MF VS ULIP[1] - · 3 of 19 A Reliance Capital company …Reflected in Capital Market performance 20.6 (1.4) 9.7 4.7 11.6 54.6 21.2 42.5 30.5 2.4 20.2 25.6-10 0 10 20 30 40 50 60

A Reliance Capital company

INDIA STORY

POTENTIAL OR THREAT

2 of 19 A Reliance Capital company

Incredible India

India to be the third biggest economy in next 30 yearsSource: Economist


…Reflected in Capital Market performance

20.6

(1.4)

9.74.7

11.6

54.6

21.2

42.5

30.5

2.4

20.2

25.6

-10

0

10

20

30

40

50

60

Dow jones Eurotop MSCI A s iaPac if ic

MSCIEmergingMarkets

MSCI WorldIndex

BSE Sens ex

3 y ears 5 y ears

3&5 yea r pe rfo rm ance (% )

Source: Bloomberg, March 2006


India – Growth Story intact….

6.7

5.6

1.3

5.15.9

7.3 7.37.8

4.8

6.56.1

4.4

5.8

3.8

8.5

7.58.4

8.9

7.8

0

12

3

45

6

7

89

10

FY90

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

06C

L

07C

L

08C

L

GDP growth (% YoY)

GDP growth projections 2006-072005 2006 2007

Consensus CLSA Consensus CLSAChina 9.9 9.6 7-9 8.9 3-5Hong Kong 7.3 6.1 5.5 4.7 3.8India 8.4 7.6 8.9 7.2 7.8Indonesia 5.6 5.2 4.4 5.7 3.8Japan 2.6 2.9 3.4 2.2 2.8Korea 4.0 5.3 4.5 4.8 3.4Malaysia 5.2 5.4 4.1 5.4 2.0Philippines 5.0 4.9 4.8 4.8 2.8Singapore 6.4 6.6 6.8 5.2 5.0Taiwan 4.1 4.1 3.5 4.1 0.4Thailand 4.5 4.7 3.9 4.8 2.9

India should sustain about 8% GDP growth . . .

. . . even as global growth slows in 2007

Source: CLSA


In the short term, equities are volatile….

46.6%

31.0%

99.7%

70.7%

65.1%

65.8%

54.9%

54.0%44.8%

0

2000

4000

6000

8000

10000

12000

14000

1998 1999 2000 2001 2002 2003 2004 2005 2006*0%

20%

40%

60%

80%

100%

120%

Low High Difference

Source: Bloomberg. * Oct 2006


….but Equity is a Long-Term Value Creator

Source: CLSA


CONSUMER DEMOGRAPHICS

The Great Indian Consumer Challenge


High domestic savings will support growth

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY00 FY01 FY02 FY03 FY04 FY0518

19

19

20

20

21

21

22

22

Household sav ings (LHS)

As % GDP (RHS)

(Rsbn) (% )


Change in Consumer Class

05 0

1 0 01 5 02 0 02 5 03 0 03 5 04 0 04 5 05 0 0

1 9 9 0 2 0 0 0 2 0 1 0 E 2 0 2 0 E0

5

1 0

1 5

2 0

2 5

3 0

3 5

4 0

N o . o f P e o p le ( L H S ) % o f P o p u l t a io n ( R H S )

U n i t M i l l io n s %

Growing Middle ClassGrowing Middle Class-- From Pyramid to DiamondFrom Pyramid to DiamondConsumer Credit Penetration (%)Consumer Credit Penetration (%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Singapore Taiwan Korea Malaysia Hong Kong Thailand India

% to GDP

98

114

10

50

135

3

Rich; >US$10,000pa Low Income;<US$2000pa

Middle Class; US$2000-10,000pa

FY02188Mn Hhlds

FY10222Mn Hhlds


Favorable Demographics

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1990 1995 2000 2005 2010 2015 202030

32

34

36

38

40

42

44Population (LHS) Dependency ratiobn %

Additional working age population by 2010

13

20

38

41

56

73

83

375

(3)

0.04

-50 0 50 100 150 200 250 300 350 400

Japan

West Europe

USA

West Asia

Latin America

SE Asia

China

Africa

India

World 4087

675

477

921

355

352

127

197

123

85

Stock position 2004

India’s population is young, with 54% under the age of 25 and 80% under 45Percentage of working age population to rise

Source: UN, CLSA Source : UN


What does this mean?- A younger and working age population means –

Income levels to rise

Higher savings and consequent flows into equity markets

Increased household consumption

Significant increase of labour supply


Indian Customers - a strong conservative streakHousehold Savings Split

Deposits (banks & others)48%

Shares, debentures & mutual funds

5%

Investments in small savings12%

Insurance14%

Government Securities2%

Currency9%

Provident & Pension Funds10%

Savings mostly in Bank

Deposits

Source: RBI, 2005-06 Annual Report


Investor Dilemma – Safe & Steady‘Safety’ is an important criteria…but

- Returns on safe fixed income options such as bank deposits have been moderating- ‘Assured’ return products are being phased out- Inflation and taxes are impacting returns

10

8.5

5.56.25

7

6.25

6.4

1.8

4.35.24.8

6.0

0

2

4

6

8

10

Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06

Ban

k D

epos

it

0

2

4

6

8

Infla

tion

Bank Deposit InflationBank Deposit Rates: 3 to 5 years horizon (Source: RBI)Inflation: Source (Citigroup)


ULIP Vs EQUITY MF

At a Glance


Indian Mutual Fund Investor Profile79%

14%7%

Top 5 cities

Next 10 cities

Remainingcities

34%

66%

Retail Institutional

Retail Penetration Low Metro and Urban Skew

ULIP has pure retail money. RLI has focus to capitalise both in metros as well as next 200 cities


ULIP vs Equity MFULIP

- Long Term investment Plan- Goal Based saving

(child,retirement,wealth)- Automatic SIP - Life cover- Tax efficient- Convenience of switching between

equity & debt- Customer IRR high over long term- Capitalise short term gain through

switch and tax efficient way without moving out of scheme

Equity MF- Short Term investment Plan- For a short term goal- SIP or STP is by choice- No life cover- Not very tax efficient- Switch a costly proposition- Customer IRR loses sheen over

long term, competitive over short term

- No opportunity to switch, short term capitalisation can result into tax


ULIP – A perspectiveULIPs in India have 5 years history

Fund managers have been conservative (long term investment horizon)

As Fund under Management is growing, ULIPs will be having highest retail money- Currently, FUM of Reliance Life is in the TOP 5 retail FUM in MF industry


Asset AllocationUnder ULIP, there is asset allocation by default- Benefit of regular periodic investment(rupee cost averaging)

MF lumpsum investment advocates “time the market”Hence, MF used as speculation tool vis-à-vis ULIP as a wealth creation tool because of product designClosed end MF tries to bring ULIP culture, however:- It is tax inefficient - Inflow stagnant (Fund is fixed)


Significance of Asset Allocation

Most Important factor for successful financial

planning –

Asset Allocation(94% contribution)

Brinson, Hood and Beebower : Determinants of Portfolio Performance, 1986, 1991: “Asset Allocation helps explain over 94% of a portfolio’s performance”.


MYTH 1

MF charges are much less !


Charges of a Equity Mutual FundEntry Load – 2.25%- Lumpsum investment- SIP investment- STP investment

Marketing costs (Upto 6%) can be charged upfront- Closed end MF, it is amortised over term

Fund Management Charges - Varies between 2.00% - 2.50% p.a

STT charged at entry & exit (0.15%)


ULIPs ChargesHave a high premium allocation charge initially & then tapers down sharply- Initially 10% - 25%- Later tapers to 0%-5% (4th yr onwards)

Fund Management Charge at 1.50%Policy admin charges at Rs. 40 per monthUltimately, ULIP’s (DB=SA+FV) customer IRR better than a Mutual Fund + Term Insurance Cover over long termMF average portfolio holding is less than 1 year & disclosure ofinvestment is less than 20%


MYTH 2

Mutual funds can yield better returns to the custmor


What does returns imply?Tax effectivenessLong Term -“Maximising Returns”


Tax effectivenessDuring InvestmentMFs do not get tax exemption unless it is an Equity-linked Savings Scheme (ELSS)ULIPs are exempt under Section 80C.

During MaturityCurrently Equity MFs are exempt from tax on maturity if held for more than a year- Capital Gains of less than 1 year is STCG & taxed at 11.22%- ST Capital loss cannot be set-off against LTCG

ULIP maturity is exempted under Sec. 10 (10D)


“Maximizing Returns”“Markets go through volatile phases in the short-term. An active

investor exits & re-enters to maximise returns”

In MF, you need to exit & re-enter in case of volatility to maximise returns. Implications -- Have to pay Entry load every time- Short-term capital gains tax may be applicable- STT is also applicable at both entry & exit

ULIPs have a switch feature to help switching between equity & debt & back to equity any number of times at Zero or nominal cost.- With changing lifestage (risk appetite), you can tune your investment


Acid Test – ULIP (Automatic Investment Plan) Vs MF

Customer aged 30 yearsInvests Rs. 1 Lac every year for 30 yearsSum Assured = Rs. 20 Lacs- In AIP (DB = Higher of SA/FV)- In an ELSS Mutual Fund PLUS a Term Plan

No switch considered during the term- Adverse impact of switch under MF- No or negligible impact of switch under ULIP

Assumed return @ 10%


ULIP - Long Term Winner!

1,01,74,9821,29,27,84820,00,00010000030

66,83,17080,96,81020,00,00010000025

42,53,745492071020,00,00010000020

25,63,474283262720,00,00010000015

13,87,469146198820,00,00010000010

569,26556731120,00,0001000005

ELSS FUND VALUEULIP FUND VALUESUM

ASSUREDPREMIUMYEAR

ULIPVSAIP

Winner by margin


ConcludeApproach Consumer with- Goal based saving

- Long term wealth creation

- Dynamic Asset Allocation

“Don’t Time the Market,

Spend Time in the Market.”


Key investor concernsGoals (Child, retirement, wealth..)FlexibilityDecent returnsTax efficiencyProtection

Key Investor concerns are addressed only through ULIPs (Unit Linked Insurance Plan)


Thank you

Month DD YYYY

Documents

MF VS ULIP[1] - · 3 of 19 A Reliance Capital company …Reflected in Capital Market performance 20.6 (1.4) 9.7 4.7 11.6 54.6 21.2 42.5 30.5 2.4 20.2 25.6-10 0 10 20 30 40 50 60