Internship Report Mehnaz

KOTAK MAHINDRA OLD MUTUAL LIFE INSURANCE LTD.
Internship Report
Mehnaz Qureshi PID NO. P001066435
In Partial fulfillment of the Masters Program in Business Administration, Ohio University, Athens, USA
OHIO University Christ College Academy For Management Education Christ 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: Place:
Mehnaz Qureshi
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.
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.
TABLE OF CONTENTS
Chapter 1. Chapter 2. Objective of Study Industry Profile History of Insurance What is Life Insurance ? Mutual Funds Equities Derivatives Company Profile History of Kotak Mahindra Old Mutual Life Insurance Journey so far About Old Mutual Plc. Organization Structure Products Major Competitors Competitive Analysis On Job Training SWOT Analysis Financials 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
Chapter 3.
Chapter 4.
Chapter 5. Chapter 6.
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.
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, 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. operational restructuring and
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
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."
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
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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 longterm. 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.
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.
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 predominantly 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.
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.
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.
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.
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.
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.
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 VPFinance 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.
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.
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.
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 1987 1990 1991 1992 1995 Kotak Mahindra Finance Limited starts the activity of Bill Discounting Kotak Mahindra Finance Limited enters the Lease and Hire Purchase market The Auto Finance division is started The Investment Banking Division is started. Takes over FICOM, one of India's largest financial retail marketing networks Enters the Funds Syndication sector Brokerage and Distribution businesses incorporated into a separate company Kotak Securities. Investment Banking division incorporated into a separate company - Kotak Mahindra Capital Company The Auto Finance Business is hived off into a separate company - Kotak Mahindra Prime Limited (formerly known as Kotak Mahindra Primus Limited). 1996 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. 1998 Enters the mutual fund market with the launch of Kotak Mahindra Asset Management Company. Kotak Mahindra ties up with Old Mutual plc. for the Life Insurance business. 2000 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. 2001 2003 Matrix sold to Friday Corporation. Launches Insurance Services Kotak Mahindra Finance Ltd. converts to a commercial bank - the first Indian company to do so.
2004
Launches India Growth Fund, a private equity fund. 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 Bought the 25% stake held by Goldman Sachs in Kotak Mahindra Capital Company and Kotak Securities
2005
2006
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.
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 Sutcliffe CEO
Julian Roberts EUROPE
Scott Powers USA
Bob Head SOUTH AFRICA
Hasan Askari ASIA PACIFIC
Julian Roberts
NORDIC (Acting)
Scott Powers
Asset Management
Paul Hanratty
OMSA
Gaurang Shah
INDIA
Nick PoytnzWright
UK
Guy Barker
LIFE
Tom Boardman
NEDBANK
Chris OHehir
China
Rafael Galdon
ELAM
M&F Ohio University Christ College Academy For Management Education, Bangalore
Bruce Campbell
Ross Laidlaw
AUSTRALIA
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.
(Mr. Gaurang Shah)
Managing Director
(Mr. G Murlidharan)
CFO & COO
VP-Sales & Mgmt.Dev.

Mr. Arun Patil
(Mr. Pankaj Desai)
Sales Head
Marketing Head
(Mr. Rahul Sinha)
(Mr. Sugatta Dutta
HR & Admin
(Mr. Bryce Johns)
Appointed Actuary
CIO
(Mr. Krishna Sanghvi)
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)
VP
CPC & Group Ops.
Internal Control
VP
MIS
VP
VP
Accounts & Compliance
Underwriting
VP
Branch Operations
VP
Managers
Managers
Managers
Managers
Managers
Managers
Exec Finance
Exec Finance
Exec Finance
Exec Finance
Exec Finance
Exec Finance
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.
(Mr. Pankaj Desai)
Sales Head
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 & Branch Managers

(Mr.Muruganesh South Zone)
(Mr. Sharrad Shrivastava South Zone)
Regional Heads
(Mr. Thakur Bhaskar South Zone)
Area Managers
Asst. Branch Managers & Agency Team Managers
Customer Relationship Managers
PAMS/BDMs/BDM Key Accounts
Sales Managers & Agency Managers
Marketing
Customer Relationship Execs
Sales Managers & Sales Associates
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
Operations Operations Department is handled by Mr. Shekhar Iyer Head Operations.
Head Operations
Regional Operations Incharge (South Zone)
Regional Operations Incharge (West Zone)
Regional Operations Incharge (East Zone)
Regional Operations Incharge (North Zone)
Human Resource
Head HR (Mr. Sugatta Dutta)
VP West & South Zone
VP North & East Zone
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
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
Competitive Analysis
Kotak Life Kotak Flexi Plan ICICIs Invest Shield Life Unit Linked Plan with Guaranteed death Unit Linked Plan with Guaranteed death and Maturity Benefit. and Maturity Benefit
Four Fund Options, exposure 80% Maximum Equity One Fund Options, Maximum Equity exposure 40%
Features
Minimum Guaranteed payment of Sum of all premiums paid is guaranteed Guaranteed Maturity Value ( GMV )on on death or maturity Maturity No switching option Option to invest funds in any proportion among different options. Change No switching charges. allocation as well as redirect future premiums in new proportion among funds. Lock-in period of three years 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. Automatic Cover maintenance facility after completion of 3 years.
Yr 1 Yr 2 onwards 3 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)
3 years thereafter 3%
Yr 1 Yr 2onwards 35% 15%
Fund related charges: Average 1.25% (depends on the fund) No special switching charges Surrender Charges 3rd 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 No Riders
Expenses Riders
Surrender Charges: 4th year 3% 5th year 2% 6th year 1% year 7 onwards Nil
Mortality Expense Additional Accidental Death Benefit Permanent Disability Benefit Critical Illness Benefit Term/Preferred Term Benefit Life Guarding Benefit Accidental Disability Guarding
Maturity
Guaranteed Maturity Value or Market Value whichever is higher
Sum Assured or Market Value whichever is higher
Death
Sum Assured or Market Value whichever is higher Age of entry : 14 to 65 years Premium 10,000 onwards, no restriction on Sum Assured Term 10 to 30 yrs Maximum Age at maturity 75yrs
Sum Assured, Market Value or Guaranteed Value whichever is higher Age of entry : 0 to 65 years Premium 8,000 onwards, no restriction on Sum Assured Term 10 to 30 yrs Maximum Age at maturity 75yrs
Eligibility
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.
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
Financials
CAGR 106%
First Year Life Insurance Premium (Rs crore)
351
193 95 40
2003
2004 Years
2005
2006
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*)
Others 3% Fees 30% Finance 33% Finance Treasury Insurance Fees Others Insurance 21% Treasury 13%
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%.
Share Capital
Particulars
Authorized Capital 260,000,000 (2005 212,000,000) Equity Shares of Rs. 10 each Issued Capital 244,583,546(2005 211,760,643) Equity Shares of Rs. 10 each Subscribed Capital 244,583,546(2005 211,760,643) Equity Shares of Rs. 10 each Called-up Capital 244,583,546(2005 211,760,643) Equity Shares of Rs. 10 each Less: Calls unpaid Add: Shares forfeited (Amount originally paid up) Less: Par Value of Equity Shares bought back Less: Preliminary Expenses Less: Expenses on issue of shares Total
As at As at 31stMarch,2006 31stMarch,2005
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)
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%.
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.
Submission for Research Project In 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 Administration Ohio University Christ College Academy For Management Education, Bangalore
Mail : mehnaz.qureshi@gmail.com
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.
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
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.
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.
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.
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.
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.
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
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.
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:
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.
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.
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). Bansal, Mutual funds Management and working, Deep and Deep (1998), New Delhi. Report on Reform of Mutual Funds in India, Cadogan Financial in association with A F Ferguson & Co. Technical assistance to India for reform of the mutual fund industry ADB. Online Resources www.sebi.gov.in www.amfiindia.com www.pwc.com www.kotak.com www.wikipedia.org www.kotaklifeinsurance.com

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KOTAK MAHINDRA OLD MUTUAL LIFE INSURANCE LTD.

Mehnaz Qureshi PID NO. P001066435

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Life Insurance What is Life Insurance ?

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

About Old Mutual Plc.

It commenced operations in the US life market in 2001 through the acquisition of

Ohio University Christ College Academy For Management Education, Bangalore

Julian Roberts EUROPE

Scott Powers USA

Bob Head SOUTH AFRICA

Hasan Askari ASIA PACIFIC

(Mr. Gaurang Shah)

CFO & COO

VP-Sales & Mgmt.Dev.

(Mr. Pankaj Desai)

(Mr. Sugatta Dutta

(Mr. Bryce Johns)

Ohio University Christ College Academy For Management Education, Bangalore

Ohio University Christ College Academy For Management Education, Bangalore

(Mr. Pankaj Desai)

Alternate Channel Head

Group Business Head

Area Managers & Branch Managers

(Mr. Sharrad Shrivastava South Zone)

(Mr. Thakur Bhaskar South Zone)

Asst. Branch Managers & Agency Team Managers

Customer Relationship Managers

PAMS/BDMs/BDM Key Accounts

Sales Managers & Agency Managers

Customer Relationship Execs

Sales Managers & Sales Associates

Ohio University Christ College Academy For Management Education, Bangalore