Internship Report Mehnaz[1]

Ohio University Christ College Academy For Management Education, Bangalore

KOTAK MAHINDRA OLD MUTUAL LIFE INSURANCE LTD.

Internship Report

Mehnaz QureshiPID NO. P001066435

In Partial fulfillment of the Masters Program in Business Administration, Ohio University, Athens, USA

OHIO University Christ College Academy For Management EducationChrist College Campus,

Hosur Road, Bangalore-29

MARCH 2007


DECLARATION

I Mehnaz Qureshi, studying in Ohio University Christ College Academy For Management

Education Bangalore, do hereby declare that this project titled How does the Indian

mutual fund industry compare vis a vis global standards and what should be our

future expectations from it ?, has been prepared by me, under the guidance of Dr.

Amalendu Jyotishi, Assistant Director (Special Projects) and Mr. Mayur Ankolekar,

Regional Manager South Zone. This is after undergoing the training in Kotak Mahindra

Old Mutual Life Insurance Ltd., which is in partial fulfillment of Masters Program in

Business Administration, Ohio University, Athens, USA.

I further declare that this project report has not been submitted earlier to any other

University or Institute for the award of any degree or diploma.

Date: Mehnaz Qureshi

Place:


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. Objective of Study

Chapter 2. Industry ProfileHistory of InsuranceWhat is Life Insurance ?Mutual FundsEquitiesDerivatives

Chapter 3. Company ProfileHistory of Kotak Mahindra Old Mutual Life InsuranceJourney so farAbout Old Mutual Plc.Organization Structure

Chapter 4. Products Major CompetitorsCompetitive AnalysisOn Job TrainingSWOT Analysis

Chapter 5. Financials

Chapter 6. Project : How does the Indian mutual fund industry compare vis a vis global standards and what should be our future expectations from it?

Conclusion

References


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, operational restructuring and

technology upgrades

Insurance companies are moving beyond their traditional business models and are

searching for the right combination of technology and processes to remain profitable.

Companies are investing more in information technology in order to alter their business

models and processes.

History of insurance

In some sense we can say that insurance appears simultaneously with appearance of

human society. We know of two types of economies in human societies: money

economies (with markets, money, financial instruments and so on) and non-money or

natural economies (without money, markets, financial instruments and so on). The

second type is a more ancient form than the first. In such an economy and community,

we can see insurance in the form of people helping each other. For example, if a house

burns down, the members of the community help build a new one. Should the same

thing happen to one's neighbour, the other neighbours must help. Otherwise,

neighbours will not receive help in the future. This type of insurance has survived to the

present day in some countries where modern money economy with its financial


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 long-

term. Such schemes normally invest a major part of their corpus in equities. Such funds

have comparatively high risks. These schemes provide different options to the investors

like dividend option, capital appreciation, etc. and the investors may choose an option

depending on their preferences. The investors must indicate the option in the application

form. The mutual funds also allow the investors to change the options at a later date.

Growth schemes are good for investors having a long-term outlook seeking appreciation

over a period of time.

Income / Debt Oriented Scheme

The aim of income funds is to provide regular and steady income to investors. Such

schemes generally invest in fixed income securities such as bonds, corporate

debentures, Government securities and money market instruments. Such funds are less

risky compared to equity schemes. These funds are not affected because of fluctuations

in equity markets. However, opportunities of capital appreciation are also limited in such

funds. The NAVs of such funds are affected because of change in interest rates in the

country. If the interest rates fall, NAVs of such funds are likely to increase in the short

run and vice versa. However, long term investors may not bother about these

fluctuations.


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 pre-

dominantly in equities. Their growth opportunities and risks associated are like any

equity-oriented scheme.

What is a Fund of Funds (FoF) scheme?

A scheme that invests primarily in other schemes of the same mutual fund or other

mutual funds is known as a FoF scheme. An FoF scheme enables the investors to

achieve greater diversification through one scheme. It spreads risks across a greater

universe.


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 VP-

Finance at Gujarat Glass Ltd.

As Chief Financial Officer at Kotak Life Insurance, he oversees all aspects of Finance

including Operations, Regulatory, Internal Control, Finance, Accounts and Treasury.


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 Kotak Mahindra Finance Limited starts the activity of Bill Discounting

1987 Kotak Mahindra Finance Limited enters the Lease and Hire Purchase market

1990 The Auto Finance division is started

1991The Investment Banking Division is started. Takes over FICOM, one of India's

largest financial retail marketing networks

1992 Enters the Funds Syndication sector

1995

Brokerage and Distribution businesses incorporated into a separate company -

Kotak Securities. Investment Banking division incorporated into a separate

company - Kotak Mahindra Capital Company

1996

The Auto Finance Business is hived off into a separate company - Kotak

Mahindra Prime Limited (formerly known as Kotak Mahindra Primus Limited).

Kotak Mahindra takes a significant stake in Ford Credit Kotak Mahindra

Limited, for financing Ford vehicles. The launch of Matrix Information Services

Limited marks the Group's entry into information distribution.

1998Enters the mutual fund market with the launch of Kotak Mahindra Asset

Management Company.

2000

Kotak Mahindra ties up with Old Mutual plc. for the Life Insurance business.

Kotak Securities launches its on-line broking site (now

www.kotaksecurities.com). Commencement of private equity activity through

setting up of Kotak Mahindra Venture Capital Fund.

2001Matrix sold to Friday Corporation.

Launches Insurance Services

2003Kotak Mahindra Finance Ltd. converts to a commercial bank - the first Indian

company to do so.


2004 Launches India Growth Fund, a private equity fund.

2005

Kotak Group realigns joint venture in Ford Credit; Buys Kotak Mahindra Prime

(formerly known as Kotak Mahindra Primus Limited) and sells Ford credit

Kotak Mahindra.

Launches a real estate fund

2006Bought the 25% stake held by Goldman Sachs in Kotak Mahindra Capital

Company and Kotak Securities


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 SutcliffeCEO

Julian RobertsEUROPE

Scott PowersUSA

Bob HeadSOUTH AFRICA

Hasan AskariASIA PACIFIC

Julian RobertsNORDIC (Acting)

Nick Poytnz-Wright

UK

Rafael GaldonELAM

Scott PowersAsset

Management

Guy BarkerLIFE

Paul HanrattyOMSA

Tom BoardmanNEDBANK

Bruce Campbell

M&F

Gaurang ShahINDIA

Chris OHehirChina

Ross LaidlawAUSTRALIA


Organization Structure

The organization is divided into 5 categories:-

Finance

Sales

Marketing

Operations

Human Resource

Corporate Structure

The Chairman of Kotak Group is Mr. Uday Kotak and Kotak Insurance is managed by Mr.

Gaurang Shah Managing Director.

Managing Director

(Mr. Gaurang Shah)

CFO & COO(Mr. G Murlidharan)

Sales Head(Mr. Pankaj Desai)

Marketing Head(Mr. Rahul Sinha)

CIO(Mr. Krishna

Sanghvi)

Appointed Actuary

(Mr. Bryce Johns)

HR & Admin(Mr. Sugatta Dutta

VP-Sales & Mgmt.Dev.Mr. Arun Patil


Finance

The Finance section is operated centrally by Head Office which is Bombay, headed by

CFO - Mr. G. Murlidharan and further sub-divided into categories like Vice Presidents of

different departments. These departments are :- CPC & Group Ops, Internal Control,

MIS, Accounts & Compliance, Underwriting, Branch Operations.

CFO & COO(Mr. G Murlidharan)

VPCPC & Group

Ops.

VPInternal Control

VPMIS

VPAccounts & Compliance

VPUnderwriting

VPBranch Operations

Managers Managers Managers Managers Managers Managers

Exec -Finance

Exec -Finance

Exec -Finance

Exec -Finance

Exec -Finance

Exec -Finance


Sales

The Sales Department is divided on the basis of region. Each region is thereafter divided

into categories like Alternate Channel, Tied Channel and Group Business. The Sales dept

is headed by Mr. Pankaj Desai, Alternate Channel Head Mr. Suresh Agarwal, Tied

Channel Head MR. Subbaiah K P, Group Business Head Group Business Head Mr.

Sandeep Srikhande.

Subdivided into categories like Regional Managers, Area Managers and others.

Marketing

Sales Head(Mr. Pankaj Desai)

Alternate Channel Head

(Mr. Suresh Agarwal)

Tied Channel RM(Mr. Subbaiah KP)

Group Business Head

(Mr. Sandeep Srikhande)

Regional Managers

(Mr. Mayur Ankolekar South Zone)

Area Managers(Mr. Thakur Bhaskar

South Zone)

PAMS/BDMs/BDM Key Accounts

Area Managers & Branch Managers(Mr.Muruganesh South

Zone)

Asst. Branch Managers &

Agency Team Managers

Sales Managers & Agency Managers

Regional Heads(Mr. Sharrad Shrivastava

South Zone)

Customer Relationship

Managers

Customer Relationship

Execs

Sales Managers & Sales Associates


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.

Human Resource

Head Operations

Regional Operations Incharge

(South Zone)


(West Zone)


(East Zone)


(North Zone)

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

Feat

ure

s

Unit Linked Plan with Guaranteed death and Maturity Benefit.

Four Fund Options, Maximum Equity exposure 80%

Minimum Guaranteed payment of Guaranteed Maturity Value ( GMV )on Maturity

Option to invest funds in any proportion among different options. Change allocation as well as redirect future premiums in new proportion among funds.

Switching allowed - 4 Free Switches.

Lock-in period of three years

Automatic Cover maintenance facility after completion of 3 years, to keep the life cover going even if the policy lapses. Partial withdrawal allowed after 3 years from main account. Injection of extra premium allowed anytime after the policy is in force.

Unit Linked Plan with Guaranteed death and Maturity Benefit

One Fund Options, Maximum Equity exposure 40%

Sum of all premiums paid is guaranteed on death or maturity

No switching option

No switching charges.

Lock-in period of three years

Automatic Cover maintenance facility after completion of 3 years.


Expe

nse

s Yr 1 Yr 2 onwards3 years 28% 4.38%5 to 7 years 42% 4.38% 10 to 14 years 56% 4.38% 15 years + 65% 4 .38%

Fund related charges: Average 1.1% (depends on the fund)

Surrender Charges:4th year 3%5th year 2%6th year 1%year 7 onwards Nil

Mortality Expense Additional

Yr 1 Yr 2onwards3 years 35% 15%thereafter 3%

Fund related charges: Average 1.25% (depends on the fund)

No special switching chargesSurrender Charges3rd year 50%4th year 60%5th year 70%6th year 80%7th year 85%8th year 90%9th year 95%thereafter 100%

Mortality Expense Additional

Rid

ers

Accidental Death Benefit

Permanent Disability Benefit

Critical Illness Benefit

Term/Preferred Term Benefit

Life Guarding Benefit

Accidental Disability Guarding

No Riders

Mat

uri

ty Guaranteed Maturity Value or Market Value whichever is higher

Sum Assured or Market Value whichever is higher

Dea

th Sum Assured or Market Value whichever is higher

Sum Assured, Market Value or Guaranteed Value whichever is higher

Elig

ibili

ty

Age of entry : 14 to 65 yearsPremium 10,000 onwards, no restriction on Sum AssuredTerm 10 to 30 yrsMaximum Age at maturity 75yrs

Age of entry : 0 to 65 yearsPremium 8,000 onwards, no restriction on Sum AssuredTerm 10 to 30 yrsMaximum Age at maturity 75yrs


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%

40

95

193

351

2003 2004 2005 2006

Years

First Year Life Insurance Premium (Rs crore)

The CAGR ( Compound Annual Growth Rate) for 4 years is 106% which indicates the

good performance of company. The premium in year 2006 went up by 81.86% more

than of 2005 showing a rapid growth in the business.

Consolidated Revenue Composition 2005-06 (Rs 2,854 crore*)

Finance33%

Treasury13%

Insurance21%

Fees30%

Others3%

Finance

Treasury

Insurance

Fees

Others

In the year 2005-06, the total revenue of Kotak Mahindra Bank Limited was Rs 2,854

crores of which Kotak Mahindra Old Mutual Life Insurance Ltd. contributes 21%.


Share Capital

Particulars As at 31stMarch,2006

As at 31stMarch,2005

Authorized Capital260,000,000 (2005 212,000,000) Equity Shares of Rs. 10 each

Issued Capital244,583,546(2005 211,760,643) Equity Shares of Rs. 10 each

Subscribed Capital244,583,546(2005 211,760,643) Equity Shares of Rs. 10 each

Called-up Capital244,583,546(2005 211,760,643) Equity Shares of Rs. 10 each

Less: Calls unpaidAdd: Shares forfeited (Amount originally paid up)Less: Par Value of Equity Shares bought backLess: Preliminary ExpensesLess: Expenses on issue of shares

2,600,000

2,445,835

2,445,835

2,445,835

---------

(1,427)(707)

2,120,000

2,117,606

2,117,606

2,117,606

---------

(2,855)(1,414)

Total 2,443,701 2,113,337

During the year, the Authorized Share Capital of the company has increased from

Rs.212 crores to Rs.260 crores. While the paid-up Share Capital of the company has

increased from Rs.212 crores to Rs.244.58 crores. This reiterates the shareholders

commitment towards investment in facilitating sustainable growth of the company.

Financial Results

The company performed exceptionally well this year. The premium income for the year

grew to Rs.621.85 crores (2005 Rs.466.16 crores). Of this, the first year premium

inclusive of single premium was Rs.396.06 crores (2005 Rs.373.99 crores)

The first year premium growth rate of 92% compares favourably to the overall industry

growth rate of 33% and the private sector life insurance growth rate of 79%.


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 ProjectIn

Kotak Mahindra Old Mutual Life Insurance Plc.

How does the Indian mutual fund industry compare vis a vis global standards and what should be our future

expectations from it ?

By

Mehnaz Qureshi

Masters in Business AdministrationOhio University Christ College Academy For Management

Education, Bangalore

Mail : [email protected]


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).

Bans

Internship Report Mehnaz[1]

Documents

life insurance industry

management education

insurance sector

guidance of

project guides

project report

able guidance

consistent guidance