A REPORT

ON
CUSTOMER PERCEPTIONS ABOUT
INNOVATIVE PRODCUTS OF WEALTH
MANAGEMENT

BY
ALOK RANJAN

IDBIFORTIS LIFE INSURANCE

CORPORATION LIMITED

A REPORT
ON
1
 CUSTOMER PERCEPTIONS ABOUT
INNOVATIVE PRODCUTS OF WEALTH
MANAGEMENT

BY
ALOK RANJAN

IDBIFORTIS LIFE INSURANCE CORPORATION

LIMITED

DATE: MAY 24, 2009

AUTHORIZATION

The report is submitted as partial fulfillment of the requirement of MBA

program of IBS, Hyderabad.

2
 ACKNOWLEDGEMENTS

It gives immense gratification to express my gratitude to everyone who made their

contributions and helped me in completing this project.

I acknowledge my sincere thanks to Mr. Yogesh Agarwal, Chairman IDBIFortis Life

Insurance Corporation Ltd for providing me the opportunity to work with his organization.

My gratitude to Mrs. C. Shanthi Yagyanath, Agency Manager, IDBIFortis Life Insurance

Corporation Ltd without whose consistent encouragement and timely feedback, the project
would not have been completed.

3
I am immensely indebted to our faculty guide Dr. D. Satish, for providing me with useful
inputs and guidelines that have added significant difference to the way the project is finally
shaped.

I offer my gratitude to all of my colleagues and faculties who were always ready for
providing suggestions which could be fruitful towards the accomplishment of intended
objectives of the project.

Any omission in the brief acknowledgement does not mean a lack of gratitude.

Alok Ranjan

EXECUTIVE SUMMARY
The project titled ‘Customer perception about innovative products in wealth
management’ is done during the course of summer internship of the management program
pursued by the researcher. The project covers the marketing and promotional aspects of
products and services of wealth management.

Marketing of unconventional products has always been a challenging task, but this
helps the marketers to come up with innovative ideas and plans which facilitates these
products to carve a niche for them in an unprecedented way. Wealth Management
righteously belongs to the unconventional group of products which require a totally
different approach, regarding the way they are introduced, marketed and eventually
perceived by their prospective customers.

4
 This project is prepared to study the aspects of wealth management, with prime
focus on understanding and meeting customer needs, which undoubtedly, is the key
indicator of any business’s success.

Recent volatility in the financial markets has in a way completely changed the way
in which investors make their investment decisions. Stock markets collapse and stagnation
of traditional norms for investment compelled the financial sector to revise the way in
which it has been operating. This upheaval though can be viewed as an opportunity for
innovation, and calls for introducing new products and services that have the potential of
developing an optimistic mindset among investors.

Life Insurance, which was viewed only as an avenue to save, has used innovation as
a strategic tool to introduce products which offer varying benefits to its customers apart
from the usual benefits of insurance cover. The innovation and customization offered by
products such as ULIPs tend to serve the investors as per their investment needs. It is of
vital importance for any organization in this sector to properly assess the prospective
customers’ awareness levels and outlook which they posses about these products. The
project strives to provide useful insights to the organization in assessing and meeting
investors’ needs appropriately.

The project studies the changing perceptions of the retail investors, mostly
belonging to middle income group. The dynamic market conditions have led to a huge shift
in the mindset of individual investors, some overtly popular investment avenues have faded
away, giving way to the new products and services. The project focuses on the current
perception of investors about different options for investment available to them with main
focus on products offered by the Life Insurance Sector.

TABLE OF CONTENTS

AUTHORIZATION……………………………………………………….. 3

ACKNOWLEDGEMENTS……………………………………………….. 4

EXECUTIVE SUMMARY………………………………………………... 5

1. INTRODUCTION………………………………………………….. 7

5
2. BACKGROUND DETAILS ………...…………………………….. 7

3. OBJECTIVES………………………………………………………. 9

4. SCOPE………………………………………………………………. 9

5. LIMITATIONS……………………………………………………...
10

6. LITERATURE REVIEW…………………………………………...
10

7. RESEARCH METHODOLOGY…………………………………...
15

7.1 Research Design

15

7.2 Data Collection

16

7.3 Sampling Procedure

16

7.4 Scaling Procedure

16

8. DATA ANALYSIS…………………………………………………..
17

6
 8.1.1 Interpretation of data
17

8.1.2 Framework of Analysis

18

8.1.3 Findings and Analysis

18

8.1.4 Conclusion
24

9. MANAGERIAL IMPLICATIONS...............................................
27

10. ANNEXURES………………………………………………………
29

11. REFERENCES………………………………………………………
39

1. INTRODUCTION
Off late, a lot has been happening in the global economy, past two years have been
witness to the collapse of several well performing establishments, of the most influential
and strong nation in the world, the United States of America, leading to the worst recession
of all times. This global slump has caused a drastic change in the way business will be
conducted in the financial markets now. All the countries around the world are looking out
for ways to tackle the recession by making all the efforts to reshape their respective
economies.

The extremely volatile market conditions call for newer products and services in the
financial markets sector, as the customer perceptions have definitely changed a lot. Various
options of investment which they are looking at cannot provide them the certainty of returns
as per their expectations, due to the losses incurred in huge amounts and the helplessness of
different authorities to help them recover from their losses. This calls for introducing new
offerings in the market which assure returns.

7
This project deals with the perceptions that an individual, as a retail investor has, of
different investment options available to him/her, and his/her say about the innovative
products and services offered by different players competing in the market.

2. BACKGROUND DETAILS
There are a lot of factors that are responsible for continuous change in the consumer
preference over the decades, about the investment decisions they make in different avenues
available to them.

Factors such as deregulatory norms introduced by the government, introduction of

foreign capital and foreign companies into Indian financial markets, increase in the income
and saving levels of investors, sudden hike in the capital markets led to a lot of business
activities in the financial sector. The untapped Indian Markets suddenly became wide awake
with entry of a lot of private players, coming up with different products and services,
catering to various needs of customers in different segments of market.

The highly competitive environment has caused the traditional norms of investment
to make way for the newer alternatives available to the retail investors. This facilitated the
entry of inactive sectors like insurance into the main stream. The products and services
offered by the insurance organizations are now competing with the traditional modes of
investment like in equities or reality.

Till the early 90s the investment pattern was pretty constrained due to various
restrictions imposed by the authorities. The options available to the customer were few.
Some of the conventional products which were consistently popular for over decades
among the retail investors included bank fixed deposits, investment in equities (stocks and
shares), debt (bonds, money market instruments), metals (gold, silver, diamond and other
jewels), etc.

With the change in the income level and economic conditions in the country, backed
by supportive regulatory norms by the government, entry of private and foreign players in
the Indian financial markets, led to the introduction of a whole new gamut of products and
services to the individual investors. Many innovative products and services of wealth
management have been introduced in the markets with many more queued up to be
launched. Some of them which have recently witness proliferating growth include:

• Mutual Funds: These are the investment options in which investors pool in their
investments and a group of professionals and experts in the Asset Management

8
 Companies (AMC) invest this fund across various sectors with main objective of
diversifying the risk involved by investing across different sectors. They cater to the
individual investors whose income levels are small and it tries to manage their
portfolio in a way which promises regular income, growth, security, liquidity and
risk diversification.

• Unit Linked Insurance Plans: Popularly known as ULIPs, they are investment
options offered by the Life Insurance sector. It provides the combined options of
investment and insurance. The amount invested in a Unit Linked Plan can be
invested as per the specifications preferred by the policy owner. The investors can
choose the investment avenues and amount to be invested in these plans, based on
his risk appetite, asset allocation, investment horizon, investment objective and
other factors. ULIPs can be considered as a good investment option if purchased as
a long term investment option.

• Equity Linked Saving Schemes: Until recently, they did enjoy a preference status
among investors as they offered returns from the capital markets while
simultaneously providing tax benefits, but the economic turmoil has changed the
way investors used to perceive them.

• Art: investment in art is the latest inclusion to the investment options that are made
available to the retail investor. Considering the quick hike in the market values of
different art forms like paintings, antiques, vintage products; investment in arts
seems to be catching up pretty quickly with other investment options.

3. OBJECTIVES
The main objectives which the project seeks to achieve are mentioned as follows:

• To conduct a survey for obtaining customer perceptions about innovative investment

products.

• To identify the factors that drive a retail investors decision of investing in innovative
investment avenues, with main emphasis on Life Insurance Products (ULIPs).

• To study the demographic and psychographic profiles of retail investors and analyze
their investment habits.

9
 • To identify new ways of marketing and promoting investment products and services
during volatile market conditions

4. SCOPE OF STUDY
The project will be useful in different dimensions to suit the requirements of different
segments; the project is made in accordance with the given parameters:

a. Description of the products: details regarding the basic information and structures
of innovative financial and insurance products.

b. Organizational goals : suggestions and findings from the survey which will add to
the organization’s efforts to consolidate the products of wealth management during
volatile market conditions

c. Individual goals: the main aim at individual level is to gain an insight of current
trends in the investment sector with main focus on life insurance. The project will
aid in observing the actual performance of wealth insurance products in the market,
analyzing the factors that drive people to invest in innovative investment vehicles.

5. LIMITATIONS

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Any project has certain constraints that are beyond the control of the researcher; this project
too, is no exception. Some of the limitations of the study include:

1. Geographical Constraints: the survey is conducted only across 2 cities, Hyderabad

and New Delhi. So the observations obtained may not be put to use on a national
level perspective, though it will aid in managing business activities in the cities in
which the survey is done.

2. Respondent Knowledge: the very nature of the study calls for respondents with fair
amount of knowledge about investment. It was at times tedious to look out for
respondents who can comprehend the goals of the study and could provide their
responses for the same.

3. Respondents’ Apprehension: despite the disclosure of confidentiality of

information many respondents were not willing to divulge relevant information,
especially financial information, which may act as a hindrance while analyzing the
demographic profile of the target customers.

6. LITERATURE REVIEW
INVESTMENT SCENARIO

The global economy has witnessed a substantial fluctuation in past two financial years.
Even the most influential economies like that of America and Europe are at the receiving
end of recessionary impact. The present slowdown in the global economy has been reported
as the worst recession of all the times, worst than the great depression of United States
during 1930s. The turmoil in the US economy which was initiated by the subprime
mortgage crisis, and collapse of its topmost financing firms led to an extreme stock market
crash, the impact of which is prominently visible in almost all the economies across the
globe, the reason being highly interconnected economic and trade activities among
countries.

The change in the global economic conditions has a direct impact on the way banks and
financial institutions around the world will operate. Inflow of capital from corporate sectors,
and banks is vital to any economy’s sustenance. Any volatility in these sectors will directly
affect the economic indices of the country. Emphasizing on the dominance that banking
institutions have over bond markets Miguel Cantillo Simon (1997) says that banks, which
always have a significant role in organizing any trade activity than other intermediary
11
financing sources, can directly lead to the changes in the investment patterns of the
economy at both macro and micro levels. The sudden downturn in the US economy led to
the global turmoil and left the world with a deep recessionary period, which calls for
looking apart from banks and traditional source of capital and strengthening new
intermediaries as sources for capital.

Change in the economic conditions will definitely lead to a change in the

investment, consumption and saving patterns of people. These changes will be reflected
differently in different economies. This change however can also be viewed as an
opportunity to introduce new alternatives for investment by improvising the financial
services market. The sudden change in the market conditions will lead to change in the
investment habits. Major sources of investment include the corporate sector, governments
and households.

While corporate and government investments are highly regulated and compliant
with the norms regarding investment and expenditure. Household sector, being largely
unregulated, often demonstrates large variations in the investment patterns from its
government and corporate counterparts. This leads to a relatively quicker change in the
investment preference of the individual investors which tends to fasten up when market
conditions are volatile.

The investment needs of the investors during the 1990s was to accomplish the
investment objectives such as portfolio diversification and professional wealth management
at relatively lower costs, which led to introduction of Mutual Funds, an elegant example of
introducing innovative financial products and services catering to the needs of individual
investors and utilizing the monetary resources more efficiently to generate higher returns.
Fernando et al (2003) profile the growth of Mutual Funds around the world during past 2
decades. The households’ investment in Mutual funds in US alone made a transitional leap
from 6% in 1980 to 24% in 1992 and further up to 44% in 1998. Almost all the major
countries in the European Union have also seen a huge hike in their total mutual fund
assets.

Investment in Indian financial markets had been following a traditional and

consistent trend till liberalization and introduction of various monetary and fiscal reforms in
1990. Liberalization in policies, entry of private players and global firms due to
privatization and globalization in the Indian financial markets led to a sudden change in the
investment habits of the investors. It also introduced a whole gamut of products providing
different services as per differing customers’ needs. Entry of private players in the mutual
funds market revived the stagnant mutual fund industry in India. The benefits of risk
diversification, fund management services etc. offered by the private firms with flexibility

12
in options regarding fund selection triggered a wave of competition in the financial markets.
Luiz Ferotz & Cristina Ortiz (2006) in a study conducted to understand the investment
objectives of the investors and evaluate the performance of firms regarding management of
funds have found that investors display more confidence for firms having proper fund
management.

Thus the stiff competition in the financial services sector calls for continuous
innovation of products and services offered to the customer. Another popular vehicle for
investment is Private Equity. Private Equity market has always been an avenue well sought
by both the investors and firms. Investors look out for innovative products in private equity
funds to diversify their investment risk and maximize their returns; while financial firms
seek the private equities market to design and offer products that provide flexibility and
customization to the customers which are considered as important factors for any investor’s
purchase decision. According to a descriptive research by Alexander Peter Groh (2009),
apart from adequate governance investment protection is the main factor for firms while
allocating resources to tap market share in Private Equity segment.

For further diversification of the investors’ risk, another innovative tool called Fund
of Funds was introduced in the markets. As private equity funds provide diversification by
collecting capital from individuals and group of investors and investing them across a wide
range of portfolio firms, the fund of funds collect capital from investors and invest it in a
wide range of portfolio private equity funds. Achleitner et al (2009) while studying the risks
involved with private equity fund of funds have found that definitely investment in fund of
fund options provides greater risk diversification. However the strategies adopted by the
Fund of fund management companies like deciding the management charges play a
significant role in the risk perception of the investors.

Indian economic upsurge post liberalization has made Indian markets a highly
sought after destination both for the domestic and international investors and financing
institutions. High competition, huge market potential, heterogeneous customer base,
different investment objectives and preferences have caused traditional norms of investment
to make way for the new vehicles of investment. Considering the current recessionary
conditions, apart from traditional investment methods like share markets, fixed deposits,
new investment avenues available for investors at individual level include Mutual Funds,
Real Estate, Life insurance and commodities.

INSURANCE SECTOR

13
 Insurance sector around the world is about to attain huge market growth,
considering the concern people have about avenues for investment with safer returns after
the volatility in the stock markets. Even though recessionary conditions have brought about
a slowdown in various financial services markets, insurance sector has an opportunity to tap
higher market penetration. Life insurance industry will attain high growth rates as it fulfills
2 of the most crucial needs of the investors risk protection and wealth management.
Profiling the European life industry Close & Bertoni (2008) researched about the
inefficiencies in the European life insurance markets, and the results predictably describe
similar kind of inefficiencies across major countries of the European Union. The prime
reason for the inefficiency in insurance markets is the improper management of resources
available to the players in these markets.

In contrast to developed economies like the European Union, small and emerging
economies have a different perspective regarding insurance. Small countries like Mauritius
have a highly concentrated market for insurance with a fewer number of firms offering life
insurance products. In his research of life insurance industry of Mauritius Dimitri Vitas
(2003) reveals that even though the life insurance market is highly concentrated, it operates
with high level of competition. The insurance market unlike EU is efficient as well as
profitable for the major players.

Insurance in India started early during the 19th century without proper regulatory
framework. The first life insurance firm to operate in India was a British firm called
Oriental life Insurance Corporation which commenced operations in 1818, which was
followed by Bombay Assurance Company (1823), and Madras Equitable Life Insurance
Society (1829). Post independence insurance was nationalized and government owned Life
Insurance Corporation was the single player in the life insurance market with traditional life
covers being offered to investors with almost no scope of customization and innovation. But
with the liberalization of regulatory reforms and passage of the Insurance Regulatory
Development Authority (IRDA) Act in 1999, private entrants were allowed to introduce
market driven competition. The passage of the IRDA Act has ended the monopoly
commanded by LIC since 1956 and GIC since 1972 in the life insurance and non-life
insurance sectors respectively. The main intention behind the Act was to regulate and
effectively coordinate the activities in the insurance sector, as it segregated the life
insurance, general insurance and reinsurance domains into different lines of business.

Insurance markets in India have a promising future ahead due to favorable factors
like entry of private players in the industry, deregulation and de-tariffing norms introduced
by the government, introduction of new channels of distribution to name a few. Precisely
the life insurance market with the introduction of innovative products like Unit Linked
Insurance products have been at the forefront of sectors receiving high growth.
14
 Life insurance products after deregulation and innovation have merged various
investment and insurance options into different products. One such option is portfolio
insurance, the underlying concept on which the Unit Linked Insurance Products are based.
Suleyman Basak(2001) reveals that portfolio insurance aims at providing the dual benefits
of assured minimum returns on investment along with options to gain high returns from
investing in various stock market schemes.

Risk perception and expected returns play a major role in the life insurance market,
as the objectives for investing in life insurance policy can be significantly different on the
basis of parameters like age, mortality , charges commenced, protection(in terms of life
cover), tax planning and investment objectives of the investors. Dash et al (2007) infer that
different life insurance policies have different rate of returns depending upon the age and
mortality rates of the investors. It was also found that the unit linked plans provide better
returns if they are treated as a product for core investment instead of getting both the
options of life cover and investment.

Industry experts and policy owners all over have been evaluating the unit linked
insurance policies right from their inception. The general perception about these products
comes as a mixed reaction. Grosen and Jorgensen (1999) compared the Unit Linked
Policies with other participating policies, (also referred to as with profit policies) in which
the profit earned from investment is disbursed periodically to the owners, the main
components of these kind of insurance policies include the interest rate guarantees and the
options available to the policy owners to surrender or sell the policy back to the firm. These
flexibilities offered in the products make them all the more popular, and also calls for
standard regulatory norms for industry wide consistency in terms of offers made by the
insurers in these product categories. Cook & Cummins (1994) emphasize further on product
innovation in the actuaries market. Among different factors for gaining market share,
innovation in life insurance products in terms of flexibility, transparency and benefits
offered to the customer is of utmost importance.

However changing the product design strategies with innovative offerings alone
cannot solve the purpose of gaining competitive advantage. Other factors too, need to be
taken care of adequately.

Recent improvisation that took place in the actuaries sector is the innovation in
distribution channel management. While the insurance advisors and agents all over the
country are still the main source of distribution of information and products to life insurance
customers, banks have come forward to provide exposure of their highly dense customer
base to the life insurance firms, thereby creating a win-win situation for both, banks as well
as insurance firms, with customer focus and satisfaction the top priority of their joint

15
venture. Bancassurance, as a channel of distribution for life insurance policies has come as
a promising and profitable alternative to both the parties. Brahmam et al (2004) in a
descriptive study of this channel of distribution focus on the prospect of this innovation.
Bancassurance though has to face new challenges like excessive persuasion and providing
value-for-money for the customer as banks have customers from very disparate income
group levels.

Like any new product being offered, life insurance products too have to face the
challenge of increasing customer awareness, promoting through adequate channels and
quickly moving from the introductory phase to the growth phase of the product life cycle.

The amount of flexibility and options provided by new life insurance products to
facilitate customization makes them highly complex which might be beyond the
comprehension levels of the target customer. Due to lack of awareness and adequate
information regarding various products offered by life insurance, investors might choose to
invest in traditional investment channels rather than life insurance, or might end up buying
a wrong policy or plan which may not completely meet their investment objectives.

This calls for adequate education of the customers. The process of increasing
awareness among the customers should not be constrained to educating them about different
life insurance policies only, but they should be properly informed and educated about the
significance of developing the habit of savings and the gains associated with it. It is a
commonly found observation that customers or investors who are well educated tend to be
more aware of these innovative financial products and services. This notion is substantiated
by a research report submitted by Morisset & Revoredo(1995) to the world bank, studying
patterns of education and savings of 74 countries over a period of 30 years. It was found
that level of education in the long run is positively correlated to the savings and growth rate.
It is quite obvious too because the increase in education levels lead to increase in the
disposable income of the individuals thereby increasing the savings and investment
components of their disposable income.

Hence it is of prime importance for the players of financial products and services, to
properly gauge the awareness, perception and preference of their target customers towards
the flexible but complex products being offered. This will help them in catering to the needs
of the customers in a more efficient way by offering products and services that suit the
needs and investment motives of the customers to the maximum possible extent.

7. RESEARCH METHODOLOGY

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 7.1 RESEARCH DESIGN
As the main focus of this project is to gauge the performance of innovative investment
products, how effective they are and how do they drive an individual’s decision to invest in
them. In order to identify the factors which influence investors’ investment decisions, the
research type selected is Problem Identification Research. The main objective lies in
finding out what factors are responsible for the preference, or non preference of customers
for products and services that offer innovativeness to cater to varying needs of different
target segments.

For adequate problem identification a two part research is conducted. During the initial
phase an Exploratory Research is done in order to identify the underlying management
problem more precisely, and, to identify the factors that innovative products should be
concerned about, using secondary data analysis. It is then followed by a Descriptive
Research conducted through a cross sectional survey, to describe various aspects of retail
investors’ investment habits, demographic and psychographic profiles which play a
significant role during purchase decision making. The descriptive and exploratory
researches hence complement each other to provide a better picture of investor perceptions
about innovative products & services in finance and insurance. They also depict the
parameters which influence a customer’s decision to invest in innovative avenues, instead
of the traditional options that they have been using for so long, with primal focus on ULIPs,
the innovative offering from the Life Insurance Sector.

7.2 DATA COLLECTION

For Descriptive Research, Structured Data Collection is done. The data is collected from
respondents using Mall-intercept Survey method, in which the respondents were asked to
give their responses on a Questionnaire which was prepared using Fixed Alternative
Questions format.

7.3 SAMPLING PROCEDURE

The target population for the study is defined as follows:

17
Elements: Retail Investors, who vary greatly in their investment habits and needs.

Sampling Units: Include private professionals, public servants,

businessmen/businesswomen and households.

Extent: Hyderabad, New Delhi.

Time Frame: 3 months (march-may, 2009)

The research type being exploratory, Non Probability Sampling Technique is used and
samples are collected using Convenience Sampling. To determine the sample size the
commonly followed rule of choosing sample size as 5 times the total no. of variables is
adopted, and since the factor analysis studies 14 variables hence sample size is selected as
70.

7.4 SCALING PROCEDURE

To obtain the investment habits, demographic and psychographic profile of the respondents,
comparative scaling is done. Rank order scaling technique is used to measure the ordinal
characteristics and distinct categories of investment vehicle preferences for different
respondents.

However to obtain the factors that motivate a retail investors decision to invest in
innovative products, especially in life insurance products, Non Comparative Scaling is
used and the respondents were asked to mark their responses which are recorded on a 5-
point Likert Scale.

8. DATA ANALYSIS
For descriptive research, investment habits and various other demographic and
psychographic attributes of respondents were studied. Data analyzed for demographic
profile included educational level (see Annexure 1), Occupation (Annexure 2), and Annual
Income (Annexure 3). Psychographic profile included information on Investment
Experience (annexure 4), Investment Horizon (annexure 5), Returns Expected (annexure 6),
Confidence Level(annexure 7), Risk Category(Annexure 8), and Perception about
innovative products(annexure 9)

For exploratory research, the data obtained from the survey was analyzed using Factor
Analysis from the statistical tool SPSS (Statistical Package for Social Sciences).

18
 8.1 INTERPRETATION OF FACTORS
To start the interpretation and analysis, the Formulated Problem is stated as “What are the
factors which influence the decision of a retail investor to invest in innovative avenues for
investment, especially Life Insurance Products (ULIPs)?”

Information obtained from secondary data and qualitative analyses suggest 14 variables
which are enumerated below (chosen variable names are given alongside in brackets):

V1 Familiarity with innovative investment options available in the market (Familiarity).

V2 Preference for innovativeness in the offering (Innovativeness)

V3 Impact of promotional activities (PromotionImpact)

V4 Core Benefits of life Cover (LifeCover)

V5 Security of capital and assurance of principal investment amount (InvestmentSecurity).

V6 Tax Benefits offered in Life Insurance products (TaxPlanning)

V7 Degree of Customizability offered (Customizability)

V8 Awareness about applicable charges (TariffAwareness).

V9 Flexibility to Switch from one plan/option/fund with minimal load (Flexibility).

V10 Diversification of risk involved with investment (RiskDiversification)

V11 Long term investment objective (InvestmentHorizon)

V12 Perception about private players (Privatization)

V13 Bancassurance, banks acting as the main link in the distribution chain (Bancassurance)

V14 Expertise of professionals/AMC (Asset Management Companies)

(ProfessionalAssistance)

8.1 FRAMEWORK OF ANALYSIS

The respondents were asked to indicate on a 5 point rating scale, their agreement or
disagreement, on various aspects related to their investment decisions, with 1 indicating
“Totally Disagree” and 5 denoting “Totally Agree”. The respondents were asked 14
questions related to their perception and some attributes of innovative investment options,
19
especially (ULIPs) in life insurance. The responses obtained will help in identifying the
variables which are quiet similar to some other variables and thus can be grouped together
under a single component/factor, which eventually, will reduce the no of factors to analyze
and should also aid the management by identifying and focusing on the most important
factor obtained from the analysis.

A lot of factors might be responsible for the investors’ selection of a particular

investment avenue. Secondary data analysis and qualitative research suggested some of the
prominent factors which could probably facilitate the investor’s decision to invest in
avenues that offer them innovativeness and a lot of other benefits. Above mentioned list
contains the variables which seem to influence the investment decision of the investors.

8.2 FINDINGS & ANALYSIS

To identify the most prominent factors, chosen variables were factor analyzed using
Principal Component Analysis. The adequacy of the sample collected is verified by KMO
test of sampling adequacy. Table 1 show that the value of KMO statistic is 0.642 which is
acceptable as KMO value greater than 0.5 indicates that chosen sample is adequate and
correlation between a pair of variable can be described by other variables.

Table 1.

Bartlett’s test of Sphericity is used to justify the selection of Factor Analysis as the
appropriate analysis technique. For factor Analysis to be appropriate the variables should
demonstrate high correlation among each other. A null hypothesis is initially proposed
which states that all variables under study are totally uncorrelated and that the correlation
matrix is an identity matrix. Large values of Chi Square Transformation under Bartlett’s test
of Sphericity support the selection of Factor Analysis as the appropriate analysis technique.
As evident from the table the Chi Square transformation is 231.996 with 91 degrees of
freedom, which is quiet high.
20
 The analysis conducted for the reduction of factors is done using principal
component analysis which aims to reduce the total number of variables, which are
interdependent on each other, and group these variables under individual factors leading to
fewer numbers of factors.

Table 2 shows the communalities, i.e. the amount of variance that a variable shares
with all other variables. Communalities of all the 14 variables before and after factor
extraction are shown below. Values under the column Initial have the default value as 1.0
for all 14 variables indicating the null hypotheses that there is no correlation between any
pair of variables.

Table 2

Table 3 shows the Eigen value and variance explained by each variable. The table also
contains information about the percentage of variance explained by all the variables and is
ordered in a descending order. Variable having high Eigen values, usually greater than 1 are
found to be easily explaining total variance. It can be seen that 5 components have Eigen
values greater than 1 and cumulatively these variables explain 64 % of the total variance,
which can be considered, since if the variables can cumulatively account for greater than 60
% of the total variance, it is considered satisfactory. Component 1 accounts for 25 % of the
total variance, component 2 explains 12.5% of total variance in the population, while
components 1 and 2 together account for 37.7 % of total variance. However after the fifth
component, including an additional component will lead to a marginal increase in the

21
percentage of variance explained and it is not worthwhile to include any more additional
components apart from the 5 components, whose Eigen values are greater than 1.

Table 3

The total number of factors is determined on the basis of Eigen Values; all the
components with Eigen value greater than 1 are selected as factors. This provides a 5 factor
solution as 5 components have Eigen values greater than one. This is further substantiated
by the Scree plot (Fig-1) which suggests a 5 factor solution. It can also be seen in table 3
that first 5 components account for 64 % variance and the gain associated with going for a
6th component is marginal.

22
 Fig-1

In order to group the variables showing correlation with a factor, orthogonal rotation
of the factors is done using the Verimax Procedure for rotation using Kaizer
Normalization. Table 4 shows the correlation or factor loadings of different variable with
respect to the 5 factors. It can be seen that variables which were showing moderate
correlations with more than 1 factor before rotation, are highly correlated with a single
factor and almost uncorrelated with all the other factors apart from the one to which they
show high correlation.

23
 Table 4.a

Table 4.b

Following the rotation, interpretation of the factors is done by analyzing different

variables which show high correlation with their corresponding factors and grouping them
together on the basis of factor loadings they have on each factor. The list given in table 5
shows the grouping of variables into different factors, following which, an appropriate
name will be given to the given factors.

______________________________Table
5________________________________________

Factor Variable Name Factor Loading

_________________________________________________________________________
___

1. LifeCover -0.654

TaxPlanning 0.739

TariffAwareness 0.774

RiskDiversification 0.590

24
2. Familiarity 0.646

InvestmentSecurity 0.838

Privatization -0.617

3. Innovativeness -0.537

Customizability 0.626

InvestmentHorizon 0.809

4. Flexibility 0.590

Bancassurance 0.829

5. PromotionImpact 0.731

ProfessionalAssistance -0.645

Factor 1 is highly correlated (as given by the factor loadings in the brackets along
with the variable) with TaxPlanning (0.739) and TariffAwareness (0.774), and has moderate
factor loading for RiskDiversification (0.590) whereas negative loading for LifeCover (-
0.654).

Factor 2 shows high factor loadings of InvestmentSecurity (0.838) and Familiarity

(0.646), but negative loading for Privatization (-0.617) indicating negative correlation of
Factor 2 with Privatization.

Factor 3 is in high correlation with InvestmentHorizon (0.809) and Customizability

(0.626), again Innovativeness (-0.537) shows a negative correlation.

Factor 4 has high loadings for Bancassurance (0.829) and moderate loading for
Flexibility (0.590) on it.

Factor 5 shows high factor loading for PromotionImpact (0.731) and high negative
factor loading for ProfessionalAssistance (-0.645).

25
 8.3 CONCLUSION

The 1st factor consists of four variables, of which TaxPlanning and TariffAwareness
show a high positive correlation, RiskDiversification is moderately correlated and
LifeCover shows a negative correlation with Factor 1. Thus Factor 1 may be likely termed
as INVESTMENT OBJECTIVES of the retail investors, as it indicates that the main
reason for investment can play a prominent role in guiding an investment decision about the
avenue one intends to invest in. An investor is likely to invest in an innovative investment
vehicle as it offers Tax Benefits, apart from this he may seek the benefit of risk
diversification which is offered by products like ULIPs and Mutual Funds. Knowledge
about the different charges applicable in any investment option emerges as the most
important factor to be considered. Regarding life insurance products, it can be said that life
insurance products should not limit themselves to offering core life cover only, they ought
to come up with innovation in product design, as like the existing ULIPs which offer
opportunities for investment apart from the usual life cover being offered in insurance
policies.

The 2nd factor comprises of 3 variables, namely InvestmentSecurity, Familiarity, and

Privatization. Of these variables InvestmentSecurity shows the maximum correlation with
the factor followed by Familiarity, which indicates that security of the invested capital is a
factor of prime importance to a retail investor and may indicate that innovation in the
product may be appreciated but only if it assures the security of invested capital. This is
further substantiated by the negative correlation displayed by Privatization, which suggests
that people will not prefer private players against public establishments like LIC, which is
widely viewed as the trusted institution assuring security of the investment. This suggests
that the 2nd factor can be termed as SECURITY.

The 3rd factor consists of Innovativeness, Customizability, and InvestmentHorizon.

InvestmentHorizon shows highest correlation which indicates that investors are likely to
invest in ULIPs as a long term investment and will not be looking at short term gains while
investing in other such products. A significant correlation displayed by Customizability
indicates that a single product which offers the option of getting both the insurance benefits
and investment opportunities under a single umbrella can gather attention of the investors.
However a negative correlation displayed by Innovativeness indicates that though
customization is desirable but innovation is not a preferable reason to invest in financial
products owing to the risks involved with products offered in the Indian financial markets.
Looking at the perspective these variables try to point out, this factor could be interpreted as
PRODUCT DESIGN.
26
 The 4th factor comprises of Flexibility and Bancassurance. High correlation shown
by Bancassurance reveals that the usage of banks in the distribution channel of insurance
players can be viewed as a popular initiative. This can be verified by the fact that most of
the investors are quite familiar with the banks and they can trust these banks as an
intermediary in their investment decisions. Flexibility too is moderately correlating to the
factor which suggests investors’ preference for hassle free usage of their investments with
ease of switching from one option to other. This factor may be named as DISTRIBUTION
as it intends to describe the significance of efficient distribution practice of unconventional
products and services.

The 5th factor contains two variables PromotionImpact and ProfessionalAssistance,

high factor loading of PromotionImpact indicates the preference for products and plans
which are more prominently visible to their target customers through various media
channels. ProfessionalAssistance though, negatively correlated with the last factor suggests
that during recessionary conditions investors confidence levels are down and they are not
willing to trust even the experts when it comes to their investment decisions. This factor can
be interpreted as MARKETING AND PROMOTION EFFORTS as it emphasizes on the
marketing efforts of an organization in context to promotion efforts applied and service
quality provided to the customer.

The study on investment habits of individual investors suggests about their

preference in the markets. Table 6 gives the rankings of different investment options as per
the preference of the respondents.

27
 It was found in the survey that Equity Markets are still ranked as the 1st preference
for individual investors which hints about the confidence, investors are showing in the
markets. The 2nd place is shared by Mutual Funds and Bullion both, as the former offers
diversification of risk and latter promises assured returns during volatile market conditions.
This is followed by Real Estate (4th) and Debt Market (5th). ULIPs which were ranked 2nd
last at 6th position seem to have a long way to go as they need to gain popularity among
middle income group, this needs to be achieved by consolidating the marketing and
promotional efforts to educate the investors about them. At the last slot are the bank fixed
deposits (7th), which were traditionally considered as the best way to save for a long time.

9. MANAGERIAL IMPLICATIONS
28
 The take home from the information obtained through the survey is the insight and
identification of key areas on which companies need to focus on, in order to gain
competitive advantage and increase market share.

• Proper knowledge about the options for investment available to them is a must for
the retail investors. Since, investment decisions involve financial risk hence it
becomes imperative for the investor to have a thorough understanding of the avenue
he/she intends to invest in. It is therefore advisable to educate the customers through
proper channels, making them aware of the investment options available to them,
guiding them clearly through the risks and returns associated with different options,
various charges that will be applicable and the investment objective the investment
option seeks to achieve.

• Security of Investment obviously is among the prime criteria for an investor while
deciding on selecting a particular investment. This is verified by the research which
indicates that it is most likely for an investor to select an option which assures him
of returns apart from securing the initial capital. For these reasons one would prefer
to invest in avenues through which one is quite familiar and can trust these options
for safeguarding the investments.

• Players in the insurance and financial services market must come with products that
are lesser in complexity and offer them some, if not much, customization to deal
with their investment options. As found in the analysis, tax benefits offered by an
investment product are the main drivers in influencing an investment decision. This
indicates that products like ULIPs, ELSSs etc. which offer tax deductions under sec-
80(c) and sec-10(d) of the Income Tax Act, should be more prominently marketed
among the investors.

• When it comes to life insurance “the one size fits all” proposition may not hold
good, owing to the differing needs of the middle income retail investor segment,
which again calls for either introducing a lot of products with different structures or
provide the option of customizability by altering the product design, as like in
ULIPs where the policy owner enjoys the discretion of Fund Selection, asset
allocation and risk appetites.

29
• Buyers and Non Buyers of life insurance differ widely in terms of their
psychographic characteristics like their risk perception/averseness, Investment
Objectives, Returns expected and prior knowledge and familiarity of the product
being offered. It should thus be tried to identify the specific needs of the investors
and provide them with products which cater to their specific needs.

• Owing to the heterogeneity present in the prospective segment, an organization can

use innovative marketing as its strategic tool to gain preference over its competitors,
by offering unique products and solutions to different customers.

• Introduction of new entrants in the distribution network of financial business can

catalyze the business activities, like using banks and financial institutions being used
as intermediaries in the distribution channel of insurance sector.

******************************

30
ANNEXURES

ANNEXURE – 1

31
ANNEXURE-2

32
ANNEXURE-3

33
ANNEXURE-4

34
ANNEXURE-5

35
ANNEXURE-6

36
37
ANNEXURE-7

ANNEXURE-8

38
ANNEXURE-9
39
ANNEXURE-10
40
41
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