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
3 of 19 A Reliance Capital company
…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
4 of 19 A Reliance Capital company
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
5 of 19 A Reliance Capital company
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
6 of 19 A Reliance Capital company
….but Equity is a Long-Term Value Creator
Source: CLSA
A Reliance Capital company
CONSUMER DEMOGRAPHICS
The Great Indian Consumer Challenge
8 of 19 A Reliance Capital company
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) (% )
9 of 19 A Reliance Capital company
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
10 of 19 A Reliance Capital company
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
11 of 19 A Reliance Capital company
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
12 of 19 A Reliance Capital company
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
13 of 19 A Reliance Capital company
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)
A Reliance Capital company
ULIP Vs EQUITY MF
At a Glance
15 of 19 A Reliance Capital company
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
16 of 19 A Reliance Capital company
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
17 of 19 A Reliance Capital company
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
18 of 19 A Reliance Capital company
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)
19 of 19 A Reliance Capital company
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”.
A Reliance Capital company
MYTH 1
MF charges are much less !
21 of 19 A Reliance Capital company
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%)
22 of 19 A Reliance Capital company
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%
A Reliance Capital company
MYTH 2
Mutual funds can yield better returns to the custmor
24 of 19 A Reliance Capital company
What does returns imply?Tax effectivenessLong Term -“Maximising Returns”
25 of 19 A Reliance Capital company
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)
26 of 19 A Reliance Capital company
“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
27 of 19 A Reliance Capital company
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%
28 of 19 A Reliance Capital company
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
29 of 19 A Reliance Capital company
ConcludeApproach Consumer with- Goal based saving
- Long term wealth creation
- Dynamic Asset Allocation
“Don’t Time the Market,
Spend Time in the Market.”
30 of 19 A Reliance Capital company
Key investor concernsGoals (Child, retirement, wealth..)FlexibilityDecent returnsTax efficiencyProtection
Key Investor concerns are addressed only through ULIPs (Unit Linked Insurance Plan)
A Reliance Capital company
Thank you
Month DD YYYY
Recommended