How to Select a right ULIP ?

Unit Linked Insurance Plans (ULIPs) were seen as a “wonder product” that simultaneously fulfilled an individual’s needs for investment and insurance. However the recent downswings in the markets have forced investors to do a rethink. Very often it was poor selection that was responsible for the investors’ woes. We present a 5-step strategy for investing in ULIPs

1.Understand the concept of ULIPs

Try to do as much homework as possible before investing in an ULIP. This way you will know what you are getting into and won’t be faced with unpleasant surprises at a later stage. Our experience suggests that many a time people do not realise what they are getting into (in fact we have been approached by several people who wanted to cancel the ULIPs they had been coerced into taking by unscrupulous agents). Gather information on ULIPs, the various options available and understand their working. Read the literature available on ULIPs on the websites and brochures circulated by insurance companies. 

2. Focus on your requirement and risk profile

Identify a plan that is best suited for you (in terms of allocation of money between equity and debt instruments). Your risk appetite should play an important role in the plan you choose. So if you have a high risk appetite, go in for a more aggressive investment option and vice-a-versa. Opting for a plan that is lop-sided in favour of equities when you are a risk-averse individual might spell disaster for you (this is true in most cases currently).

3. Compare ULIPs of different insurance companies

Compare products of the leading insurance companies. Enquire about the premium payments as ULIPs work on minimum premium basis as opposed to sum assured in the case of conventional insurance policies. Check the fund’s performance over the past six months. Find out how the debt and equity schemes are performing and how steady the performance has been. Enquire about the charges you will have to pay. In ULIPs the costs involved are a big deciding factor. Ask about the top-up facility offered by ULIPs i.e. additional lump sum investments you can make to increase the savings portion of your policy. The companies give you the option to increase the premium amounts, thereby providing you with the opportunity to gainfully utilise surplus funds at your disposal. Enquire about the number of times you can make free switches (i.e. change the asset allocation of the money in your ULIP account) from one investment plan to another. Some insurance companies offer you free switches for a 2-Yr period while others do so only for 1 year. 

4. Go for an experienced insurance advisor

Select an advisor who is not only professional and informed, but also independent and unbiased. Also enquire whether he has serviced clients like you. When your agent recommends a ULIP of X company ask him a few product-related questions to test him and also ask him why the other products should not be considered.

Insurance advice at all times must be unbiased and independent and your agent must be willing to inform you about the pros and cons of buying a particular plan. His job should not just begin by filling the form and end after he deposits the cheque and gives you the receipt. He should keep a track of your plan and inform you on a regular basis. The key is to go for an advisor who will offer you value-added products.

5. Does your ULIP offer a minimum guarantee?

In market linked product if your investment’s downside can be protected, it would be a huge advantage. Find out if the ULIP you are considering offers a minimum guarantee and what costs have to be borne for the same. This will enable you to make an informed choice.

Insurance Policy - Charges and Expenses

ULIPs work very similar to a mutual fund with an added benefit of life cover and tax deduction. They have a mandate to invest the premiums in varying proportions in gsecs (government securities), bonds, the money markets (call money) and equities. The primary difference between conventional savings-based insurance plans like endowment and ULIPs is the investment mandate- while ULIPs can invest up to 100% of the premium in equities, the percentage is much lower (usually not more than 15%) in case of conventional insurance plans. ULIPs are also available in multiple options like ‘aggressive’ ULIPs (which can invest upto 100% in equities), ‘balanced’ ULIPs (which invest 40-60% in equities) and ‘debt’ ULIPs (which invest only in debt and money market instruments). Broadly speaking, ULIP expenses are classified into three major categories:

1) Mortality charges

Mortality expenses are charged by life insurance companies for providing a life cover to the individual. The expenses vary with the age, sum assured and sum-at-risk for the individual. There is a direct relation between the mortality expenses and the above mentioned factors. In a ULIP, the sum-at-risk is an important reference point for the insurance company. The sum-at-risk is the difference between the sum assured and the investment value the individual’s corpus as on a specified date. Usually, the mortality charges are levied on the per thousand sum assured.

2) Sales and Fund Administration expenses

Insurance companies incur these expenses for operational purposes on a regular basis. The expenses are recovered from the premiums that individuals pay towards their insurance policies. Agent commissions, sales and marketing expenses and the overhead costs incurred to run the insurance business on a day-to-day basis are examples of such expenses.

3) Fund management charges (FMC)

These charges are levied by the insurance company to meet the expenses incurred on managing the ULIP investments. A portion of ULIP premiums are invested in equities, bonds, g-secs and money market instruments. Managing these investments incurs a fund management charge, similar to what mutual funds incur on their investments. FMCs differ across investment options like aggressive, balanced and debt ULIPs; usually a higher equity option translates into higher FMC.

Apart from the three expense categories mentioned above, individuals may also have to incur certain expenses, which are primarily ‘optional’ in nature- the expenses will be incurred if certain choices that are made available to individuals are exercised.

a) Switching charges

Individuals are allowed to switch their ULIP options. For example, an individual can switch his fund money from 100% equities to a balanced portfolio, which has say, 60% equities and 40% debt. However, the company may charge him a fee for ‘switching’. While most life insurance companies allow a certain number of free switches annually, a switch made over and above this number is charged.

b) Top-up charges

ULIPs allow individuals to invest a top-up amount. Top-up amount is paid in addition to the premium amount for a particular year. Insurance companies usually deduct a certain percentage from the top-up amount as charges. These charges are usually lower than the regular charges that are deducted from the annual premium.

c) Cancellation charges  

Life insurance companies levy cancellation charges if individuals decide to surrender their policies before the mandated lock-in period which is usually three years. These charges are levied as a percentage of the fund value on a particular date. The Compounded Annual Growth Rate (CAGR) of the fund goes up over a period of time. This is because the ULIP expenses even out over a period of time. The ‘evening out’ occurs because although the expenses are high in the initial years, they fall thereafter. And as the years roll by, the expenses tend to ‘spread themselves’ more evenly over the tenure of the ULIP. Another reason is also because the expenses are levied on the annual premium amount, which stays the same throughout the tenure. Therefore, the expenses do not have any impact on the returns generated by the corpus. Fund management charges also have an effect on the returns. FMC is levied on the corpus, which keeps fluctuating over the tenure.

The returns also depend to a large extent on how well the insurance company manages the investment. Individuals therefore, need to bear in mind that expenses are an important variable while evaluating ULIPs across life insurance companies. They have the potential to make a considerable difference to the returns generated over a period of time.

Unit Linked Insurance Plans (ULIPs)

For the generation of insurance seekers who thrived on insurance policies with assured returns issued by a single public sector enterprise, unit-linked insurance plans are a revelation. Traditionally insurance products have been associated with attractive returns coupled with tax benefits. The returns part was often so compelling that insurance products competed with investment products for a place in the investor's portfolio. Perhaps insurance policies then were symbolic of the times when high interest rates and the absence of a rational risk-return trade-off were the norms. The subsequent softening of interest rates introduced a degree a much-needed rationality to insurance products like endowment plans; attractive returns at low risk became a thing of the past. The same period also coincided with an upturn in equity markets and the emergence of a new breed of market-linked insurance products like ULIPs. While in conventional insurance products the insurance component takes precedence over the savings component, the opposite holds true for ULIPs. More importantly ULIPs (powered by the presence of a large number of variants) offer investors the opportunity to select a product which matches their risk profile; for example an individual with a high risk appetite can shun traditional endowment plans (which invest about 85% of their funds in the debt instruments) in favour of a ULIP which invests most of its corpus in equities.

In traditional insurance products, the sum assured is the corner stone; in ULIPs premium payments is the key component. ULIPs are remarkably alike to mutual funds in terms of their structure and functioning; premium payments made are converted into units and a net asset value (NAV) is declared for the same. Investors have the choice of enhancing stheir insurance cover, modifying premium payments and even opting for a distinct asset allocation than the one they originally opted for. This calls for enhanced flexibility in ULIPs. Also if an unforeseen eventuality were to occur, in case of traditional products, the sum assured is paid along with accumulated bonuses; conversely in ULIPs, the insured is paid either the sum assured or corpus amount whichever is higher. Insurance seekers have never been exposed to this kind of flexibility in traditional insurance products and it would be fair to say that ULIPs represent the new face of insurance. While few would dispute the value-add that ULIPs can provide to one's insurance portfolio and financial planning; the same is not without its flipside. For the uninitiated, understanding the functioning of ULIPs can be quite a handful! The presence of what seem to be relatively higher expenses, rigidly defined insurance and investment components and the impact of markets on the corpus clearly make ULIPs a complex proposition. Traditionally the insurance seeker's role was a passive one restricted to making premium payments; ULIPs require greater participation from the insured.

ULIP as an Insurance Plan

Life Insurance Cover is a plan in which the insured person gives periodic premiums to the Insurer for a particular period, and in case of any eventuality before the lapse of the policy, the insurer pays the sum assured and the accrued bonus to the nominee of the insured person. Now based on term of premium payment and the term of life coverage, the Life Insurance covers are broadly classified into four categories:

a)   Whole Life Policy: In the Whole Life Policies, the insured person is provided a life cover till he attains an age of 65 irrespective of the age at which he subscribes to the policy. In this case, the person just has to pay the insurance premiums for a particular period.

b)    Money-Back Policy: The insured person is provided a life cover for a particular term that is predetermined and the premiums are decided on the basis of the term of policy. Additionally, the insured person is given back some amount at regular intervals throughout the term of the policy.

c)    Endowment Policy: The Endowment Policies are given for a particular term for which the life cover is provided and the insured person has to pay periodic premiums to the insurer. At successful completion of the policy term, the insured person is given back all the survival benefits and accrued benefits.

d)      Unit Linked Plans: Unit Linked Insurance Plans are similar to Endowment schemes, but here the returns are not guaranteed, as the part of the annual premiums is invested in stock markets, debts and other market linked securities. The life cover is provided to the insured person for particular term and amount. In traditional insurance products, the sum assured is the corner stone; in ULIPs premium payments is the key component.

Life Insurance covers besides giving a lease of life (literally to the dependants of policy holder), provide several additional benefits:

• Gainful Investment: With the advent of ULIPs, insurance products graduated from being a protection device to an investment vehicle. Investment based inusrance plans give the chance to benefit from the gains of the stock market and the debt market along with providing the desired safety net.

• Inculcates discipline in savings: Even if one does not manage to save money and invest regularly in financial instruments, with insurance, the policyholder has no choice. If he does not pay his premiums on time, his insurance cover will lapse.

• Beats the Market fluctuations: Long term investments are the sure fire way to beat the stock market fluctuations. No better way than insurance which carries perhaps the longest investment term in the portfolio mix. 

• Tax benefits: Insurance has always been the first choice as a tax saving device. The premiums that an investor pays and all the benefits payable to him under the plan are eligible for tax benefits under section 80 C and 10(10D) of the Income Tax Act of 1961.

Why The Investment Needs of an Investor ?

The investment needs of an investor are simply his lifestyle needs converted into financial terms. These include the normal living expenses, accommodation, food, as well as education, health, recreation, transport, special occasions like marriages, festivals etc. These needs are defined not only in current terms but also over the rest of the life. These needs tend to remain the same over the years. It is the current lifestyle and the lifestyle desired in future that determines the attitude of investor towards investments.

By and large, most investors have eight common needs from their investments:               1.

Security of Original Capital; 2. Wealth Accumulation; 3. Comfort Factor; 4. Tax Efficiency; 5. Life Cover; 6. Income; 7. Simplicity; 8. Ease of Withdrawal; 9. Communication.

• Security of original capital: The chance of losing some capital has been a primary need. This is perhaps the strongest need among investors in India, who have suffered regularly due to failures of the financial system.
• Wealth accumulation: This is largely a factor of investment performance, including both short-term performance of an investment and long-term performance of a portfolio. Wealth accumulation is the ultimate measure of the success of an investment decision.
• Comfort factor: This refers to the peace of mind associated with an investment. Avoiding discomfort is probably a greater need than receiving comfort. Reputation plays an important part in delivering the comfort factor.
• Tax efficiency: Legitimate reduction in the amount of tax payable is an important part of the Indian psyche. Every rupee saved in taxes goes towards wealth accumulation.
• Life Cover: Many investors look for investments that offer good return with adequate life cover to manage the situations in case of any eventualities.
• Income: This refers to money distributed at intervals by an investment, which are usually used by the investor for meeting regular expenses. Income needs tend to be fairly constant because they are related to lifestyle and are well understood by investors.
• Simplicity: Investment instruments are complex, but investors need to understand what is being done with their money. A planner should also deliver simplicity to investors.
• Ease of withdrawal: This refers to the ability to invest long term but withdraw funds when desired. This is strongly linked to a sense of ownership. It is normally triggered by a need to spend capital, change investments or cater to changes in other needs. Access to a long-term investment at short notice can only be had at a substantial cost.
• Communication: This refers to informing and educating investors about the purpose and progress of their investments. The need to communicate increases when investments are threatened.

It is also pertinent to differentiate between needs and wants. Wants can be described as transient needs. Wants focus on the short-term, and often lead to long-term investment disappointment.

•  Security of original capital is more important when performance falls.
•  Performance is more important when investments are performing well.
• Failures engender a desire for an increase in the comfort factor.

Perfect investment would have been achieved if all the above-mentioned needs had been met to satisfaction. But there is always a trade-off involved in making investments. As long as the investment strategy matches the needs of investor according to the priority assigned to them, he should be happy.

The Ideal Investment strategy should be a customized one for each investor depending on his risk-return profile, his satisfaction level, his income, and his expectations. Accurate planning gives accurate results. And for that there must be an efficient and trustworthy roadmap to achieve the ultimate goal of wealth maximization.

Savings and Investments

Savings form an important part of the economy of any nation. But what really Savings mean? Saving is simply defined as the sacrifice we made on our expenditure. With the savings invested in various options available to the people, the money acts as the driver for growth of the country. Indian financial scene too, presents a plethora of avenues to the investors. Though certainly not the best or deepest of markets in the world, it has reasonable options for an ordinary man to invest his savings.

Investments, unlike works of art, cannot afford the luxury of experimenting. Investing is not guesswork. It takes more than just a 'tip', it needs training to plan, instinct to pick and sheer intellect to pick and sheer intellect driven by knowledge to make it work for you.

Standard chartered Bank, using over 150 years of expertise, promise to guide you through the world of exciting new investment opportunities in India and overseas.

An investment can be described as, perfect, if it satisfies all the needs of all investors. So, the starting point in searching for the perfect investment would be to examine investor needs. If all those needs are met by the investment, then that investment can be termed the perfect investment.

Most investors and advisors spend a great deal of time understanding the merits of the thousands of investments available in India. Little time, however, is spent understanding the needs of the investor and ensuring that the most appropriate investments are selected for him.

What is Corporate Profile ?

The Standard Chartered Group was formed in 1969 through a merger of two banks: The Standard Bank of British South Africa founded in 1863, and the Chartered Bank of India, Australia and China, founded in 1853. Both companies were keen to capitalise on the huge expansion of trade and to earn the handsome profits to be made from financing the movement of goods from Europe to the East and to Africa.

The Chartered Bank

·   Funded by James Wilson following the grant of a Royal Charter by Queen Victoria in 1853

·   Chartered opened its first branches in Mumbai (Bombay), Calcutta and Shanghai in 1858, followed by Hong Kong and Singapore in 1859

·   Traditional business was in cotton from Mumbai (Bombay), indigo and tea from Calcutta, rice in Burma, sugar from Java, tobacco from Sumatra, hemp in Manila and silk from Yokohama.

·   In 1957 Chartered Bank bought the Eastern Bank together with the Ionian Bank’s Cyprus Branches. This established a presence in the Gulf

The Standard Bank

·   Founded in the Cape Province of South Africa in 1862 by John Paterson. Commenced business in Port Elizabeth, South Africa, in January 1863 Was prominent in financing the development of the diamond fields of Kimberley from 1867 and later extended its network further north to the new town of Johannesburg when gold was discovered there in 1885

·   Expanded in Southern, Central and Eastern Africa and by 1953 had 600 offices.

·   In 1965, it merged with the Bank of West Africa expanding its operations into Cameroon, Gambia, Ghana, Nigeria and Sierra Leone.

·   In 1969, the decision was made by Chartered and by Standard to undergo a friendly merger. All was going well until 1986, when Lloyds Bank of the United Kingdom made a hostile takeover bid for the Group. When the bid was defeated, Standard Chartered entered a period of change. Provisions had to be made against third world debt exposure and loans to corporations and entrepreneurs who could not meet their commitments. Standard Chartered began a series of divestments notably in the United States and South Africa, and also entered into a number of asset sales. From the early 90s, Standard Chartered has focused on developing its strong franchises in Asia, the Middle East and Africa using its operations in the United Kingdom and North America to provide customers with a bridge between these markets. Secondly, it would focus on consumer, corporate and institutional banking, and on the provision of treasury services – areas in which the Group had particular strength and expertise. In the new millennium we acquired Grindlays Bank from the ANZ Group and the Chase Consumer Banking operations in Hong Kong in 2000.

Standard Chartered is one of the world's most international banks, with employees representing 80 nationalities. Standard Chartered PLC is listed on both the London Stock Exchange and the Stock Exchange of Hong Kong and is in the top 25 FTSE-100 companies, by market capitalization. Following the acquisition of Korea First Bank, Standard Chartered now employs 38,000 people in 950 locations in more than 50 countries in the Asia Pacific Region, South Asia, the Middle East, Africa, the United Kingdom and the Americas. It serves both Consumer and Wholesale Banking customers. Consumer banking provides credit cards, personal loans, mortgages, deposit taking and wealth management services to individuals and small to medium sized enterprises. Wholesale Banking provides corporate and institutional clients with services in trade finance, cash management, lending, securities services, foreign exchange, debt capital markets and corporate finance. Standard Chartered is well established in growth markets and aims to be the right partner for its customers. The Bank combines deep local knowledge with global capability. The Bank is trusted across its network for its standard of governance and its commitment to making a difference in the communities in which it operates.

Do you know History of Banking in India ???

Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors.

For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process.
The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a pizza. Money has become the order of the day. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below:

• Early phase from 1786 to 1969 of Indian Banks
• Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms.
• New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III. 

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders.
In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with. The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in india as the Central Banking Authority. During those days public has lesser confidence in the banks. As an aftermath deposit mobilisation was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale specially in rural and semi-urban areas. It formed  State Bank of  India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th July, 1969, major process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was nationalised. Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. After the nationalization of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000% Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.