CONTENTS OF THE PROJECT

PAGE NO.

1. Introduction

Synopsis Need of the study Scope of the study Objectives of the study Research methodology Limitations

2. Industry Profile

3. Company Profile

4. Conceptual and theoretical framework

5. Data Analysis and Interpretation

6. Findings & Suggestions

7. Case study

8. Bibliography

1

CHAPTER-1

INTRODUCTION

1. INTRODUCTION

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1.1 Synopsis:

The introduction of unit linked insurance plans (ULIPs) is possibly, the single largest

innovation in the field of life insurance in the past several decades. In a swoop, it has

addressed and overcome several concerns that customers had about life insurance –

liquidity, flexibility and transparency and the lack thereof. These benefits are possible

because ULIPs are differently structured products and leave many choices to the

policyholders. Broadly speaking, ULIPs are best suited for those who have a

conceptual understanding of financial markets and are genuinely looking for a

flexible, long term savings-cum-insurance solution.

What is a Unit Linked Insurance Plan?

A ULIP is a linked insurance plan where the characteristics of insurance and Mutual

Fund are combined. An allocated portion of fund amount goes into insurance and the

remaining into asset class.

Ulip features:

Unit linked insurance plan (ULIP) is life insurance solution that provides for

the benefits of protection and flexibility in investment. The investment is denoted as

units and is represented by the value that it has attained called as Net Asset Value

(NAV). The policy value at any time varies according to the value of the underlying

assets at the time.

ULIP provides multiple benefit to the consumer, the benefits include:

Life protection

Investment and savings

Flexibility

Adjustable life cover

Investment options

Transparency

Options to take additional cover against death due to accident

Disability

Critical illness

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Surgeries

Liquidity

Tax planning

Funds of Ulip:

Liquid fund

Secure managed fund

Defensive managed fund

Equity managed fund

Growth fund

1.2 Need of the Study:

The introduction of unit-linked insurance plans (ULIPs) has been, possibly, the

single-largest innovation in the field of life insurance in the past several decades. In a

swoop, it has addressed and overcome several concerns that customers had about life

insurance-liquidity, flexibility and transparency and the lack thereof. These benefits

are possible because ULIPs are differently structured products and leave many

choices to the policyholder. Broadly speaking, ULIPs are best suited for those who

have a conceptual understanding of financial markets and are genuinely looking for a

flexible, long-term savings-cum-insurance solution.

1.3 Scope of the Study:

The study delves into the concept of ulip plan.

It studies the various investment avenues like mutual funds, traditional plans

and other savings schemes.

The study evaluates the performance of ulip schemes provided by Kotak life

insurance.

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The study focuses on creating awareness among the investors about the right

investment products and helping investors understand the risk and return in the

plan.

The study also analyses the superiority of ULIPs over Fixed deposits.

It also compares ULIPs with other Investment avenues.

1.4 Objectives of the Study:

Primary objectives:

1. To evaluate the performance of basic ULIPs of Kotak Life

Insurance on the basis of returns and risk.

2. To analyze the superiority of ULIPs over Fixed deposits.

Secondary objectives:

1. To Study the Concept of ULIPs

2. To Study about the basic ULIPs of KOTAK LIFE INSURANCE and their Key Advantages

3. To Study the Advantages of ULIPs over Mutual Funds

4. To Study the Advantages of ULIPs over Traditional Plans

5. To Study the Role of ULIPs as a Saving Insurance-cum-Investment Plan

1.5 Research Methodology:

The data for the study is collected from two main sources.

1. Primary source

2. Secondary source

Primary source:

The data is collected through interaction with the official in the company.

Secondary source:

The secondary source has been collected through the following source.

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Booklets on ulips

Broachers of the company

Insurance magazines

Insurance books

Internet (web site)

1.6 Limitations:

Every study has some limitations but the effectiveness of the project comes

from how well these limitations have been handled to bring out the

result, which are pertinent and are adding value to the already existing studies.

This project also has some limitation but my attempt would be to strive hard to

overcome these limitation so that the results prove out be prolific and useful to the

organization. Some of these limitations are:

The study is for a limited period of 45 days

The study relies on secondary data.

The data and figures shown are as given by the bank.

The study does not attempt to analyze the insurance sector as a whole, but is

limited to ULIPs.

6

CHAPTER-2

INDUSTRY PROFILE

7

2. INDUSTRY PROFILE

2.1 Insurance:

Insurance may be described as to protect the economic value of asset. It can be said to

be a system of spreading the losses of an individual over a group of individuals.

Since it is an intangible product, Insurance Industry is a service industry.

Insurance Industry do not produce any goods but sell the promise. A promise to take

care of the customers or their dependents in case they suffer a loss due to some peril

during the term of policy.

What Is Insurance?

Mankind is exposed to many serious perils such as property losses from fire and

windstorm and personal losses from disability and premature death. Although it is

impossible for an individual to foretell or completely prevent their occurrence but it is

possible to provide against their financial effect the loss of property and earnings.

From the point of view of the individual the life Insurance may be defined as a

contract whereby for a Consideration amount called the premium, one party (the

insurer) agrees to pay to the other (the insured) or a beneficiary a particular amount

upon the occurrence of death or any other agreed event.

Insurance is the method of spreading and transfer of risks

Losses of few unfortunate are shared by and spread over to many exposed to

the same risk.

Assets created by the owner in expectation of future needs

have a value.

Losses of assets for any reason deprive the owner of the expected benefits.

It acts as a form of a safeguard against misfortunes.

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From the point of view of community life insurance may be defined as a social

device to make accumulations to meet uncertain losses resulting from

premature death or disability.

2.2 Purpose and Need of Insurance :

As said earlier that the making is exposed to many serious perils which risk the

security of their belongings. The risk here means that there is a possibility of

occurrence of loss or damage to the property, it may happen or may not happen.

Insurance is relevant only in the contingency of uncertainty. If there is no uncertainly

about the occurrence of the loss it can’t be insured against:

Assets are likely to be destroyed or made non-functional due to perils like

firefloods, breakdowns, lightning and earthquake.

Damage to assets caused by any perils is the risk that assets are exposed to.

Insurance become relevant only if there is uncertainly of occurrence of event

leading to loss.

No uncertainty No insurance.

We can say that the human life value is an ongoing generating asset, which

can be lost on early death or disability caused by accidents.

Insurance doesn’t protect the assets but only compensates the economic or

financial loss.

Basically insurance covers tangible assets but the concept can be extended to

intangible also.

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2.3 Functions of Insurance:

The functions of Insurance can be bifurcated into two parts:

1. Primary Functions

2. Secondary Functions

The primary functions of insurance include the following:

Provide Protection - The primary function of insurance is to provide protection

against future risk, accidents and uncertainty. Insurance cannot check the happening

of the risk, but can certainly provide for the losses of risk. Insurance is actually a

protection against economic loss, by sharing the risk with others.

Collective bearing of risk - Insurance is a device to share the financial loss of few

among many others. Insurance is a mean by which few losses are shared among larger

number of people.

Assessment of risk - Insurance determines the probable volume of risk by evaluating

various factors that give rise to risk. Risk is the basis for determining the premium

rate also.

Provide Certainty - Insurance is a device, which helps to change from uncertainty to

certainty. Insurance is device whereby the uncertain risks may be made more certain.

The secondary functions of insurance include the following:

Prevention of Losses - Insurance cautions individuals and businessmen to adopt

suitable device to prevent unfortunate consequences of risk by observing safety

instructions; installation of automatic sparkler or alarm systems, etc. Prevention of

losses cause lesser payment to the assured by the insurer and this will encourage for

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more savings by way of premium. Reduced rate of premiums stimulate for more

business and better protection to the insured.

Small capital to cover larger risks - Insurance relieves the businessmen from

security investments, by paying small amount of premium against larger risks and

uncertainty.

Contributes towards the development of larger industries - Insurance provides

development opportunity to those larger industries having more risks in their setting

up. Even the financial institutions may be prepared to give credit to sick industrial

units which have insured their assets including plant and machinery.

2.4 Life Insurance:

Life insurance is a contract where the person requiring and insurance pays a

consideration / premium to maintain a policy and the insurer promises to pay a sum

assured or a guaranteed amount on the happening of an eventuality. If no eventuality

occurs then the insured may be eligible for some bonus also.

Why life insurance:

1. Protection of the interest of the family member.

2. Provision for education and marriage of the children.

3. Post retirement income for self and dependents

4. Special needs for medical expenses.

5. Provision for health /illness.

6. Provision for housing.

7. Provision for income tax rebate.

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2.5 Benefits of life insurance:

Insurance not only serves the ends of individuals or of special groups of individuals

but also is advantageous to the society as a whole.

Benefits to the Individual:

Superior to any other saving plans:

Unlike any other saving plan, a life insurance policy affords full protection against

risk of death. In the event of death of a policy holder, the insurance company makes

available the full sum assured to the near and dear of policy holder. In comparison,

any other saving plan would amount the total saving accumulated till date. If the death

occurs prematurely, such saving can be much lesser than sum assured. Evidently, the

potential financial loss of the family of the policy holder is sizable.

Encourages and forces thrift:

A saving deposit can easily be withdrawn. The payment of Life insurance premiums,

however, is considered sacrosanct and is viewed with the same seriousness as the

payment of interest on a mortgage. Thus, a life insurance policy in effect brings about

compulsory saving.

Easy Settlement and Protection against Creditors:

A life insurance policy is the only financial instrument, the proceeds of which can be

protected against the claims of a creditor of the assured by affecting a valid

assignment of the policy.

Administering the legacy for beneficiaries:

Speculative or otherwise, expenses can quickly cause the proceeds to be squandered.

Several policies have foreseen this possibility and provide for payment over a period

of years or in a combination of installments and lump sum amounts.

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Ready marketing and suitability for quick borrowing:

A life insurance policy can, after a certain period (generally Three years), is

surrendered for a cash value. The policy is also acceptable as a security for

commercial loans, for example, a student loan.

Disability benefits:

Death is not only hazard that is insured; many policies may include disability benefits.

Typically, these provide for waiver of future premiums and payment of monthly

installment periods.

Accidental death benefits:

Many policies can also provide for an extra sum to be paid (typically equal to the sum

assured) if death occurs as a result of accident.

Tax relief:

Under the Indian income tax act, the following tax relief is available

1. 20% of premium can be deducted from total income tax

liability.

2. 100% of the premium paid is deductible from your total

taxable income.

When these benefits are factored in, it is found that most Policies offer returns that are

comparable /or even better than other saving modes such as PPF, NSC etc. moreover,

the cost of insurance is a very negligible.

Benefits to business:

Insurance results in business continuation and welfare of employees. Uncertainty of

business losses is reduced by insurance.

Benefits of society:

The welfare of the society is protected. Insurance results in economic growth of the

country and reduction in inflation.

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2.6 Insurance Industry profile

Life Insurance:

As is evident from its very name, it deals with insurance of human life. “Life

insurance corporation of India”- a public sector undertaking has the monopoly in this

sector since its nationalization.

In our wordily life, whenever there is uncertainty, there is an involvement of risk. The

instinct for security against such risk is one of the basic motivating forces determining

human attitudes. As a squeal to this quest for Security, the concept of insurance must

have been born. The urge to provide insurance or protection against the loss of life &

property must have prompted people to make some sort of sacrifice willingly in order

to achieve security through “COLLECTIVE CO-OPERATION”, in this sense; story

of insurance is probably as old as THE story of mankind.

Insurance Industry in India

India is marching ahead to more prosperous future. The economy is on a

high growth path, domestic savings are growing, exports have risen and inflation has

stabilized. Infrastructure sector, which even today is woefully inadequate to meet the

expected increased industrial activities, has been accorded top priority by the

government. All this should reflect in a growth rate of 7 to 8% for the next 3-4 years.

With this scenario of high economic growth further reforms in the financial sector are

in the Common Minimum Program of the Government.

India is regarded as under- insured country with insurance penetration at a very low

level of 0.6% of GDP. Insurance, as a rule, has always been given very low priority

by corporate India. It is always taken with reluctance, usually only when it is

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compulsory, and then only by big industrial houses. Without exception it is always

inadequate to meet the needs of the corporate sector.

In addition to the tradition exposure of fire, floods, workers compensation and the

interruption, Corporate India also has to address unpredictable changes in areas such

as environment; security; occupational health and safety; public liabilities; Directors

and Officers Liability and product liability

It therefore becomes quite obvious that purchase of insurance, in itself, will not

substitute for a soundly based and property implemented Risk Management

Program as insurance can only offer some financial relief by replacing the plants; it

cannot replace the loss in development of a business or development of the market.

The likely private players:

A number of foreign insurance companies have set up representative office in India

and have also tied up with various asset management companies. They have either

signed Memorandum of Understanding with Indian companies or are trying to do the

same. A few of them have been around for the last four to five years. Some have

carried out extensive research on the Indian insurance sector. Others have set up

liaison offices. All of them are waiting with bated breathe for the opening up of the

sector and taking a bite of the great Indian Insurance pie.

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32%

22%11%

9%

7%

19% ICICI

BIRLASUNLIFE

HDFC STANDARD

MAX NEWYORK LIFE

TATA AIG

OTHERS

Various Players Presents In The Market

1. Bajaj Allianz Life Insurance Company Limited.

2. Birla Sun Life Insurance Co. Ltd.

3. HDFC Standard Life Insurance Co. Ltd.

4. ICICI Prudential Life Insurance Co. Ltd.

5. ING Vysya Life Insurance Company pvt. Ltd.

6. Life Insurance Corporation of India.

7. Max New York Life Insurance Co. Ltd.

8. Kotak Mahindra Old Mutual Life Insurance Limited.

9. SBI Life Insurance Co. Ltd.

10. Tata AIG Life Insurance Company Limited.

11. Reliance Life Insurance Company Limited.

12. Aviva Life Insurance Co. India Pvt.Ltd.

13. Sahara India Life Insurance Co.Ltd.

14. Shriram Life Insurance Co.Ltd.

15. Bharti AXA Life insurance Company Ltd.

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16. Met Life India Insurance Company Pvt. Ltd.

Introduction to IRDA

Insurance regulatory authority, 1996 (IRA):

The IRA was set up in January 1996

The IRA bill has first to be passed by parliament to make the IRA a statutory

body.

Second, the powers of the erstwhile controller of insurance have to be conferred

on the IRA.

Third, comprehensive legislation aimed at reviewing the insurance act of 1938 and

repealing the LIFE INSURANCE CORPORATION ACT of 1956 and the general

insurance (Nationalization) act of 1972 have to be passed.

Government’s pronouncements:

Post statutory status, IRA to be centre piece for future insurance sector reforms

IRA will be sole authority, which will be responsible for awarding of licensing i.e.

little or no government or political interference in licensing in process.

No restriction on the no. of licenses.

No composite licenses for life and non life business.

IRDA was set up to protect the interests of the policyholders, to regulate, promote and

ensure orderly growth of the insurance industry. After this the private players started

entering the market.

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CHAPTER-3

COMPANY PROFILE

18

3. Company profile

3.1 Kotak Mahindra Life Insurance

Stock broking businesses in the UK. Kotak Group was established in

1985.Kotak Mahindra Bank is the parent company of the group. Kotak Group entered

into the life insurance business in 2001. Kotak Mahindra Old Mutual Life Insurance

Ltd. is a joint venture between Kotak Mahindra Bank Ltd. (76%) and Old Mutual plc.

(24%) Old Mutual plc is a world-Class international financial services company. It

was established in South Africa before 160 years.

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 employs

over 13 000 South Africans in its local operations.

In the USA, OLD MUTUAL is one of the top ten fixed annuity businesses

offering an array of specialist asset management skills through its 23 asset

management businesses. The company’s US Life business recorded sales of $4 billion

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at the end of 2002. Operations in the United Kingdom are focused on wealth

management, through Gerrard as one of the leading private client .

The OLD MUTUAL Group has the ability to cater for a variety of consumer

segments and offers a comprehensive and innovative range of products for all income

groups Kotak Mahindra Life Insurance actually termed as Kotak Mahindra Old

Mutual Life Insurance Ltd is a joint venture between Kotak Mahindra Bank Ltd., its

affiliates and Old Mutual. 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.The Kotak Mahindra group is one of India’s leading banking and

financial services organizations, with offerings across personal financial services;

commercial banking; corporate and investment banking and markets; stock broking;

asset management and life insurance. The Kotak Group has over 1,300 offices, and

services around 5.9 million customer accounts across India. Kotak also has offices in

London, New York, San Francisco, Singapore, Dubai and Mauritius. Old Mutual is an

international savings and wealth management company based in the UK. Originating

in South Africa in 1845, it is among the top 100 largest companies in the FTSE100.

The group has a balanced portfolio of businesses offering Asset Management, Life

Assurance, Banking and General Insurance Services in over 40 countries, with a focus

on South Africa, Europe and the United States, and a growing presence in Asia

Pacific. Old Mutual employs approximately 54,000 employees worldwide with its

primary listing on the London, secondary listing on the Johannesburg stock exchanges

as well as in Namibia, Malawi and Zimbabwe.

Kotak Mahindra Old Mutual Life Insurance Ltd is a company that combines

its international strengths and local advantages to offer its customers a wide range of

innovative life insurance products, helping them in taking important financial

decisions at every stage in life and stay financially independent. It believes in offering

its customers a lifetime of value. A commitment that has made it a leading financial

services group with, employing around 10,800 people in its various businesses and

has a distribution network of branches, franchisees, representative offices and satellite

offices across 300 cities and towns in India and offices in New York, London, Dubai,

Mauritius and Singapore. The Group services around 2.6 million customer accounts.

3.2 Kotak’s Strengths

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Financial Acumen - Holds a stable and diversified portfolio and has received

some of the highest ratings in financial strength from industry’s independent

rating agencies.

Disciplined fund management - Years of experience in asset management, and a

strong track record in managing funds - backed by the acclaimed expertise of

Old Mutual plc

Innovativeness - Known for being an innovator in providing world-class

pragmatic financial solutions, with a constant focus on customization and

flexibility

Unrelenting Customer Focus - A highly committed sales force, with customer

satisfaction as the key driving force - a major differentiator

Transparency in Services - Daily declaration of fund performances, regular

performance benchmarking, well regulated asset management, and monthly

newsletter on market updates

3.3 Kotak’s Values, Mission and Vision

Values: Every member of the Kotak Group team is committed to 5 core values:

Integrity, Customer First, Boundary less, Ownership, and Passion. These values shine

forth in all we do, and have become the keystones of our success.

Mission: “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. We focus on the needs

of our customers and create confidence, trust and loyalty Strengthened by our

commitment to professional management; we ensure the continued growth and

advancement of our employees.”

Vision: Kotak Life Insurance has a deep rooted commitment to improve the

quality of life of its customers, employees and stakeholders. We aim at improving the

long term value in our relationship by continuous innovation and improvements. We

do this by our three-prong effort which strives to make Kotak Life Insurance a

corporate with values.

A. Increase Customer Value: Kotak Life Insurance has gone to the heart of its

customer's requirements and developed products which are unique and serve the

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customer needs perfectly. We built a relationship of mutual trust and benefit to

serve the Indian customer. At Kotak the customer always comes first.

B. Cohesive Work Environment: We form long-term partnership with our

employees by offering them an invigorating work experience. We not only demand

loyalty, sincerity and values but also give it back in equal measures. Kotak will like

to offer its employees space to grow, innovate and build a long-term career

C. Work with Honor: We deliver everyday services in the marketplace with the

high sense of duty and commitment. Our employees strive to build the long-term

value for all those come in contact with Kotak. Our consumers, distributors,

employees, shareholders and the nation have our commitment that we will uphold

the values of trust, integrity and a Sense of Honor in every thought, act and deed in

order to positively contribute to individual, society and nation growth.

3.4 Achievements of the Company so far:

1. Listed in the stock exchange since 1992

2. Leading financial brand

3. India’s first NBFC to convert into a bank

4. Top 3 in several financial services

5. AAA rated by credit agencies

6. Customer Base of over 5 Lakh

7. 3500 Professional Employees

8. Several National and International Awards

3.5 Management Overview

We at Kotak Life Insurance work as a team and have a flat management

structure. Our top management has many years of experience which has helped guide

the company into a position of leadership. The top management of the organization is

as follows:

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Mr. Uday Kotak --- Chief Executive Officer

Mr. Gaurang Shah --- Managing Director

Mr. G Muralidhar --- Chief Operating Officer

Mr. Pankaj Desai --- Executive Director

Mr. Subhasish Ghosh --- Sr. VP, Financial Institutions Group

Mr. Sugata Dutta --- Head Human Resources

Ms. Elizabeth Venkataraman --- Sr. Vice President Marketing

Mr. Andrew Cartwright --- Appointed Actuary

Mr. Suresh Agarwal --- Head of Alternate channel

Mr. Shekhar Bhandari --- Head of Tied channel

Mr. Anand Dewan --- Head Business Impact Group (BIG)

Mr. Sandip Shrikhande --- Senior Vice President - Group Business

Mr. Dhiresh Rustogi --- Chief Technology Officer

Mr. Sudhakar Shanbag --- Chief Investment Officer

3.6 Products of Kotak Life Insurance

Being one of the top private players in the insurance industry Kotak provides

various products aiming at all kinds of target customers. A brief overview of the

products it offers are:

Protection Plans:

Kotak Loan Protection Plan : Kotak Loan Protection Plan is a protection plan

that helps share the burden of your loan.

Kotak Eternal Life Plans : Kotak Eternal Life Plans are participating whole

life plans that provide enhanced protection till the golden age of 99.

Kotak Term/Preferred Term Plan : The Kotak Term/Preferred Term Plan is

a pure risk cover plan that provides you with a high level of protection at

nominal costs.

Savings & Investment Plans:

Kotak Safe Investment Plan II : Equity investments although attractive are

given to volatility and can often result in loss of capital. Therefore, as a

prudent investor you would be inclined to avoid such investments or limit your

exposure to them.

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Kotak Platinum Edge : You've lived life on your own terms; always done

what you've believed in. You are used to having the luxury of choice and the

power to control.

Kotak Single Invest : Life has the ability to surprise you pleasantly with

financial windfall and surplus. As an individual, who is aware of his

responsibilities and aspirations, it is now up to you to make the best use of it.

Kotak Capital Multiplier Plan : The Kotak Capital Multiplier Plan is the

only plan of its kind that allows you to enjoy returns even beyond maturity.

Kotak Money Back Plan : This plan offers the key benefit of cash lump sums

at periodic intervals of five years ensuring that you are able to meet any of

your financial obligations.

Kotak Endowment Plan : Kotak Endowment Plan is a participating

endowment plan that provides you an avenue for long term regular

investments to accumulate a lump sum on maturity.

Children’s Plans:

Kotak Headstart Child Plans : The headstart child plans are specially

tailored, cost effective plans that aim to give your children the financial means

to pursue his or her dreams

Kotak Child Advantage Plan : The Kotak Child Advantage Plan is an

investment plan designed to meet your child's future financial needs

Retirement Plans:

Kotak Long Life Wealth Plus : Life has several shades. Some known, some

unknown; some planned, some unplanned. Life may not always be the way

you want it to be.

Kotak Long Life Secure Plus : Protecting your family and ensuring their

comfort has always been your primary concern and key responsibility.

Kotak Second Innings Plan : With a comfortable lifestyle and a happy

family, today you are enjoying life to the full.

Kotak Guaranteed Pension Builder : Kotak Guaranteed Pension Builder

works for your security and financial independence by allowing you to save

systematically for your golden years.

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Kotak Retirement Income Plan : The Kotak Retirement Income Plan is a

savings plan designed to meet your post-retirement needs. It is a plan that

gives you "Jeene ki azaadi".

CHAPTER-4

CONCEPTUAL AND THEORETICAL

FRAMEWORK

25

4. Conceptual and theoretical framework

4.1 Unit Linked Insurance Plans (ULIPs)

ULIPS: ULIPs are market-linked life insurance products that provide a combination of

life cover and wealth creation options.

A part of the amount that people invest in a ULIP goes toward providing life

cover, while the rest is invested in the equity & debt instruments for

maximizing returns.

They provide the flexibility of choosing from a variety of fund options

depending on the customers risk appetite. One can opt from aggressive funds

(invested largely in the equity market with the objective of high capital

appreciation) to conservative funds (invested in debt markets, cash, bank

deposits and other instruments, with the aim of preserving capital while

providing steady returns).

ULIPs can be useful for achieving various long term financial goals such as

planning for retirement, child’s education, marriage etc.

Unit linked insurance plan (ULIP) is a life insurance solution that provides the client

with the benefits of protection and flexibility in investment. It is a solution which

provides for life insurance where the policy value at any time varies according to the

value of the underlying assets at the time .

The investment is denoted as unit and is represented by the value that it has attained

called as Net Asset Value (NAV).

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ULIP came into play in 1960s and became very popular in Western Europe and

America. The reason that is attributed to the wide spread popularity of ULIP is

because of the transparency and the flexibility which it offers to the clients .

As time progressed the plans were also successfully mapped along with life insurance

needs to retirement planning.

In today’s times ULIP provides solution for all the needs of a client like insurance

planning, financial needs, financial planning for children’s future and retirement

planning.

4.2 Structure of Ulip

4.3 Benefits of Unit Linked Plan

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UNITS

IN

FUNDS

UNDERLYING

INVESTMENT

PREMIUM

LESS CHARGE

LIFE COVER

UNIT LINKED INSURANCE POLICIES

INVESTMENT REPRESENTED AS UNITS

ULIP distinguishes itself through the multiple benefits that it provides to the

consumer. The plan is a one stop solution providing

1. Life protection

2. Investment and Savings

a. Market linked fund based on risk profile

b. Switch option

c. Premium redirection

d. Automatic transfer plan (ATP)

3. Flexibility of cover continuance

4. Transparency

5. Extra protection with riders

a. Death due to accident

b. Disability

c. Critical illness

6. Liquidity

a. During the term partial withdrawals

b. At Maturity

7. Tax planning

4.4 Charges under ULIP

Contribution related charges:

These are the charges that are represented as a percentage of the regular or single

contribution paid. In case of a regular contribution plan, it is usually high in the first

year to pay for the distribution cost. These charges pay for the issuance and for

distribution commissions. These charges are running for the policy.

Administrative charges:

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These are charges that are levied for the administration of the policy and the related

cost of administration of the insurance company, itself. They are more related to the

cost like IT, operational, etc cost of continuing the policy.

Fund management charges:

These are the charges for buying and selling debt and equity. These are the charges

are adjusted in NAV it self.

Mortality charges:

This covers the cost of providing life protection for the insured and may be paid once

at the start of the policy for a recurrent manner for example this charges levied to

provide the insurance cover under the plan. Normally these charges are one year

charges as per the age of the holder.

Rider charges:

Rider charges are similar in nature to the mortality charges as they are levied to pay

for the other protection benefits that the policy holder has chosen for- like the critical

illness benefit or the accident benefit, etc.

Surrender charges:

When the policy holder decides to surrender the policy or partially withdraw some of

the units for cash, a surrender charge may be apply.

Surrender charges are used to cover initial expenses that have been incurred by the

company but not yet recovered from the policyholder yet.

Bid offer charges:

In ULIP specifically certain insurers might create a difference in the price at which

they sell the unit and the price at which they buy the units. Investor’s contribution is

used to buy units in the investment fund at the offer price and is sold when benefits

are required at the bid price. The difference between the offer and bid prices is known

as the “bid-offer spread", this is used to cover expenses when setting up the policy.

29

Transactional specific charges:

These charges are levied when the client does some specific transaction like changing

funds, topping up the investment component or withdrawals.

4.5 Steps to select the right ULIP

Unit linked Insurance Plans (ULIPs) were seen as a “wonder product” that simultaneously fulfilled an individual’s needs for investment and insurance.

Understand the concept of ULIP

Focus on your requirement and risk profile

Compare ULIPs of different insurance companies

Go for an experienced insurance advisor.

Does your ULIP offer a minimum guarantee?

4.6 Comparison of ULIPs with Traditional plans

Unit Linked Insurance Product:

ULIPs have gained high acceptance due to attractive features they offer. These

include:

Flexibility

o Flexibility to choose Sum Assured.

o Flexibility to choose premium amount.

o Option to change level of Premium /Sum Assured even after the plan

has started.

o Flexibility to change asset allocation by switching between funds

Transparency

o Charges in the plan & net amount invested are known to the customer

o Convenience of tracking one’s investment performance on a daily

basis.

Liquidity

o Option to withdraw money after few years (comfort required in case of

exigency)

30

o Low minimum tenure.

o Partial / Systematic withdrawal allowed

Fund Options

o A choice of funds (ranging from equity, debt, cash or a combination)

o Option to choose your fund mix based on desired asset allocation

Traditional Plans :

These are the oldest types of plans available. These plans cater to customers

with a low risk appetite. Some of the common features of traditional plans are:

Steady Investment

o Major chunk of investible funds are in debt instruments

o Steady and almost assured returns over the long term

Features

o Death benefit is Sum Assured + guaranteed & vested bonus

o Helps in asset creation as they are for a long tenure

o Premium to Sum Assured ratios are fixed for each plan and age.

o Generally withdrawals are not allowed before maturity.

Point of difference ULIP Traditional Policy

Investment

Market related (May be

stock market or debt

market)

IRDA? Determined

investments

Transparency in costs Yes No

Flexibility in payment Yes No

Assured Bonus No Yes

Assured Sum on survival No Yes

Option to increase

investment/premium Yes No

31

ULIPs better than traditional policies:

Until a couple of years ago, when ULIPs were a rare commodity, nobody knew how

life insurance companies charged policyholders for expenses. And nobody seemed to

want to know either. Then came the ULIPs with good intentions to make

policyholders aware of how much they would pay as expenses. But that move

backfired. Policyholders were taken aback by the high amount of fees that ULIPs

charged.

 While the charge structure on ULIPs is something that is open to debate, the issue is

that ULIPs alone cannot be isolated. Traditional policies too charge high

administrative and management expenses. In ULIPs, the first year charges range from

20-70%, one does not know how much traditional policies charge.

This can have a bearing on returns as well. A ULIP may charge you upfront but

thereafter, all the returns on the fund are yours while a traditional policy may charge

less but share a smaller portion of returns with you.

 So if you were substituting a traditional endowment with a ULIP, you would be

better off with the latter since you would know your charges and your returns.

We recommend traditional policies:

Where the objective is only Risk cover and not savings and cost has to be minimum.

We recommend Unit Linked products where:

The intention is to provide security for a goal.

The purpose is to make the savings grow at a better rate seeking the best

solution.

It is a market linked investment where the premium paid is invested in funds

Different options are available, like 100% Equity, Balanced, Debt, Liquid etc

and according to the fund selected, the risks and returns vary.

The costs are upfront and are transparent, the investment made is known to the

investor (As he is the one who decides where his money should be invested).

There is a greater flexibility in terms of premium payments ie. A premium

holiday is possible.

You can also invest surplus money by way of top ups which will increase your

investment in the fund and thereby provide a push to returns as well.

32

There is no assured Sum on survival, the higher of the Sum Assured or Fund

Value is paid at the maturity or incase of death.

4.7 Unit Linked Insurance Plans VS Mutual Funds:

Differences between ULIPs and a Mutual Fund:

Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual

funds in terms of their structure and functioning. As is the case with mutual funds, the

insurance company allots units investors in ulips and a net asset value (NAV) is

declared for the same on a daily basis.Similarly ULIP investor have the option of investing across various schemes similar

to the ones found in the mutual funds domain, i.e. diversified equity funds, balanced

funds and debt funds to name a few. Generally speaking, ULIPs can be termed as

mutual fund schemes with an insurance component.

However it should not be constructed that barring the insurance element there is

nothing differentiating mutual funds from ULIPs.

Despite the seemingly comparable structures there are various factors wherein the two

differ.

1. Mode of investment/ investment amounts:

Mutual fund investors have the option of either making lump sum investments or

investing using the systematic investment plan (SIP) route, which entails commitments

over longer time horizons. The fund house lays out the minimum investment amounts.

ULIP investors also have the choice of investing in a lump sum (single premium) or

using the conventional route, i.e. making premium payment on an annual, half-yearly,

quarterly or monthly basis. In ULIPs, determine the premium paid is often the starting

point for the investment activity.

ULIP investors also have the flexibility to alter the premium amounts during the

policy’s tenure. For example an individual with access to surplus funds can enhance the

contribution thereby ensuring that his surplus funds are gainfully invested; conversely

an individual faced with a liquidity crunch has the option of paying a lower amount (the

difference being adjusted in the accumulated value of his UILP). The freedom to

33

modify premium payments at one’s convenience clearly gives UILP investors an edge

over their mutual fund counterparts.

2. Expenses:

In mutual fund investments, expenses charged for various activities like fund

management, sales and marketing, administration among others are subject to

predetermined upper limits as prescribed by the Securities and Exchange Board of

India.

For example equity-oriented funds can charge their investors a maximum of 2.5% per

annum on a recurring basis for all their expenses; any expense above the prescribed

limit is borne by the fund house and not the investors.

Similarly funds also charge their investors entry and exit loads (in most cases, either is

applicable). Entry loads are charged at the timing of making an investment while the

exit load is charged at the time of sale.

Insurance companies have a free hand in levying expenses on their ULIP products with

no upper limits being prescribed by the regulator, i.e. the Insurance Regulatory and

Development Authority. This explains the complex and at times ‘unwieldy’ expense

structure on UILP offerings. The only restraint placed is that insurers are required to

notify the regulator of all the expenses that will be charged on their ULIP offerings.

Expenses can have far-reaching consequences on investors since higher expenses

translate into lower amounts being invested and a smaller corpus being accumulated.

3. Portfolio disclosure:

Mutual fund houses are required to statutorily declare their portfolios on a quarterly

basis, albeit most fund houses do so on a monthly basis. Investors get the opportunity to

see where their monies are being invested and how they have been managed by

studying the portfolio. There is lack of consensus on whether ULIPs are required to

disclose their portfolios. During our interactions with leading insures we came across

divergent views on this issue. While one school of thought believes that disclosing

portfolios on a quarterly basis is mandatory , the other believes that there is no legal

obligation to do so and that insurers are required to disclose their portfolios only on

demand.

Some insurance companies do declare their portfolios on a monthly/ quarterly basis.

34

However the lack of transparency in ULIP investments could be a cause for concern

considering that the amount invested in insurance policies in essentially meant to

provide for contingencies and for long-term needs like retirements; regular portfolio

disclosures on the other hand can enable investors to make timely investment decisions.

ULIPs MUTUAL FUNDS

Investment amounts Determined by the

investor and can be

modified as well

Minimum investment

amounts are determined by

the fund house

Expenses No upper limits, expenses

determined by the

insurance companies

Upper limits for expenses

chargeable to investors

have been set by the

regulator

Portfolio disclosure Not mandatory Quarterly disclosures are

mandatory

Modifying asset allocation Generally permitted for

free or at a nominal costs

Entry/ exit loads have to

be borne by the investor

Tax benefits Sec 80C benefits are

available on all UILP

investments

Sec 80C benefits are

available only on

investments in tax saving

funds

Table: ULIPs vs MUTUAL FUNDS

4.8 What makes ULIPs a total financial planning package?

o Potential for Superior returns by switching between Equity & Debt 

o Anytime Liquidity

o No Long Term Commitments

o Flexible Insurance Cover

o 100% Tax Free Returns on Withdrawals & Maturity

35

4.9 Comparison of ULIP with other Investment Modules:

OTHER

INSTRUMENT

RATE OF

RETURN

TIME

PERIOD

RISK MIN.

INVEST

MENT

MAX

INVEST

MENT

TAX

FREE

RETUR

N

TAX

BENE

FIT

NSC 8% 6years No 100 No limit No Yes

PPF 8% 15years No 500 70000 Yes Yes

ELSS Market

return

3years Risky 500 No limit Yes Yes

ULIP Market

return

5years Risky

Module

500 No limit Yes Yes

FD 9.5% 5years No 10000 No limit No Yes

MUTUAL

FUND

Market

Return

Open

Ended

High 500 No limit Capital

gain

@10%

for time

less than

1year

Only in

ELSS

Funds

STOCK Variable No time

frame

Very

high

Variable No limit Capital

gain

@10%

for time

less than

1 year

No

4.10 ULIPs- Systematic Insurance cum Investment Plan

Any individual who has purchased a life insurance policy in the last year or so surely

would have a Unit Linked Insurance Plan (ULIP). ULIPs have been selling like

36

Wonder Products in the recent past and they are likely to continue to outsell their

plain vanilla counterparts going ahead.

A ULIP is a market-linked insurance plan. The difference between a ULIP and other

insurance plans is the way in which the premium money is invested. Premium from,

say, an endowment plan, is invested primarily in risk-free instruments like

government securities (gsecs) and AAA rated corporate paper, while ULIP premiums

can be invested in stock markets in addition to corporate bonds and gsecs. So what

else apart from this reason makes ULIPs so attractive to the individual? Here, we have

explored some reasons, which have made ULIPs so irresistible.

Transparency:

However, ULIPs offer a transparent option for customers to plan their various life

stage needs through market-led investments as compared to traditional investment

plans.

Insurance cover plus saving:

ULIPs serve the purpose of providing life insurance combined with savings at market-

linked returns. To that extent, ULIPs can be termed as a two-in-one plan in terms of

giving an individual the twin benefits of life insurance plus savings. This is unlike

comparable instruments like a mutual fund for instance, which does not offer a life

cover.

Multiple investment options:

ULIPs offer variety than traditional life insurance plans. So there are multiple options

at the individual's disposal. ULIPs generally come in three broad variants:

• Aggressive ULIPs (which invest 80%-100% in equities, balance in debt)

• Balanced ULIPs (invest around 40%-60% in equities)

• Conservative ULIPs (invest upto 20% in equities)

Although this is how the ULIP options are generally designed, the exact debt/equity

allocations may vary across insurance companies. A ULIP policyholder has the option

to invest in a variety of funds, depending on his risk profile. If one does not have the

appetite to invest in equity, they can choose a debt or balanced fund.

37

Flexibility:

Individuals can switch between the ULIP variants outlined above to capitalize on

investment opportunities across the equity and debt markets. Some insurance

companies allow a certain number of free' switches. This is an important feature that

allows the informed individual/investor to benefit from the vagaries of stock/debt

markets. For instance, when stock markets were on the brink of 7,000 points (Sensex),

the informed investor could have shifted his assets from an Aggressive ULIP to a low-

risk Conservative ULIP.

Switching also helps individuals on another front. They can shift from an Aggressive

to a Balanced or a Conservative ULIP as they approach retirement. This is a reflection

of the change in their risk appetite, as they grow older.

Works like a SIP:

Rupee cost-averaging is another important benefit associated with ULIPs. Individuals

have probably already heard of the Systematic Investment Plan (SIP), which is

increasingly being advocated by the mutual fund industry. With an SIP, individuals

invest their monies regularly over time intervals of a month/quarter and don't have to

worry about `timing' the stock markets. These are not benefits peculiar to mutual

funds. Not many realise that ULIPs also tend to do the same, albeit on a

quarterly/half-yearly basis. As a matter of fact, even the annual premium in a ULIP

works on the rupee cost-averaging principle. An added benefit with ULIPs is that

individuals can also invest a one-time amount in the ULIP either to benefit from

opportunities in the stock markets or if they have an investible surplus in a particular

year that they wish to put aside for the future. When you're buying a ULIP, make sure

you select one that works well for you. The important thing is to look for and

understand the nuances, which can considerably alter the way the product works for

you. Take the following into consideration:

Charges:

Understand all the charges levied on the product over its tenure, not just the initial

charges. A complete charge structure would include the initial charges, the fixed

administrative charges, the fund management charges, mortality charges and spreads,

38

and that too, not only in the first year but also through the term of the policy.

Fund Options and Management:

Understand the various fund options available to you and the fund management

philosophy and objectives of each of them. Examine the track record of the funds and

how they are performing in comparison to benchmarks. Who manages the funds and

what experience do they have? Are there adequate controls? Importantly, look at how

easily you can access information about your fund's performance when you need it --

are their daily NAVs? Is the portfolio disclosed regularly?

Features:

Most ULIPs are rich in features such as allowing one to top-up or switch between

funds, increase or decrease the protection level, or premium holidays. Carefully

understand the conditions and charges associated with each of these. For instance, is

there a minimum amount that must be switched? Is there a charge on the same? Must

you go through medical underwriting if you want to increase the sum assured?

Company:

Last but not least, insure with a brand you can trust to honour its commitment and

service you according to your requirements

First and foremost, investors need to understand that a ULIP is a bundled product of

their investments and their insurance proceeds. Since privatization in 2000 and the

introduction of ULIPs as a life insurance product category, the overall insurance

penetration in the country has grown from around 2% to 4%. Today, more than 70 per

cent of the new business premium for life insurers comes from Ulips.

All Ulips have several funds in which your money can be put to work, much like a

mutual fund. Assuming that you choose the growth or the equity plan, ask for the

NAV performance for the last two years at least. Choose three with the highest

performance track record vis-a-vis the benchmark. Now choose the best performing

policy in terms of returns with the lowest cost.

39

CHAPTER-5

DATA ANALYSIS AND INTERPRETATION

40

Superiority of Ulips over fixed deposits:

An investment gives you financial freedom. If you invest your money from the

beginning, you need not to worry about the future financial necessities. As future is

uncertain, and there may be a situation in your life where you require a large amount

of money to get out of that situation with minimal loss. So to effectively protect

yourself from such type of situation, you must inculcate the habits of saving and

investing. It may be because of your children's education, marriage or medication.

Let it be anything which demands lot of money, you may outdo it if you have invested

your money from the beginning itself. Hence, investment gives you more financial

freedom to rely upon. If you have a desire for having a luxurious apartment and a

luxurious car of your own, then it is obvious that these desires may be fulfilled by a

planned investment and savings. As you invest more, you tend to become richer. And

as you become richer, you may find no difficulty in achieving your personal goal.

Achieving personal goals is the essence of your success in every aspect of your life.

A good investment strategy requires choosing the right mix of safe and risky

investments. Among safe investments, fixed deposits (FD) are the most popular. But

think before investing in FD because there are some other investment avenues that

provide you much better returns such as ULIPs and Mutual Funds. Following are the

factors that you have to consider before investing in FD;

· What is the Rate of return you need to satisfy your future needs?

· Whether the returns generated by FD are sufficient to meet your future

financial

needs?

41

· Is there any other better investment option than FD?

· Tax benefits on the returns

With FDs you deposit a lump sum of money for a fixed period ranging from a few

weeks to a few years and earn a pre-determined rate of interest. In ULIPs you invest

money regularly and after a period of time you will receive the lump sum amount.

The return on ULIPs will be normally greater than the return on FD. Following

illustration will help you to understand the return on FD and ULIP.

Interest Rate on FD

Bank Upto 1 year Upto 2 year Upto 3 year Upto 4 year Upto 5 year

ICICI 7.25% 7.75% 7.75% 7.75% 8.25%

Canara 7.25% 7.50% 6.00% 8.00% 8.00%

SBI 7.00% 5.00% 5.00% 7.25% 7.75%

HSBC 5.00% 5.50% 6.25% 6.25% 7.50%

Citi Bank 3.35% 3.75% 3.75% 7.00% 7.00%

· If you are investing in FD for 1 year you will get a maximum of 7.25% return

· If you are investing in FD for 2 year you will get a maximum of 7.75% return

· If you are investing in FD for 3 year you will get a maximum of 7.75% return

· If you are investing in FD for 4 year you will get a maximum of 8% return

· If you are investing in FD for 5 year you will get a maximum of 8.25% return

Company Fund Last 1 year Last 2 years Last 3 years

Birla Sun Life Creator 21.40% 18.40% 19.30%

Birla Sun Life Balancer 20.60% 15.80% 14.70%

ICICI Prudential

Balancer II 10.20% 11.30% 13.70%

HDFC Life Time Flexi Growth

6.50% 8.50% 12.90%

HDFC Life Balanced Managed

6.40% 8.10% 12.50%

Returns on ULIPs

42

ULIPs are always given more return than FD to the investors. It is always a

better option to the investors as it is generating comparatively more return than

FD.

Example:

Let us understand the performance of FDs and ULIPs with the help of following

example:

Mr. Rahul is working with a multinational software company; he wants to save a

good amount of money for his child’s education. He is looking to invest his money in

a profitable avenue so that he can withdraw back his money with huge returns after a

period of five years. He has approached some financial Planners and most of them

have guided him to invest in two different avenues such as Fixed Deposit and ULIP.

At last he decided to invest Rs, 1,00,000 every year in ULIP and Rs. 1,00,000 every

year in Fixed Deposit. But in FD he doesn’t have the option to invest every year. So

he has to deposit Rs. 100000 for one year. At the end of first year he has to withdraw

the money and again he has to invest Rs.100000 plus last year’s return (i.e.

Rs.100000+Interest) in the second year. Below given table will help you to find out

the returns generated from both the investments.

(In this example we have considered the average return from FD as 7% and Average

return from ULIP as 14%).

Returns from Fixed Deposit (FD):

43

Below given table will provide you details about the performance of Fixed Deposit

return over a period of 10 years

* Money Deposited every year = Last year’s FV + 1,00,000

Above given table shows that the return from FD over a period of 5 years is Rs.

6,15,329.07. If Rahul is investing for a period of 10 years the return will be Rs.

14,78,359.93. Compared to ULIPs Fixed Deposits doesn’t carry any charges like

Allocation charges or Fund Management charged. But on the other hand the return

generated is very less moreover he has to pay tax on the returns. The interest rate on

FD is taken as 7% because you cannot invest Rs. 100000 every year in FD. So you

have to invest for 1 year after that you have to withdraw it and reinvest (i.e.

withdrawn amount + 100000).

44

Returns from ULIPs:

Below given table will provide you details about the performance of Fixed Deposit

return over a period of 10 years.

Above mentioned table shows that the investment of Rahul has gone up to Rs.

6,88,851.14 in a period of 5 years. During a period of 10 years this will grow upto Rs.

19, 32,922.87.

Analysis of Returns:

Returns Over a period of 5 years:

· Return on ULIPs – Rs. 6, 88,851.14

· Return on FD – Rs. 6, 15,329.07

(By looking at the figure we can make out that the performance of ULIP is much

better than the performance of FD)

Returns Over a period of 10 years:

· Return on ULIPs – Rs. 19,32,922.87

· Return on FD – Rs. 14,78,359.93

45

(By looking at the figure we can make out that the performance of ULIP is much

better than the performance of FD)

Difference in Returns:

Investment 5 year returns 10 year returns

ULIP 6,88,851.14 19,32,922.87

FD 6,15,329.07 14,78,359.93

Difference 73522.07* 454562.94**

*Return on ULIP is Rs. 73522.07 more than the return on FD

** Return on ULIP is Rs. 454562.94 more than the return on FD

Return over a period of 5 years = 6,88,851.14 - 6,15,329.07 = 73522.07

Return over a period of 10 years = 19,32,922.87 - 14,78,359.93 = 454562.94

Absolute Return :

To find out the absolute return on the investment we should deduct Tax from the

actual return. From the below given table we can clearly find out the absolute return

on ULIP and absolute return on FD.

Over a period of 5 years:

PARTICULARS ULIP FD

5 year Return 6,88,851.14 6,15,329.07

Tax (30%) Nil* 1,84,598.72

Absolute return 68,88,51.14 4,30,730.35

Profit of investing in ULIPs-Rs. 258120.79

*Returns on ULIPs are Tax free

Over a period of 10 years:

46

PARTICULARS ULIP FD

10 year Return 19,32,922.87 14,78,359.93

Tax (30%) Nil* 443507.98

Absolute return 19,32,922.87 10,34,851..95

Profit of investing in FD-Rs.8,98,070.92

*Returns on ULIPs are Tax free

At the end of 5th year Rahul will receive Rs. 6, 88,851.14 fromULIPs and Rs. 4,

30,730.35 from FD. The return from ULIP is Rs. 2, 58,120.79 more than the return

from FD. If he is investing for a period of 10 years at the end of the term he will

receive Rs. 19, 32,922.87 from ULIPs and Rs. 10, 34,851.95 from FD. The return

from ULIP is RS. 8, 98,070.92 more than the return from FD.

Graphical Representation:

From the below given table you can understand the difference in return from ULIP

and FD.

Why ULIPs are the best:

Unit-linked insurance plans have caught the fancy of investors in urban centers.

ULIPs not only provided life cover, but also brought in a lot of transparency in the

way the policyholders' money is invested. Birla Sun Life Insurance Company

47

revolutionalised the life insurance industry in India with its decision to offer only

ULIPs. The rest of the life insurers followed, including the public sector Life

Insurance Corporation (LIC). The key stock market indices are touching newer peaks

and it is the time to take a look at how ULIPs are performing. The returns from

growth funds of leading private sector players like, Birla Sun Life, HDFC Standard

Life, ICICI Prudential Life and Bajaj Allianz, are performing very good. - 48 -The

returns on ULIPs are normally higher than the mutual funds. ULIPs do not face

redemption pressures as the insurance money is for longer term and hence offers room

for fund managers to design better, disciplined investment strategies.

Inference:

1. From the above analysis it can be inferred that, the returns from Ulips over a period

of 5years are Rs.2, 58,120.79 more than that of fixed deposits.

2. Over a period of 10years, the returns from Ulips are Rs.8, 98,070.92 more than that

of fixed deposits.

Kotak pension floating rate

48

49

Kotak pension floating rate

sensex ROR(X) nav ROR(Y)

2007 JAN 14090.92 11.46

FEB 12938.09 -8.18137 11.41 -0.4363

MAR 13072.1 1.035779 11.49 0.701139

APR 13872.37 6.12197 11.59 0.870322

MAY 14544.46 4.84481 11.65 0.517688

JUN 14650.51 0.729144 11.82 1.459227

JUL 15550.99 6.146407 12.17 2.961083

AUG 15318.6 -1.49437 11.87 -2.46508

SEP 17291.1 12.8765 11.92 0.42123

OCT 19837.99 14.72949 12 0.671141

NOV 19363.19 -2.39339 12.1 0.833333

DEC 20286 4.765795 12.19 0.743802

2008 JAN 17648.71 -13.0005 12.27 0.656276

FEB 17578.72 -0.39657 12.34 0.570497

MAR 15644.44 -11.0035 12.41 0.567261

APR 17125.98 9.470074 12.45 0.322321

MAY 16415.57 -4.14814 12.51 0.481928

JUN 13802.22 -15.9199 12.53 0.159872

JUL 14274.94 3.424956 12.61 0.638468

AUG 14564.53 2.02866 12.7 0.713719

SEP 12860.43 -11.7003 12.82 0.944882

OCT 9788.06 -23.8901 12.99 1.326053

NOV 9092.72 -7.10396 13.12 1.00077

DEC 9647.31 6.099275 13.42 2.286585

2009 JAN 9424.24 -2.31225 13.44 0.149031

FEB 8891.61 -5.6517 13.55 0.818452

MAR 9708.5 9.1872 13.54 -0.0738

APR 11403.25 17.45635 13.69 1.107829

MAY 14625.25 28.2551 13.74 0.36523

JUN 14493.84 -0.89851 13.75 0.07278

JUL 15670.31 8.117035 13.79 0.290909

AUG 15666.64 -0.02342 13.79 0

SEP 17126.84 9.320441 13.85 0.435098

OCT 15896.28 -7.18498 13.89 0.288809

NOV 16,926.22 6.479126 13.99 0.719942

DEC 17464.81 3.181986 14.02 0.214439

SUM 38.96696 20.33494

 AVERAGE 1.113342 0.580998

 

STD DEV 10.11858 0.82186

Kotak pension floating rate returns 0.580998

Market returns 1.113342

COMPARISON WITH MARKET RETURNS

00.20.40.60.8

11.2

kotak pensionfloating rate

market returns

kotak pension floatingrate

market returns

Kotak pension floating rate risk 0.82186

Market risk 10.11858

COMPARISON WITH MARKET RISK

02468

1012

kotak pensionfloating rate risk

market risk

kotak pension floatingrate risk

market risk

Interpretation:

1. As the above table and chart shows, the market returns (1.11) were

higher than the Kotak pension floating rate (0.58), it indicates that the

fund underperformed when compared to market.

2. In comparison with market risk, the fund (0.82) was less riskier than

the market (10.12).

50

Kotak advantage plus fund

kotak advantage plus fundsensex ROR(X) nav ROR(Y)

2007 JAN 14090.92 10.97FEB 12938.09 -8.18137 10.51 -4.19325MAR 13072.1 1.035779 10.54 0.285442APR 13872.37 6.12197 10.78 2.27704MAY 14544.46 4.84481 11.08 2.782931JUN 14650.51 0.729144 11.16 0.722022JUL 15550.99 6.146407 11.56 3.584229AUG 15318.6 -1.49437 11.36 -1.7301SEP 17291.1 12.8765 12.06 6.161972OCT 19837.99 14.72949 13.44 11.44279NOV 19363.19 -2.39339 13.24 -1.4881DEC 20286 4.765795 13.8 4.229607

2008 JAN 17648.71 -13.0005 11.88 -13.913FEB 17578.72 -0.39657 11.92 0.3367MAR 15644.44 -11.0035 11.06 -7.21477APR 17125.98 9.470074 11.44 3.435805MAY 16415.57 -4.14814 11.09 -3.05944JUN 13802.22 -15.9199 10.44 -5.86114JUL 14274.94 3.424956 10.47 0.287356AUG 14564.53 2.02866 10.5 0.286533SEP 12860.43 -11.7003 10.43 -0.66667OCT 9788.06 -23.8901 10.33 -0.95877NOV 9092.72 -7.10396 10.48 1.452081DEC 9647.31 6.099275 11.26 7.442748

2009 JAN 9424.24 -2.31225 10.92 -3.01954FEB 8891.61 -5.6517 10.9 -0.18315MAR 9708.5 9.1872 10.95 0.458716APR 11403.25 17.45635 11.49 4.931507MAY 14625.25 28.2551 12.17 5.91819JUN 14493.84 -0.89851 11.97 -1.64339JUL 15670.31 8.117035 12.3 2.756892AUG 15666.64 -0.02342 12.21 -0.73171SEP 17126.84 9.320441 12.67 3.767404OCT 15896.28 -7.18498 12.27 -3.15706NOV 16,926.22 6.479126 12.62 2.852486DEC 17464.81 3.181986 12.72 0.792393

SUM 38.96696 18.38472

 AVERAGE 1.113342 0.525278 STD DEV 10.11858 4.534398

51

COMPARISON WITH MARKET RETURNS

00.20.40.60.8

11.2

kotak advantage plusfund returns

market returns

kotak advantage plusfund returns

market returns

COMPARISON WITH MARKET RISK

02468

1012

kotak advantage plusfund risk

market risk

kotak advantage plusfund risk

market risk

Interpretation:

1. As the above table and chart shows, the Kotak Advantage Plus Fund’s

returns (0.53) were comparatively lower than market returns (1.11).

2. Based on risk, the fund was found to be less riskier (4.53) when compared

to market (10.12).

52

Kotak advantage plus fund risk 4.534398

Market risk 10.11858

Kotak advantage plus fund returns 0.525278

Market returns 1.113342

Kotak group money market

kotak group money market sensex ROR(X) nav ROR(Y)

2007 JAN 14090.92 12.47FEB 12938.09 -8.18137 12.55 0.64154MAR 13072.1 1.035779 12.65 0.796813APR 13872.37 6.12197 12.74 0.711462MAY 14544.46 4.84481 12.85 0.863422JUN 14650.51 0.729144 12.95 0.77821JUL 15550.99 6.146407 13.05 0.772201AUG 15318.6 -1.49437 13.16 0.842912SEP 17291.1 12.8765 13.26 0.759878OCT 19837.99 14.72949 13.37 0.829563NOV 19363.19 -2.39339 13.48 0.822737DEC 20286 4.765795 13.59 0.816024

2008 JAN 17648.71 -13.0005 13.7 0.809419FEB 17578.72 -0.39657 13.8 0.729927MAR 15644.44 -11.0035 13.96 1.15942APR 17125.98 9.470074 14.06 0.716332MAY 16415.57 -4.14814 14.17 0.782361JUN 13802.22 -15.9199 14.32 1.058574JUL 14274.94 3.424956 14.59 1.885475AUG 14564.53 2.02866 14.71 0.822481SEP 12860.43 -11.7003 14.85 0.951734OCT 9788.06 -23.8901 14.99 0.942761NOV 9092.72 -7.10396 15.13 0.933956DEC 9647.31 6.099275 15.29 1.057502

2009 JAN 9424.24 -2.31225 15.44 0.981033FEB 8891.61 -5.6517 15.58 0.906736MAR 9708.5 9.1872 15.74 1.026958APR 11403.25 17.45635 15.88 0.889454MAY 14625.25 28.2551 16.02 0.881612JUN 14493.84 -0.89851 16.17 0.93633JUL 15670.31 8.117035 16.32 0.927644AUG 15666.64 -0.02342 16.47 0.919118SEP 17126.84 9.320441 16.62 0.910747OCT 15896.28 -7.18498 16.8 1.083032NOV 16,926.22 6.479126 16.95 0.892857DEC 17464.81 3.181986 16.94 -0.059

SUM 38.96696 30.78123

 AVERAGE 1.113342 0.879464 STD DEV 10.11858 0.262083

53

COMPARISON WITH MARKET RETURNS

00.20.40.60.8

11.2

kotak group moneymarket returns

market returns

kotak group moneymarket returns

market returns

COMPARISON WITH MARKET RISK

02468

1012

kotak group moneymarket risk

market risk

kotak group moneymarket risk

market risk

Interpretation:

1. From the above table and chart, we can infer that the fund underperformed

when compared to market as the fund’s returns (0.88) were lower than the

market’s (1.11).

2. In comparison with market risk, the fund was found to be less riskier with

standard deviation (0.26).

54

Kotak group money market returns 0.879464

Market returns 1.113342

Kotak group money market risk 0.262083

Market risk 10.11858

Kotak aggressive growth fund

kotak aggressive growth fundsensex ROR(X) nav ROR(Y)

2007 JAN 14090.92 24.38FEB 12938.09 -8.18137 22.4 -8.12141MAR 13072.1 1.035779 22.78 1.696429APR 13872.37 6.12197 24.11 5.838455MAY 14544.46 4.84481 25.71 6.636251JUN 14650.51 0.729144 26.23 2.022559JUL 15550.99 6.146407 27.74 5.756767AUG 15318.6 -1.49437 27.3 -1.58616SEP 17291.1 12.8765 31.04 13.69963OCT 19837.99 14.72949 36.43 17.36469NOV 19363.19 -2.39339 36.41 -0.0549DEC 20286 4.765795 39.22 7.71766

2008 JAN 17648.71 -13.0005 32.28 -17.6951FEB 17578.72 -0.39657 32.77 1.517968MAR 15644.44 -11.0035 28.59 -12.7556APR 17125.98 9.470074 31.48 10.10843MAY 16415.57 -4.14814 30.07 -4.47903JUN 13802.22 -15.9199 24.52 -18.4569JUL 14274.94 3.424956 26.19 6.810767AUG 14564.53 2.02866 26.63 1.680031SEP 12860.43 -11.7003 23.78 -10.7022OCT 9788.06 -23.8901 18.67 -21.4886NOV 9092.72 -7.10396 17.73 -5.03482DEC 9647.31 6.099275 18.86 6.373378

2009 JAN 9424.24 -2.31225 18.33 -2.81018FEB 8891.61 -5.6517 17.64 -3.76432MAR 9708.5 9.1872 18.89 7.086168APR 11403.25 17.45635 21.39 13.23452MAY 14625.25 28.2551 26.24 22.67415JUN 14493.84 -0.89851 26.36 0.457317JUL 15670.31 8.117035 28.64 8.649469AUG 15666.64 -0.02342 28.8 0.558659SEP 17126.84 9.320441 31.31 8.715278OCT 15896.28 -7.18498 29.97 -4.27978NOV 16,926.22 6.479126 31.81 6.139473DEC 17464.81 3.181986 32.69 2.766426

SUM 38.96696 46.27545

AVERAGE 1.113342 1.322156

STD DEV 10.11858 9.826898

55

Kotak aggressive growth fund returns 1.322156

Market returns 1.113342

COMPARISON WITH MARKET RETURNS

1

1.1

1.2

1.3

1.4

kotak aggressivegrowth fund returns

market returns

kotak aggressivegrowth fund returns

market returns

COMPARISON WITH MARKET RISK

9.69.79.89.910

10.110.2

kotak aggressivegrowth fund risk

market risk

kotak aggressivegrowth fund risk

market risk

Interpretation:

1. In comparison with market returns, the returns of Kotak Aggressive Growth

fund (1.32) were higher which indicates that the fund overperformed when

compared to market (1.11).

2. The standard deviation of the fund (9.83) was found to be less than that of

market (10.12) which indicates that the fund is less riskier.

56

Kotak aggressive growth fund risk 9.826898

Market risk 10.11858

Comparison of returns of the ulips considered

ULIPS AVERAGE RETURNS

Kotak pension floating rate 0.580998

Kotak advantage plus fund 0.525278

Kotak group money market 0.879464

Kotak aggressive growth fund 1.322156

COMPARISON OF AVERAGE RETURNS

0

0.5

1

1.5

Kot

akpe

nsio

nflo

atin

gra

te

Kot

akgr

oup

mon

eym

arke

t

Kotak pension floatingrate

Kotak advantage plusfund

Kotak group moneymarket

Kotak aggressivegrowth fund

Interpretation:

Comparing the returns of all the ULIPs, the returns of Kotak Aggressive Growth

Fund (1.32) were comparatively higher than the other three funds and Kotak

Advantage Plus Fund (0.53) was found to be least performing.

57

Comparison of risks of the ulips considered

ULIPS RISK(STANDARD DEVIATION)

Kotak pension floating rate 0.82186

Kotak advantage plus fund 4.534398

Kotak group money market 0.262083

Kotak aggressive growth fund 9.826898

COMPARISON OF RISK

02468

1012

Kot

akpe

nsio

nflo

atin

gra

te

Kot

akgr

oup

mon

eym

arke

t

Kotak pension floatingrate

Kotak advantage plusfund

Kotak group moneymarket

Kotak aggressivegrowth fund

Interpretation:

Among all the ULIPS considered, Kotak Aggressive Growth Fund was found to

be the most riskier fund with a standard deviation of 9.83 and Kotak Group

Money Market with a standard deviation of 0.26 was found to be the least riskier.

58

CHAPTER-6

FINDINGS AND SUGGESTIONS

59

6.1 Findings:

1. In the comparative analysis of ULIPs and Fixed deposits, over a period of both

5years and 10years, the returns of ULIPs were found to be higher than that of fixed

deposits.

2. Among all the ULIPS, Kotak Aggressive Growth Fund was found to be the most

profitable fund and Kotak Advantage Fund was the least profitable for the company

for the duration 2007-2009.

3. In terms of risk (standard deviation), Kotak Group Money Market was found to

be the least riskier fund and the most riskier fund was found to be the Kotak

Aggressive Growth Fund for the period 2007-2009.

4. Among all the ULIPS, Kotak Aggressive Growth Fund was the only fund which

overperformed when compared to the market.

5. In terms of risk, all the funds were found to be less riskier when compared to the

market.

60

6.2 Suggestions:

Equity mutual funds have large exposure to equities including mid-cap stocks, technology stocks and growth stocks. On the other hand, ULIPs avoid such investments.

As per the new guide lines, no loans can be granted under ULIP schemes. Further, insurance advisors who sell ULIPs have to be given separate training before they are authorized to sell them.

Also, advertisements have to clearly bring out the fact that ULIPs are different from traditional insurance products.

An important factor one need to bear in mind with ULIPs is that, these are a combination of insurance and investment.

A word of caution here while switching funds in ULIP plans since it is ones protection cover that one would be tampering with, decision to switch needs to be well thought out before exercising it.

ULIPs now do not seek to replace mutual funds, they offer protection against the risk of dying too early, and also help people save for retirement. Insurance has to be an integral part of ones one’s wealth management portfolio.

Further, exposure of Indian households to capital markets is limited. ULIPs and mutual funds are, therefore, not likely to cannibalize each other in the long run.

While ULIPs as an investment avenue is closest to mutual funds un terms of their functioning and structure, the first and foremost purpose of insurance is and will always be ‘protection’.

Ideally ULIPs are considered for those classes of investors who want to put money in a investment product that earns them returns by further investing the money in the market, and at the same time ensure a life cover and tax efficiency.

61

6.3 Conclusions:

As ULIP’s are a long-term investment, the underlying funds are managed with the philosophy of delivering long term risk adjusted returns.

ULIPs are essentially long-term instruments where an investor will systematically invest every year with a certain lock-in period. ULIPs are a way of systematic investment as one pays premium on a monthly, quarterly, bi-annual or annual basis.

Mutual funds are more aggressive players. Equity mutual funds have large exposure to equities including mid-cap stocks, technology stocks and growth stocks. On the other hand, ULIP,s avoid such investments. Considering these factors ULIP is considered a better alternative for good returns, irrespective of market levels.

Some of the points to be confronted before going in for ULIP plan include:

It is prudent to make equity-oriented investments based on an established track record of at least 3 yrs over different market cycles. Ulips do not fulfill this criterion.

Insurance and savings are two different goals and it is better to address them separately rather than bundle into a single product. A combination of a term plan and a mutual fund could give better results over long term.

If investment returns are one’s priority, one should compare alternative investment products before locking in money.

Tax advantages do work in favour of ULIP,s for debt-oriented funds. For equity-oriented funds, equity-linked saving products, which enjoy tax advantages and provide market-linked returns, are comparable.

The expense structure of insurance products does significantly dent returns.

ULIP,s cannot be compared with mutual funds, as their ideologies of investment differ.

The investment pattern of mutual funds and life insurance differs. Mutual funds are more aggressive players.

As per IRDA new guidelines, ULIP,s needs to have a minimum lock-in period of 3 yrs.

62

Mutual funds are essentially short to medium term products. The liquidity that these products offer is valuable for investors. ULIP’s, in contrast, are positioned as long-term products and going ahead, there will be separate playing fields for ULIP’s and MF’s, with the product differentiation between them becoming more pronounced.

CHAPTER-7

CASE STUDY

63

Case Study:

Mr.X aged 38 years with an “above average” risk appetite wants to avail

himself of an insurance cover for 50 lakhs. He is recommended a ULIP plan by his

insurance agent with a sum assured of Rs 50 lakhs till he reaches the age of 84 years.

This works out to the client being insured for tenure of 46 years (i.e 84_38). With the

premium paying term however being only ten years, the actual premium he could be

paying per annum is about Rs 894000. The client has also been adviced by his agent

to consider his premium in the “Aggressive option”, which allows him an exposure

upto 35% exposure to equities.

Maintaining the fact that ones interest should be served best, if he keeps his

life insurance and insurance and investment needs distinct. Given below is the

possible solution for the clients needs.

The Insurance Component:

Client in this case seems to be underinsured (based on human life value

calculations). The need of the moment is to buy a term plan, moreover considering his

annual income he needs to buy a term plan for more than the recommended on the

ULIP (i.e 500000).

Sol: To begin with; we knew from our interaction with the client and based on

Human Life Value Calculations that he is underinsured. An immediate action point

for him would be for him to buy a term plan. And considering his annual income, he

would need to buy a term plan for more than the sum assured to be Rs 500000 (as per

the ULIP) for a term plan, the annual premium he would have to shell out would be

approximately Rs 30000 per annum for a 30-yrs period.

The Investment Component:

64

Having taken care of the clients insurance needs, now let’s shift our focus to his

investments; we took into consideration the client’s current financial portfolio. He had

a sizable portion of his portfolio invested in fixed income instruments like bonds and

fixed deposits. Bearing this in mind, our view was he did not need to have another

debt-heavy

(Ulip with a 65%debt component) product in his portfolio. Instead what his portfolio

needed was a higher equity component: this would not only ‘balance’ his portfolio but

also insure that the portfolio reflects his true risk profile.

It was also relevant that the client invest in equities since he was considering his

investments from a long term (over 30 yrs) horizon. This could be achieved by

investing in equity oriented mutual funds. Mutual funds can offer several benefits:

Several studies have shown that over the long term, equities give a higher

return vis-à-vis fixed income instruments like bonds and gsecs, and given that

the clients investment horizon is of 30 yrs, this is an ideal time frame to recap

the rewards of investing in equities. Also, over a 39-yr period, a 100% equity

mutual fund is better geared to outperform a ULIP portfolio with a 65% debt

component.

ULIP tend to be expensive proportions (vis-à-vis mutual funds) during the

initial years. However, over long time horizons, the expensive balance out and

ULIP vis-à-vis that of a mutual fund scheme were to be considered, the latter

would still surface as the better option.

Several mutual funds also have a track record to boast off. Personal fn’s

recommended equity-oriented funds have a proven track record extending

over several years and across Markey cycles/ ULIP’s are yet to experience a

bear phase.

Investing in a mutual fund portfolio will offer the benefit of diversification to

the client. The investor will reap the reward of diversifying across several fund

management styles. On the other hand, by investing all his money in just one

ULIP, the client would be committing his entire corpus to just one style of

investment. This can prove to be quite risky over the long term.

65

You can make adjustments to your mutual fund portfolio. If you believe you

have made a wrong investment decision, you can redeem your investment in a

Particular mutual fund and invest in another one. Such adjustments are not

entirely feasible in a ULIP.

The Tax Aspect:

We also had to contend with section 80C tax benefits. However, given the clients

annual income, the Section 80C tax benefits were being taken care of by way of

Employee’s Provident Fund (EPE) as well the recommended term plan. The client

therefore can invest in regular diversified mutual funds and not necessarily in tax

saving funds (ELSS).

As can be seen, term plans combined with mutual funds have the potential to add

considerable value to an investor’s portfolio. In our view individuals should should

first insure that they are adequately covered by opting for a term plan. Then they can

either opt for ULIP’s for the investment component or as we have shown, they can

consider mutual funds.

66

CHAPTER-8

BIBLIOGRAPHY

67

Bibliography

www.kotaklifeinsurance.com

www.outlookmoney.com

www.amphi.com www.hdfcfund.com www.businesstoday.com

www.google.com

www.aboutulips.com

www.financialexpress.com

www.bseindia.com

www.moneycontrol.com/sensex/bse/sensex-live

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69