared to pure equity funds.
Money Market or Liquid Fund
These funds are also income funds and their aim is to provide easy liquidity,
preservation of capital and moderate income. These schemes invest exclusively in safer
short-term instruments such as treasury bills, certificates of deposit, commercial paper
and inter-bank call money, government securities, etc. Returns on these schemes
fluctuate much less compared to other funds. These funds are appropriate for corporate
and individual investors as a means to park their surplus funds for short periods.
Gilt Fund
These funds invest exclusively in government securities. Government securities have no
default risk. NAVs of these schemes also fluctuate due to change in interest rates and
other economic factors as is the case with income or debt oriented schemes.
Index Funds
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index,
S&P NSE 50 index (Nifty), etc. These schemes invest in the securities in the same
weightage comprising of an index. NAVs of such schemes would rise or fall in
accordance with the rise or fall in the index, though not exactly by the same percentage
due to some factors known as "tracking error" in technical terms. Necessary disclosures
in this regard are made in the offer document of the mutual fund scheme.
Ohio University Christ College Academy For Management Education, Bangalore
There are also exchange traded index funds launched by the mutual funds which are
traded on the stock exchanges.
What are sector specific funds/schemes?
These are the funds/schemes which invest in the securities of only those sectors or
industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast
Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are
dependent on the performance of the respective sectors/industries. While these funds
may give higher returns, they are more risky compared to diversified funds. Investors
need to keep a watch on the performance of those sectors/industries and must exit at
an appropriate time. They may also seek advice of an expert.
What are Tax Saving Schemes?
These schemes offer tax rebates to the investors under specific provisions of the Income
Tax Act, 1961 as the Government offers tax incentives for investment in specified
avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the
mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-
dominantly in equities. Their growth opportunities and risks associated are like any
equity-oriented scheme.
What is a Fund of Funds (FoF) scheme?
A scheme that invests primarily in other schemes of the same mutual fund or other
mutual funds is known as a FoF scheme. An FoF scheme enables the investors to
achieve greater diversification through one scheme. It spreads risks across a greater
universe.
Ohio University Christ College Academy For Management Education, Bangalore
What is a Load or no-load Fund?
A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each
time one buys or sells units in the fund, a charge will be payable. This charge is used by
the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is
Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would
be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual
fund will get only Rs.9.90 per unit. The investors should take the loads into
consideration while making investment as these affect their yields/returns. However, the
investors should also consider the performance track record and service standards of the
mutual fund which are more important. Efficient funds may give higher returns in spite
of loads.
A no-load fund is one that does not charge for entry or exit. It means the investors can
enter the fund/scheme at NAV and no additional charges are payable on purchase or
sale of units.
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Equities
What is an Equity/Share ?
Total equity capital of a company is divided into equal units of small denominations ,
each called a share. For example, in a company the total equity capital of Rs 200,00,000
is divided into 20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share.
Thus, the company then is said to have 20,00,000 equity shares of Rs 10 each. The
holders of such shares are members of the company and have voting rights.
What is meant by a Stock Exchange ?
The Securities Contract (Regulation) Act, 1956 [SCRA] defines Stock Exchange as any
body of individuals, whether incorporated or not, constituted for the purpose of
assisting, regulating or controlling the business of buying, selling or dealing in securities.
Stock Exchange could be a regional stock exchange whose area of operation/jurisdiction
is specified at the time of its recognition or national exchanges, which are permitted to
have nationwide trading since inception. NSE was incorporated as a national stock
exchange.
What is a Debt Instrument ?
Debt instrument represents a contract whereby one party lends money to another on
pre-determined terms with regards to rate and periodicity of interest, repayment of
principal amount by the borrower to the lender.
In the Indian securities markets, the term bond is used for debt instruments issued by
the Central and State governments and public sector organizations and the term
debenture is used for the instruments issued by private corporate sector.
Ohio University Christ College Academy For Management Education, Bangalore
What is the role of Primary Market ?
The primary market provides the channel for sale of new securities. Primary market
provides opportunity to issuers of securities; Government as well as corporates, to raise
resources to meet their requirements of investment and/or discharge some obligation.
They may issue the securities at face value, or at a discount/premium and these
securities may take a variety of forms such as equity, debt etc. They may issue the
securities in domestic market and/or international market.
What is meant by Secondary Market ?
Secondary market refers to a market where securities are traded after being initially
offered to the public in the primary market and/or listed in the Stock Exchange. Majority
of the trading is done in the secondary market. Secondary market comprises of equity
markets and the debt markets.
What is the role of Secondary Market ?
For the general investor, the secondary market provides an efficient platform for trading
of his securities. For the management of the company, Secondary equity markets serve
as a monitoring and control conduit-by facilitating value-enhancing control activities,
enabling implementation of incentive-based management contracts, and aggregating
information (via price discovery) that guides management decisions.
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Derivatives
What are Derivatives ?
Derivatives are financial contracts whose value/price is dependent on the behaviour of
the price of one or more basic underlying assets (often simply known as the underlying).
These contracts are legally binding agreements, made on the trading screen of stock
exchanges, to buy or sell an asset in future. The asset can be a share, index, interest
rate, bond, rupee dollar exchange rate, sugar, crude oil, soybean, cotton, and what have
you.
What are different Types of Derivatives ?
Forwards: A forward contract is a customized contract between two entities, where
settlement takes place on a specific date in the future at todays pre-agreed price.
Futures: A futures contract is an agreement between two parties to buy or sell an asset
at a certain time in the future at a certain price. Futures contracts are special types of
forward contracts, such as futures of the Nifty index.
Options: An option is a contract which gives the right, but not an obligation, to buy or
sell the underlying at a stated date and at a stated price. While a buyer of an option
pays the premium and buys the right to exercise his option, the writer of an option is
the one who receives the option premium and therefore obliged to sell/buy the asset if
the buyer exercises it on him. Options are of two types Calls and Puts options :
Calls give the buyer the right, but not the obligation to buy a given quantity of the
underlying asset, at a given price on or before a given future date.
Puts give the buyer the right, but not the obligation to sell a given quantity of
underlying asset at a given price on or before a give future date.
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Company Profile
Kotak Mahindra Old Mutual Life Insurance Ltd. is a joint venture between Kotak
Mahindra Bank Ltd.(KMBL), and Old Mutual plc. At Kotak Life Insurance, we aim to help
customers take important financial decisions at every stage in life by offering them a
wide range of innovative life insurance products, to make them financially independent.
Management
Mr.Gaurang Shah (Managing Director)
Mr. Gaurang Shah is the Managing Director of Kotak Mahindra Old Mutual Life
Insurance Limited.
Mr. Gaurang Shah is a Chartered Accountant and a Cost and Works Accountant. He has
also done his Company Secretary ship from the Institute of Company Secretaries of
India. Mr Gaurang Shah has been with the Kotak Group for the past eight years where
he has held different positions of great responsibility and juggled multiple tasks
effectively. His cumulative experience, primarily in financial services, stands at over 21
years, several of those in building the retail finance business. At Kotak Life Insurance,
Mr Shah will focus on developing new lines of businesses and leveraging the company's
existing competencies and network to steer Kotak Life Insurance on its ongoing growth
path with even greater thrust. Mr. Shah has a commendable expertise in managing a
large number of employees.
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Mr.Shah has been previously associated with Kotak Mahindra Primus since its inception
and has contributed towards its growth to become a Rs.2000 Cr plus business. Before
coming to Kotak Life Insurance, Gaurang Shah was Group Head of Retail Assets for
Kotak Mahindra Bank. The Retail Assets include commercial vehicles, personal loans,
structured products, car loans and loans against shares.
Mr. G Murlidhar (Chief Financial Officer)
Mr. Murlidhar is a Chief Financial Officer and Company Secretary of Kotak Life
Insurance. Mr. Murlidhar is an associate member of the Institute of Chartered
Accountants of India, an associate member of the Institute Of Company Secretaries of
India, and graduate member of the Institute of Cost & Works Accountants of India. Mr.
Murlidhar possesses over 20-year work experience and has earlier worked with National
Dairy Development Board (NDDB), MDS Switchgear Limited and Nicholas Piramal India
Limited and Ion Exchange Ltd. Prior to Kotak Life Insurance, he held the position of VP-
Finance at Gujarat Glass Ltd.
As Chief Financial Officer at Kotak Life Insurance, he oversees all aspects of Finance
including Operations, Regulatory, Internal Control, Finance, Accounts and Treasury.
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Mr. Arun Patil (Vice President - Sales & Management Development)
Mr. Arun Patil is the Vice President - Sales & Management Development with Kotak Life
Insurance. A post- graduate with Law qualifications, he has over 25 years' experience in
life insurance industry. He joined as a Direct Recruit Officer in L.I.C. and worked in
various departments such as Sales, Marketing, I.T., Publicity, Housing & Branch
Administration all across the country. On foreign deputation to Fiji Islands for 5 years,
Mr. Patil substantially increased the market-share of LIC in competitive environment.
After heading LIC's premier Mumbai Division, he joined the then ICICI Ltd. as a member
of the insurance venture team and later worked for ICICI Prudential Life Insurance
Company as Head of Sales Development. Widely travelled all over the country & the
world several times for insurance related work, Mr. Patil presently has responsibilities to
enhance the skills, knowledge, productivity, and professionalism of the sales-force, with
special emphasis on developing all Managers to enhance their competencies, capabilities
& managerial effectiveness.
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History
Kotak Mahindra Old Mutual Life Insurance is a 76:24 joint venture between Kotak
Mahindra Bank Ltd. and Old Mutual plc. Kotak Mahindra Old Mutual Life Insurance is one
of the fastest growing insurance companies in India and has shown remarkable growth
since its inception in 2001.
Old Mutual, a company with 160 years experience in life insurance, is an international
financial services group listed on the London Stock Exchange and included in the FTSE
100 list of companies, with assets under management worth $ 400 Billion as on 30th
June, 2006. For customers, this joint venture translates into a company that combines
international expertise with the understanding of the local market.
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Journey So Far
The Kotak Mahindra Group was born in 1985 as Kotak Capital Management Finance
Limited. This company was promoted by Uday Kotak, Sidney A. A. Pinto and Kotak &
Company. Industrialists Harish Mahindra and Anand Mahindra took a stake in 1986, and
that's when the company changed its name to Kotak Mahindra Finance Limited.
1986 Kotak Mahindra Finance Limited starts the activity of Bill Discounting
1987 Kotak Mahindra Finance Limited enters the Lease and Hire Purchase market
1990 The Auto Finance division is started
1991The Investment Banking Division is started. Takes over FICOM, one of India's
largest financial retail marketing networks
1992 Enters the Funds Syndication sector
1995
Brokerage and Distribution businesses incorporated into a separate company -
Kotak Securities. Investment Banking division incorporated into a separate
company - Kotak Mahindra Capital Company
1996
The Auto Finance Business is hived off into a separate company - Kotak
Mahindra Prime Limited (formerly known as Kotak Mahindra Primus Limited).
Kotak Mahindra takes a significant stake in Ford Credit Kotak Mahindra
Limited, for financing Ford vehicles. The launch of Matrix Information Services
Limited marks the Group's entry into information distribution.
1998Enters the mutual fund market with the launch of Kotak Mahindra Asset
Management Company.
2000
Kotak Mahindra ties up with Old Mutual plc. for the Life Insurance business.
Kotak Securities launches its on-line broking site (now
www.kotaksecurities.com). Commencement of private equity activity through
setting up of Kotak Mahindra Venture Capital Fund.
2001Matrix sold to Friday Corporation.
Launches Insurance Services
2003Kotak Mahindra Finance Ltd. converts to a commercial bank - the first Indian
company to do so.
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2004 Launches India Growth Fund, a private equity fund.
2005
Kotak Group realigns joint venture in Ford Credit; Buys Kotak Mahindra Prime
(formerly known as Kotak Mahindra Primus Limited) and sells Ford credit
Kotak Mahindra.
Launches a real estate fund
2006Bought the 25% stake held by Goldman Sachs in Kotak Mahindra Capital
Company and Kotak Securities
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About Old Mutual Plc.
Old Mutual, a company with 160 years experience in life insurance, is an international
financial service group listed in the London Stock Exchange and included in the FTSE
100 list of companies, with assets under management worth $ 400 Billion as on 30th
June, 2006. For customers, this joint venture translates into a company that combines
international expertise with the understanding of the local market.
Old Mutual is the largest financial services business in South Africa, through its life
insurance, asset management, banking and general insurance operations. The company
serves 4 million life insurance policyholders and employees over 13,000 South Africans
in its local operations.
It commenced operations in the US life market in 2001 through the acquisition of
several established insurance companies, the largest being Fidelity & Guaranty Life. The
business is headquartered in Baltimore, with a sales office in Atlanta and offers a diverse
portfolio of annuities and life insurance products to individuals in the US.
The operations were further strengthened in 2003 with the acquisition of OMNIA Life
(Bermuda) for a nominal consideration from another South African insurer, Sage Life.
This offshore variable annuity business has been repositioned within the private bank
channels, one of the main sources of business for the offshore market and has provided
significant sales growth since acquisition. The business was rebranded Old Mutual
Bermuda in 2005 as part of the rollout of unified branding for our North American
operations.
During 2001, Selestia was launched in the UK market. Selestia offers Independent
Financial Advisers a system through which they can access over 700 funds offered by 57
fund managers to construct and maintain investment portfolios taking into account the
investors risk appetite for asset allocation and fund selection.
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Old Mutual International, based in Guernsey, provides offshore investment products and
services for international investors. Products and services include unit-linked life
offerings, unit trust offerings, discretionary portfolio management, offshore trusts and
company administration.
Palladyne Asset Management, a specialist asset management firm based in the
Netherlands, offers asset management services for the retail market through a network
of independent financial planners.
In India, Old Mutual offers a range of both individual and group life assurance products
through Kotak Mahindra Old Mutual Life Insurance Company Ltd as a joint venture with
Kotak Mahindra Bank Limited.
The Group also has a representative office in Beijing, China.
Senior Line Management Structure
Jim SutcliffeCEO
Julian RobertsEUROPE
Scott PowersUSA
Bob HeadSOUTH AFRICA
Hasan AskariASIA PACIFIC
Julian RobertsNORDIC (Acting)
Nick Poytnz-Wright
UK
Rafael GaldonELAM
Scott PowersAsset
Management
Guy BarkerLIFE
Paul HanrattyOMSA
Tom BoardmanNEDBANK
Bruce Campbell
M&F
Gaurang ShahINDIA
Chris OHehirChina
Ross LaidlawAUSTRALIA
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Organization Structure
The organization is divided into 5 categories:-
Finance
Sales
Marketing
Operations
Human Resource
Corporate Structure
The Chairman of Kotak Group is Mr. Uday Kotak and Kotak Insurance is managed by Mr.
Gaurang Shah Managing Director.
Managing Director
(Mr. Gaurang Shah)
CFO & COO(Mr. G Murlidharan)
Sales Head(Mr. Pankaj Desai)
Marketing Head(Mr. Rahul Sinha)
CIO(Mr. Krishna
Sanghvi)
Appointed Actuary
(Mr. Bryce Johns)
HR & Admin(Mr. Sugatta Dutta
VP-Sales & Mgmt.Dev.Mr. Arun Patil
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Finance
The Finance section is operated centrally by Head Office which is Bombay, headed by
CFO - Mr. G. Murlidharan and further sub-divided into categories like Vice Presidents of
different departments. These departments are :- CPC & Group Ops, Internal Control,
MIS, Accounts & Compliance, Underwriting, Branch Operations.
CFO & COO(Mr. G Murlidharan)
VPCPC & Group
Ops.
VPInternal Control
VPMIS
VPAccounts & Compliance
VPUnderwriting
VPBranch Operations
Managers Managers Managers Managers Managers Managers
Exec -Finance
Exec -Finance
Exec -Finance
Exec -Finance
Exec -Finance
Exec -Finance
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Sales
The Sales Department is divided on the basis of region. Each region is thereafter divided
into categories like Alternate Channel, Tied Channel and Group Business. The Sales dept
is headed by Mr. Pankaj Desai, Alternate Channel Head Mr. Suresh Agarwal, Tied
Channel Head MR. Subbaiah K P, Group Business Head Group Business Head Mr.
Sandeep Srikhande.
Subdivided into categories like Regional Managers, Area Managers and others.
Marketing
Sales Head(Mr. Pankaj Desai)
Alternate Channel Head
(Mr. Suresh Agarwal)
Tied Channel RM(Mr. Subbaiah KP)
Group Business Head
(Mr. Sandeep Srikhande)
Regional Managers
(Mr. Mayur Ankolekar South Zone)
Area Managers(Mr. Thakur Bhaskar
South Zone)
PAMS/BDMs/BDM Key Accounts
Area Managers & Branch Managers(Mr.Muruganesh South
Zone)
Asst. Branch Managers &
Agency Team Managers
Sales Managers & Agency Managers
Regional Heads(Mr. Sharrad Shrivastava
South Zone)
Customer Relationship
Managers
Customer Relationship
Execs
Sales Managers & Sales Associates
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Marketing
The Marketing Department is headed by Mr. Rahul Sinha from Head Office.
Marketing Head
(Mr. Rahul Sinha)
Product & Brand Head
Channel Development
Head
Product Managers Brand & PR Managers
Regional Marketing Managers
HO Channel Dev. Team
Trade Marketing Managers
Asst. Trade Marketing Managers
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Operations
Operations Department is handled by Mr. Shekhar Iyer Head Operations.
Human Resource
Head Operations
Regional Operations Incharge
(South Zone)
Regional Operations Incharge
(West Zone)
Regional Operations Incharge
(East Zone)
Regional Operations Incharge
(North Zone)
Head HR(Mr. Sugatta Dutta)
VP West & South Zone
VP North & East Zone
VP West & South Zone
VP West & South Zone
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Products
Insurance
Individual
Kotak Headstart Child Plans
Kotak Sukhi Jeevan Plan
Kotak Privileged Assurance Plan
Kotak Term Plan
Kotak Preferred Term Plan
Kotak Money Back Plan
Kotak Child Advantage Plan
Kotak Endowment Plan
Kotak Capital Multiplier Plan
Kotak Retirement Income Plan
Kotak Retirement Income Plan
(Unit-linked)
Kotak Safe Investment Plan II
Kotak Flexi Plan
Kotak Easy Growth Plan
Kotak Premium Return Plan
Riders
Group
Employee Benefits
Kotak Term Grouplan
Kotak Credit-Term Grouplan
Kotak Complete Cover Grouplan
Kotak Gratuity Grouplan
Kotak Superannuation Grouplan
Rural
Kotak Gramin Bima Yojana
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Major Competitors
Insurer Indian Partner
ICICI Prudential Life Insurance ICICI
SBI Life Insurance State Bank of India
Life Insurance Corporation LIC
Allainz Bajaj Life Insurance Bajaj Auto
Max New York Life Insurance Max India
Birla Sun Life Insurance Aditya Birla Group
Aviva Life Insurance Dabur India
HDFC Standard Life Insurance HDFC
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Competitive Analysis
Kotak Life Kotak Flexi Plan ICICIs Invest Shield Life
Feat
ure
s
Unit Linked Plan with Guaranteed death and Maturity Benefit.
Four Fund Options, Maximum Equity exposure 80%
Minimum Guaranteed payment of Guaranteed Maturity Value ( GMV )on Maturity
Option to invest funds in any proportion among different options. Change allocation as well as redirect future premiums in new proportion among funds.
Switching allowed - 4 Free Switches.
Lock-in period of three years
Automatic Cover maintenance facility after completion of 3 years, to keep the life cover going even if the policy lapses. Partial withdrawal allowed after 3 years from main account. Injection of extra premium allowed anytime after the policy is in force.
Unit Linked Plan with Guaranteed death and Maturity Benefit
One Fund Options, Maximum Equity exposure 40%
Sum of all premiums paid is guaranteed on death or maturity
No switching option
No switching charges.
Lock-in period of three years
Automatic Cover maintenance facility after completion of 3 years.
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Expe
nse
s Yr 1 Yr 2 onwards3 years 28% 4.38%5 to 7 years 42% 4.38% 10 to 14 years 56% 4.38% 15 years + 65% 4 .38%
Fund related charges: Average 1.1% (depends on the fund)
Surrender Charges:4th year 3%5th year 2%6th year 1%year 7 onwards Nil
Mortality Expense Additional
Yr 1 Yr 2onwards3 years 35% 15%thereafter 3%
Fund related charges: Average 1.25% (depends on the fund)
No special switching chargesSurrender Charges3rd year 50%4th year 60%5th year 70%6th year 80%7th year 85%8th year 90%9th year 95%thereafter 100%
Mortality Expense Additional
Rid
ers
Accidental Death Benefit
Permanent Disability Benefit
Critical Illness Benefit
Term/Preferred Term Benefit
Life Guarding Benefit
Accidental Disability Guarding
No Riders
Mat
uri
ty Guaranteed Maturity Value or Market Value whichever is higher
Sum Assured or Market Value whichever is higher
Dea
th Sum Assured or Market Value whichever is higher
Sum Assured, Market Value or Guaranteed Value whichever is higher
Elig
ibili
ty
Age of entry : 14 to 65 yearsPremium 10,000 onwards, no restriction on Sum AssuredTerm 10 to 30 yrsMaximum Age at maturity 75yrs
Age of entry : 0 to 65 yearsPremium 8,000 onwards, no restriction on Sum AssuredTerm 10 to 30 yrsMaximum Age at maturity 75yrs
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On Job Training
Field Visits :
The company is divided into 3 categories from where it generates business and
functions i.e. Alternate Channels, Tied Channel, Group Business. I visited the Tied
Channel Partners like DBS Chholamandalam along with the Asst. Managers of the
company, had meetings with the tied channel partners like Mr. Mohan Krishnamurthy &
Mr. V S Somsundaram - DBS Chholamandalam. Apart, also met some Alternate Channel
Partners who visited the office and learnt about their functioning process, marketing
strategy and managing customer relationships.
Interaction & Calling :
Had meetings with clients like senior manager of an IT company. Also called up
customers to check for their requirements which is based on the savings primarily, took
appointments with them in order to meet them and discuss the type of plan he is
looking for, whether completely insurance plan which is a traditional plan or other plans
which involves composition of central govt. issued or assured securities, call money,
short term bank deposits, cash, other debt securities and equities. Finally, succeeded in
satisfying the customers needs and getting good clients for the company as well, who
are the key contributors the business.
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SWOT Analysis
Strengths
Rich experience of the management.
Stabilized and loyal clients.
Skilled and tactful staff.
Weakness
Insufficient office equipments.
Not all employees has his/her cabin.
Work place (back office) is quite congested.
Opportunities
Stability through increased brand awareness, market penetration and service offerings across all categories of financial services.
Increase in customers wallet share.
Leveraging the latest technology for providing quality and client centric services.
Growth in economy would lead to higher demand for credit.
Threats
Increasing interest rate scenario.
Execution risk.
Competition from local and multinational players.
Rising inflation could reduce savings and investments
Rising crude oil prices
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Financials
CAGR 106%
40
95
193
351
2003 2004 2005 2006
Years
First Year Life Insurance Premium (Rs crore)
The CAGR ( Compound Annual Growth Rate) for 4 years is 106% which indicates the
good performance of company. The premium in year 2006 went up by 81.86% more
than of 2005 showing a rapid growth in the business.
Consolidated Revenue Composition 2005-06 (Rs 2,854 crore*)
Finance33%
Treasury13%
Insurance21%
Fees30%
Others3%
Finance
Treasury
Insurance
Fees
Others
In the year 2005-06, the total revenue of Kotak Mahindra Bank Limited was Rs 2,854
crores of which Kotak Mahindra Old Mutual Life Insurance Ltd. contributes 21%.
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Share Capital
Particulars As at 31stMarch,2006
As at 31stMarch,2005
Authorized Capital260,000,000 (2005 212,000,000) Equity Shares of Rs. 10 each
Issued Capital244,583,546(2005 211,760,643) Equity Shares of Rs. 10 each
Subscribed Capital244,583,546(2005 211,760,643) Equity Shares of Rs. 10 each
Called-up Capital244,583,546(2005 211,760,643) Equity Shares of Rs. 10 each
Less: Calls unpaidAdd: Shares forfeited (Amount originally paid up)Less: Par Value of Equity Shares bought backLess: Preliminary ExpensesLess: Expenses on issue of shares
2,600,000
2,445,835
2,445,835
2,445,835
---------
(1,427)(707)
2,120,000
2,117,606
2,117,606
2,117,606
---------
(2,855)(1,414)
Total 2,443,701 2,113,337
During the year, the Authorized Share Capital of the company has increased from
Rs.212 crores to Rs.260 crores. While the paid-up Share Capital of the company has
increased from Rs.212 crores to Rs.244.58 crores. This reiterates the shareholders
commitment towards investment in facilitating sustainable growth of the company.
Financial Results
The company performed exceptionally well this year. The premium income for the year
grew to Rs.621.85 crores (2005 Rs.466.16 crores). Of this, the first year premium
inclusive of single premium was Rs.396.06 crores (2005 Rs.373.99 crores)
The first year premium growth rate of 92% compares favourably to the overall industry
growth rate of 33% and the private sector life insurance growth rate of 79%.
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The Policyholders Account shows a surplus of Rs.1.18 crores for the year ended March
31,2006 (2005 27.11 crores). The Shareholders Accounts shows a deficit of Rs.44.42
crores (2005 Rs.18.69 crores).
The Director have declared an addition to the Policyholders Accumulation Account for
the year ended March 31, 2006 to give a return of 7% (2005 6.75%) to participating
policyholders. The amount set aside for this purpose is Rs.5.43 crores (2005 Rs.2.44
crores). This transfer from the Shareholders Account to the Policyholders Accounts is to
basically finance the expenses over-runs and to meet the costs of bonus.
Ohio University Christ College Academy For Management Education, Bangalore
Submission for Research ProjectIn
Kotak Mahindra Old Mutual Life Insurance Plc.
How does the Indian mutual fund industry compare vis a vis global standards and what should be our future
expectations from it ?
By
Mehnaz Qureshi
Masters in Business AdministrationOhio University Christ College Academy For Management
Education, Bangalore
Mail : [email protected]
Ohio University Christ College Academy For Management Education, Bangalore
Executive Summary
The Indian Mutual Funds Industry has witnessed a sea change since UTI was first
established in 1963. From a single player the number of players has increased to 29 and
the number of schemes has spiraled to 477. The last decade has been a period of rapid
growth for the mutual fund industry. The paper begins by analyzing the current scenario
in the industry characterized by problems with distribution, low investor awareness and
concentration of corporate investors. In the next section, a comparison of the Mutual
Fund Industry with global standards reveals that the industry still compares unfavorably
with developed countries in terms of penetration, investor awareness and diversity of
products and the extent of use of risk management techniques. Further comparison
reveals that the attitude of regulator towards investor protection and the governance of
mutual funds are at par with global standards. The paper then analysis the future
expectations from the mutual fund industry in terms of increased investor awareness,
product diversity and improvement in penetration and distribution. In the end I
recommend certain steps that SEBI and AMCs should take in order to build investor
confidence and trust. These steps focus on investor education, increased accountability
of various players, and development of AMFI as an SRO and regulation of corporate
investments.
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Introduction
The growth of Mutual Funds in any economy is an indicator of the development of
financial sector and the extent to which investors have faith in the regulatory
environment. Mutual fund industry in India began with the establishment of Unit Trust
of India, in 1963. Between 1987 and 1993 other entities belonging to the public sector
were permitted to offer mutual funds. From 1993 onwards, private sector organizations
were permitted to enter the market and the first mutual fund regulations were
promulgated, which were subsequently replaced by the SEBI (Mutual Fund) Regulations
of 1996. These private sector organizations comprised predominantly Indian and foreign
joint ventures as well as purely Indian firms. In the last decade the mutual fund industry
has been one of the fastest growing industries in the financial service sector, with the
assets under management growing at a CAGR of 13% between 1993 and 2006
Ohio University Christ College Academy For Management Education, Bangalore
Current Scenario
Since private players were allowed in 1993, the Indian Mutual Fund industry has
witnessed a sea change in the way it operates, in the regulatory and investor attitude
towards Mutual fund products. From a single player in 1987 today there are 29 mutual
funds offering as many as 477 schemes. The total assets under management have risen
to Rs. 195784 crores. However, the accolades regarding the growth of the Mutual Fund
industry should be reserved until this growth is analyzed taking the Mutual Fund industry
in other developed countries in consideration. Here are certain statistics that reflect that
Indian Mutual Fund industry still has a long way to go when compared to global
standards:
AUM as a percentage of GDP: In most of the developed countries the total assets under management ranges from 30 % - 60 % of the GDP. Total assets under
management are only 8% of the GDP in case of India.
Penetration of Mutual Funds: In India it is estimated that 6.7 % of the households hold mutual funds. This figure is close to 50 % in case of US and 17
% in case of UK. Mutual funds account for only 0.73 % of total financial assets in
India (11 % of bank deposits). AUM for Mutual funds had exceeded the bank
deposits in US in as early as 1998.
These are only some of the statistics that show that the Indian mutual fund industry is
still in its infancy. It is important to study the present industry scenario to gain a better
understanding of the impediments to the growth of the industry:
Lack of Investor Awareness : Retail investors had a wrong notion about mutual funds as an investment avenue. The benefit of risk diversification,
professional management and ease of administration involved while investing in
mutual funds are not clearly understood. Knowledge of financial products is
ingrained in school and college curriculum in countries like UK, US and France.
Ohio University Christ College Academy For Management Education, Bangalore
Investor Risk Appetite : Equity funds account for 30 % of the total AUM in India. This figure is more than 50 % in most of the countries. Frequent stock
market scams and the bust of tech sector specific MFs have contributed to this
apprehension. The growth in mutual funds has come through the growth in
investments in short term instrument like Money Market Funds which account for
40 % of AUM.
Higher Returns of Alternative Debt Instruments : Government guaranteed schemes provide risk free returns at competitive rates of returns. This is why
mutual funds have difficulty competing retail business.
Concentration of Corporate Investors : Mutual funds have become overly attractive to corporate investors because of higher returns than bank deposits
and ability to distribute capital gains tax. Corporate investors account for 57 % of
the AUM ( by value). Though the turnover rates have increased the average
fund in management has grown by only 25 % in the past 4 years. It is clear that
the lack of growth in funds under management in India is because of the
absence of long term investors. Corporate investors take profits frequently
resulting in destruction in the compound growth in funds under management.
Distributors are forced to pass on more commissions to companies, while fund
companies are compelled to offer funds with wafer thin margins. Retail investors
lose out in the sense that they continue to pay higher expenses.
Distribution : One of the major factors impacting the growth of mutual fund industry is the absence of any regulation in distribution of mutual funds. Mutual
fund investors need distributors who are able to inform them about the efficacy
of distribution product for a particular risk profile and stage in life cycle. Lack of
distributor awareness and the absence of any disclosures make mis selling of MF
products commonplace. Also penetration in rural areas is a problem. Only 3 % of
rural households own mutual funds. For mutual funds to set up a distribution
network in these centers can be very expensive.
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In many countries, mutual fund industry sees a point of inflection, a point after which
the AUM increases spectacularly after a period of sluggish growth. This happened in
case of US after 1992-93 when the AUM increases from $ 1 trillion to $ 7.3 trillion in
2004. Many studies have revealed that this period of growth corresponds to following
factors :
Explosive growth in capital markets
A sound system of regulation
Increase in investor awareness
BSE has witnessed a phenomenal rise in the last 2 years (market cap has more than
doubled in the past 2 years) A question thus arises : Has India reached its point of
inflection after which the mutual fund industry will witness a phenomenal growth ? What
are the improvements in mutual fund industry (regulation, investor awareness, depth,
distribution etc) required to stimulate such rapid growth ? Before answering these
questions let us compare the Indian Mutual fund industry with global standards and
analyze the areas in which the industry could learn from precedents abroad.
Ohio University Christ College Academy For Management Education, Bangalore
Comparison of Indian MF industry with Global Standards
The first mutual fund was established in the year 1924 in US. Like any other product
they went through a life cycle experiencing sluggish growth between 1930 1970s and
then witnessed rapid growth from 1990s onwards. The total worldwide AUM was $16.3
Trillion in 2004 05. A brief comparison of Indian MF industry with Global MF industries
(citing examples of US and EU countries) is presented below:
Types of Products: Indian funds do not offer products that cater to entire life cycle of
an investor. Mutual funds in US offer products that cater to diverse needs of investors
ranging from purchase of house, car etc to admission in university. Mutual funds
investing in commodities and real estate do not exist in India. An important factor that
led to growth in Mutual fund industry in US is the presence of pension. As Americans
began to pay attention to their own retirement plans through company - sponsored
retirement schemes, called 401(k) plans, mutual funds started being looked upon as a
smart option.
Regulation : The mutual fund industry is one of the most regulated industries in the
financial sector. The MF industry in US has been plagued by many scandals and SEC has
acted fast to restore investor confidence and trust. Fines to the tune of $1.5 billion have
been levied. Though allegations regarding frauds have surfaced in Indian MF industry
also SEBI has been quick to investigate and restore confidence. However, certain issues
regarding SEBI still exist
Unlike its American counterpart SEBI hasnt been able to formulate regulations to increase the depth of MFs.
Regulations regarding the privatization of Pension funds took a long time to come.
SEBI hasnt been able to educate investor on the usage of mutual funds as investment options.
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Risk Management Techniques: A recent survey by PWC revealed that as many as 50
percent of the respondent mutual funds are not managing risk properly. 50 percent of
the respondents did not even have documented risk procedures or dedicated risk
managers. Indian Mutual fund industry does not use statistical techniques of risk
management but is using diversification effectively within the market limitations. As far
as derivatives is concerned, they are not presently used because of the low volumes,
low liquidity and absence of sufficient hedging products in the market Risk management
in US mutual funds is more prevalent with the use of statistical software and the use of
VaR approach to risk management. Several fund companies have set up risk control
measures internally, but they still have a long way to go in relaying this to clients.
Governance: With the recent late trading and market timings scandals in US mutual
funds the issue of corporate governance of mutual fund has again gained center stage.
There have been allegations of late timing in Indian MFs. The structure of Indian mutual
funds is very similar to US mutual fund. SEC ( the US mutual fund regulator) requires
of the directors to be independent. This proportion is 2/3 in case of India. However, there
remain fundamental doubts whether the current governance structure provides
institutionally appropriate checks and prevents potential conflict of interest and provide
effective fund administration. Currently, a mutual fund is set up in the form of a trust
under the Indian Trust Act, which was enacted in 1882 to essentially govern private
trusts and charitable institutions. The trust structure has the following difficulties for a
mutual fund:
The issue of individual versus collective liability of trustees, which has deterred experienced persons from serving as trustees of mutual funds.
AMC is not subjected to a specific law book and is indirectly regulated by SEBI through trustees.
Approval of directors of AMC lies with the trustees and not with SEBI.
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The study of MF structures of other countries (UK) reveals that there is a scope for
simplification of the current structure. Eliminating the sponsor and giving the power to
propose the creation of the MF to the asset management company (AMC) could be a
possible alternative.
Future Expectations from Indian Mutual Fund Industry
Taking into consideration the above comparison and current situation prevailing in the
capital markets, the realistic expectations from the Indian Mutual fund industry could
be:
Increased Penetration: With the proposed opening up of pension funds to the private sector we can expect the penetration levels of MFs to increase in the next
few years. Because of their experience in managing MFs the AMCs will play an
important role in the management of pension funds.
Increased Emphasis on Retail Investors through Supply Chain Innovations: Retail investments less than Rs 10,000 are unprofitable for AMCs.
However, certain supply chain innovations and investments in retail
infrastructure would lead to increased emphasis on retail investors. Some of the
possible innovations can be the use of straight through processing , an
industry buzz phase for automating mutual fund transactions so that the entire
process-from placing a trade to final-settlement is fast, relatively seamless and
less subject to manipulation. Straightforward concept, straight-through
processing requires substantial integration and cooperation among members of
the mutual fund supply chain. Using IT, members of the mutual fund supply
chain can improve efficiency, manage risk and improve regulatory compliance-all
critical moves for managing investor confidence in mutual funds. As urban
markets reach a peak mutual funds would target second rung cities and smaller
towns to increase their investor base.
Diverse Range of Products: In order to make MFs more acceptable to the retail investor mutual fund industry has to mature to offering comprehensive life
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cycle financial planning and not products alone. These would include products
catering to specific life cycle needs like buying a house, funding college
admission etc. With increase in investor awareness many new products would be
introduced. Some of them are listed here: derivative based MFs (though a cap on
derivative exposure for a sponsor currently exists), commodities and real estate
MFs ( appropriate regulation from SEBI in case of real estate pending), feeder
funds, funds of funds, capital protected funds, etc.
Increase in the need for financial advice: As the affluence of Indians increases and the range of financial products available to meet peoples needs
expands mortgages, deposits, life products, defined contribution pensions,
mutual funds, etc the need for financial advice will increase. Mutual fund
distribution will become geared towards providing sound financial advice
according to investors risk profile and stage in life cycle.
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Recommendations
With penetration levels at close to 6 % great scope exists for the growth of mutual
funds in India. Mutual funds have to compete with bank deposits and government
securities for a share of consumer savings. This requires the regulator and the AMC to
increase the credibility of MFs and develop a trust among the average retail investors. I
recommend the following steps on part of SEBI and AMCs:
Steps to be taken by SEBI
Increase Accountability among Different Players
Give the board of trustees the right to choose a fund manager of their own choice. This will make them more accountable and aware as to what the AMC is
doing.
Benchmark the performance of funds with peers as well as with specific indices.
Restriction on who can be appointed as sub-brokers.
Implementation of international accounting principles across the mutual fund industry will help promote fairness and stability of the sector.
Develop of AMFI and SRO ( Self Regulatory Organization)
This will reduce the regulatory burden on SEBI. Most of the developed countries have
SROs that publish monthly disclosures of important MF related figures, and enforce a
model code of conduct. Though similar experiments have been unsuccessful in Western
countries I propose a slightly modified role of AMFI:
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AMFI will work towards increasing investor awareness through the publication of documents, organizing seminars etc.
Also AMFI serve as a regulator of distributors because mutual funds complain of poor distributor regulation as the biggest challenge to the industry.
Regulating Corporate Investments
Regulatory requirements that require mutual funds to segregate large and small
investors. This would enable retail investors to pay expenses that are relevant to their
investments and turnover rates.
Investor Education Programs
As the principal regulator of financial services in the country SEBI should invest in
programs that give investor knowledge about financial products in the country. Investors
should be able to make informed decisions after knowing how MFs can be used for
financial planning. This could be done in conjunction with AMCs, AMFI and other
participants in the financial sector.
Steps to be Taken by AMCs
Make mutual fund offer documents more comprehensible by making disclosures more simple and relevant, and fund structure more distinctive to the common
people.
Make disclosures regarding the MF expenses more transparent especially distributor expenses which form a major chunk of entry loads.
Make fund managers accountable to unit holders. This can be done by organizing Annual General Meetings of unit holders where performance of the fund would
be reviewed.
Ohio University Christ College Academy For Management Education, Bangalore
Conclusion
The comparison of Indian MF industry with respect to global standards showed that
India has a lot catching up to do in terms of penetration, the diversity of products, and
the risk mitigation techniques used. However, the attitude of the regulator towards
investor protection and governance of mutual funds was found to be very close to global
standards. The Indian MF industry is possibly at a point of inflection on the verge of
explosive growth. The factors that point towards this are the existence of robust capital
markets and the presence of an impartial regulator. In order to reap the benefits of this
growth, the mutual fund industry has to introduce changes at the rate of knots. These
changes include introduction of newer products, improvements in MF distribution and
better governance of mutual funds. The MF regulator (SEBI) should increase the
accountability of all major players including the AMCs, distributors and brokers to build
trust among retail investors.
Ohio University Christ College Academy For Management Education, Bangalore
References
Journals
Klapper, Sulla, Vittas : The development of mutual funds around the world, Emerging
Markets Review.
Khorana, Servaes, Tufano Explaining the size of mutual fund industry around the world,
Journal of Financial Economics.
Books and Reports
Insurance Institute of India Life Insurance IC-33 (2006).
Bans