1

AN INTRODUCTION TO
POST GRADUATE PROGRAM
IN BANKING AND
FINANCIAL PLANNING

RETAIL BANKING –I : Module 7

Chapter 1 Mutual Fund
Chapter 2 Insurance
Chapter 3 Gold
Chapter 4 IPO Related

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INDEX : PGP: MODULE 6

SN Module Chapter Topic Page

No.
1 7 1 TPP -Mutual Fund 3

2 7 2 TPP -Insurance 23

3 7 3 TPP -Gold 45

4 7 4 IPO Related 53

Glossary 62

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Module 7: Chapter 1
Mutual Fund

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What are Third Party Products in a Bank?

Third party products are those which are other than the Bank‘s own products.
These are the products of other companies. Banks act as Agents or third parties
in selling these products. Banks get commission for selling such products. In a
retail banking environment these are the products which are sold using the
Banks‘ net-work and makes it essential for the Bank Officers to be conversant
with the products.

Several advantages are there for the Banks in selling these products. Let us
discuss them now.

Advantages of Third party products (TPPs) for Banks:

 Banks get a fee or commission on the sale of these Third Party Products.

 The Banks do not have to invest money on this business. It is only the
services rendered by the Banks.

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Advantages to the Customers:

The advantage to the customer is that he is able to get all his needs fulfilled in
a single desk viz the Bank. He need not visit the relative TPP companies or
institutions for any purchase or clarification on the products and he is able to
get it done at the Bank itself.

The Different Third party Products sold by Banks are:

a. Mutual Funds
b. Insurance and
c. Gold.

First, let us begin with Mutual Fund

Mutual Fund is a Trust created through the pooling of the investor‘s savings.
The investors here share a common financial goal and take advantage of these
savings and thereby ensure to invest these funds in stocks, bonds or money
market instruments. Let us take an example.

Mr. Gurbachan Singh Bhatia, an young professional from Punjab is interested to

invest his excess money in some useful portfolio which could generate some
income. Which are these areas which he can consider for such investment?

Thus, we can say that Mutual funds are the proxies for direct investment in
equity shares or bonds. It is also a form of savings like Bank Deposits, however
is different from Bank Deposits. Professional Managers, with necessary
expertise run the Mutual Funds portfolio.

WHAT ARE ITS OBJECTIVES?

Let us assume that there are 1000 investors and each invests INR 5,000 with a
particular fund. The total investment here would come to INR 50,00,000 and
here with this amount which is considerably high, multiple shares, bonds and
money market instruments can be purchased covering different sectors of the
economy. Here is a chart to show as it could be achieved?

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Different features of Mutual Fund:

a. They are helpful in diversification of investments and hence holld low risks
b. Professional experts manage theportfolios and the money is in safe hands.

It is now important to see as to who can invest in a Mutual Fund? Following are
the investorts in a Mutual Fund:

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Money Market Instruments:

These are the instruments issued by Government or companies for a shorter

duration which carry low risk and also low returns. Investments in equity shares
means burden of high risk and equally more returns or loss.

NET ASSET VALUE:

Mutual funds are sold in the form of units and the cost of each unit is called the
NET ASSET VALUE of the fund. The NAV quoted will show the value of funds
investments divided by the number of units outstanding till date. ie.,

Investments = Market Value of the fund + Income Accrued - Expense

Accrued

Investments (including cash)

NAV = Number of Units outstanding till date

The Sale and purchase price of the units will depend on the NAV.

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Following is the NAV of some of the companies as on February 2016

CASE STUDY:
Let us say that the Asix Mutual Fund launches Axis Hybrid Fund Series 30 and
raises INR 100 crores by issue of 10 crore units of the fund at INR 10 each, to
generate income by investing in high quality fixed income securities maturing
on or before the maturityy of the scheme and also for capital appreciation
purpose under its close ended scheme. Post investment, the investors will be
able to buy and sell units from the fund. On a particular day the nubmer of
units outstanding were 20.5 crores. The market value of all investments
(including Cash) was INR 280 crores, the accrued dividend income was 2.5
crores and the accrued expenses were 5 crores.

SOLUTION:
Using the NAV formula which is
NAV = Market value of the fund investment +Income Accrued- Expense
Accrued
Number of Units outstanding till date.
NAV = 280 + 2.5 - 5
20.5
= 13.53

LOAN COMMISSIONS:
Entry or Front Load:
Entry or Front Load is a commission paid by the investor while buying a fund.

Exit or Back End Loan:

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Exit or back end load is commission paid while redeeming units (exiting) from
the fund. Exit Loads are generallly applicable within 6-12 months of
subscription of specific units.

Following example will show as to how they are calculated.

This was an income for the mutual fund. They would then use this income to
pay commission to the distributors. However, a SEBI directive in 2009 banned
entry loads on Mutual Funds.

With the banning of the entry load, the investor must now pay an upfront
commission directly to the distributor.

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TRAIL COMMISSION:

Other Terms: The other terms used are:

FACE VALUE It is the value of one unit of the scheme when it was
launched
FUND CORPUS It is the current value of the investment made by the
scheme
SUBSCRIPTION When you buy units of the scheme from the Mutual fund,
you are subscribing to the Units of the Scheme.
REDEMPTION When you sell units of the scheme back to the Mutual
Fund, you are redeeming units of the scheme. This
process is known as REDEMPTION.

How are Mutual Funds in India classified?

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(1) Based on Structure

Based on Structure, Mutual Funds in India can be classified as

a. Open Ended Fund

b. Close Ended Fund

a. Open Ended Funds:

These are the funds where the investor can buy or sell units at any time, that is
the fund I sopen at all times. It has no fixed maturity. This means, that the
funds corpus and the number of unit hjolders will increse or reduce over time.
The fund is valued daily and all deals are ttransacted at Net Asset Value (Net of
Loads). The NAV also gets published daily. Following is an example of some of
the Open Ended funds.

b. Close Ended Funds:

Close Ended funds are available for subscribing once and the quantity, amount,
premium etc., are fixed after issue is closed. The maturity is fixed in these
cases. Also these cannot be redeemed, meaning that selling or buying by
theinvestors is anot allowed. Following is an example of some of the Close
Ended funds.

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GROWTH SCHEMES:

Now we shall discuss about the Growth Schemes wherein the value of the
investment is increased however, is again subject to the high volatility in the
market.

Growth funds can be further divided based on the equity categories on which
they concentrate like:
Large Cap Large cap stocks are those that are part of the index, and
have a market capitalization of over INR 10,000 crore
Mid Cap Mid Cap stocks are those, that have a capitalization between
INR 250 to INR 10,000 crore
Small Cap Generally companies that have a mrket capitalization of upto
INR 250 crores are small stocks.

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Market capitalization means market price x number of shares issued.

Ex: If market price of First Class Fudns is INR 50 and if there are two million
shares issued, then Market Capitalization of First Class Funds is INR 50 x
20,00,000 = INR 10,00,00,000. These are the rules which keep changing
regularly.

Some Mutual fund companies also offer sectoral funds under this scheme which
hold the highest risk since they concentrate on one sector like Infrastructure, IT
etc.,

INCOME SCHEME
Following chart gives a fair picture of the Income Scheme based on above
factors.

These are fixed income debt instruments and are classified on the basis of the
Tenor and also the nature of Debt Securities invested therein as shown
hereunder:

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Income funds have a tendency to carry a lower risk than growth funds due to
the low valitility of the underlying securities.

BALANCED SCHEMES:
These schemes hold both equities as well as Fixed Income securities in a certain
stable proportion and hold both equities as well as fixed income securities ina
certain stble proportion. Here is an Example:

CASE STUDY:
Look at the following graph which shows different allocation under
different schemes and categorize them according to their risk profile.

SOLUTION:

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The categorization can be made as under:

Balanced funds are high risk in nature, when compared to the income funds,
however, have a lower risk apetite than the Growth Funds

SPECIAL SCHEMES:

Certain Muitual Funds have special schemes like Equity Linked Savings Schemes
(ELSS) and Index Funds.

Equity Linked Savings Schemes (ELSS)

Investments in ELSS, as per the rule slaid down in

1992 and 1998 were eligible for the tax rebate under
Section 88 of the Income tax act if such investments
were made on or before April 2005. However, section
88 has been replaced by section 80C in the last
budget. But it also mentioned specifically that the
ELSS schemes no longer be open ended. It will be a
plan with a fixed tenure of ten years.

INDEX FUNDS

These are funds that invest in stocks composing

the benchmark index or a specific industry
(Sectoral Index). Their performance will almost
mirror the performance of the respective index.
Example: ICICI prudential CNX 100 ETF- annualized
compounded return as on 31.12.2015.

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FIXED MATURITY PLANS:

These are fixed income related

and aclose ended funds and are
highly traded during high interest
rate periods, and are associated
with low risks. Risks are
considered to be low since the
funds are invested in high yielding
bonds which match up with the
maturity period. Hence the Funds
Manager is aware of the expected
returns and holds the bonds till
maturity.

Following is an example of the Super Mutual Fund.

CASE STUDY:
Match the following: Explain the schemes according to their functions:
Scheme Definition and Scheme Details
Name
Growth Useful in reducing the tax 1. Provides tax concessions for
Scheme liability and suggested for investment in equity funds.
investment for a longer term 2. Well diversified open ended fund
with
a 3 years Lock in period.
ELSS A fund which primarily 1. Invest in Government securities
invests in Government 2. A type of income scheme.
Securities
Gilt A Mutual fund whose goal is 1. Invest primarily in Equity
Fund to increase the value of 2. Increases value of investment
investment 3. Higher end of risk spectrum

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SOLUTION:
Scheme Definition and Scheme Details
Name
Growth A Mutual fund whose goal 1. Invest primarily in Equity
Scheme is to increase the value of 2. Increases value of investment
investment 3. Higher end of risk spectrum
ELSS Useful in reducing the tax 1. Provides tax concessions for
liability and suggested for investment in equity funds.
investment for a longer 2. Well diversified open ended fund
term With a 3 years Lock in period.
Gilt Fund A fund which primarily 1. Invest in Government securities
invests in Government 2. A type of income scheme.
Securities

FUNDS OF FUNDS:

These are the funds that invest in other mutual Funds, based on a certain asset
allocation strategy. These can probably be termed as the ultimate form of a
diversification. Very few Mutual Funds have launched such schemes, given
their low popularity among investors.

The above mutual fund details have been discussed keeping in mind their
structures and investment objectives. We shall now categorize them on their
risk appetite.

Types of Mutual Funds: Investment Plan:

Mutual funds are also classified keeping in mind their investment plans.
Investment plans are classified based on the way money is repaid to the
investors, or the way the investors bring in the money.

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GROWTH PLAN

Here the returns made on an investment is again reinvested in the Fund. This
scheme is advocated to those who look for long term investments and are not
keen in regular cash incomes.

DIVIDEND PLAN
Here, the returns are distributed through Dividends, back to the investor at
regular intervals.

This sort of investment

is preferred by those
who are interested in
getting a regular
income. This suits
those interested ina
Retirment sort of
Regular Dividend
income.
paid.

CASE STUDY:

Select out of the following as to which scheme is suited for the perse personnel?

Solution:

1. A Growth Plan is beneficial for young

professionals looking to invest for a
long term.

2. A monthly income (Dividend) Plan is

beneficial for senior citizens who want
regular income.

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DIVIDEND REINVESTMENT PLAN:

Here the dividend is not credited to the customers‘ account, instead the same is
used in purchasing additional units of the scheme. Following is an example.

SYSTEMATIC INVESTMENT PLAN:

Here the money is invested in instalments like a Bank‘s Recurring Deposit. This
gives a clear way of fund investment process. Here, the moneyis invested by
the customer is in monthly installments, over a certain period of time, with a
due commitment.
Following is an example.

WE SHALL SEE NOW, THE PERFORMANCE OF ABOVE MUTUAL FUND

OVER A PERIOD OF SIX MONTHS. THE RED DOTS SHOW DATE ON
WHICH MONTHLY INSTALMENTS ARE PAID BY MR. KAMLESH KAMAT.

BENEFITS OF SIP:

a. It helps in managing the ups and down of the customer during a defined
period
b. A Small amount is advised to be invested in an SIP due to the volatility in
the market for which there is due provision under SIP Scheme.
c. The return is based on the weighted average cost, due to the fact that

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- We buy more units when the NAV is low

- We buy less units when the NAV is high
d. Due to this the Investor gets a better average market rate than normal
rate.
e. In an SIP it is more pertinent to know as to how the money is invested
rather
than to see as to where the money is invested.
f. The SIP can be had either for a Growth Plan or Dividend Plan and could be
under a Growth scheme or an Income Scheme.
g. Here the main factor to remember is that the amount invested is in
instalments.

CASE STUDY:
Go through the following case study and select the correct answer:

Solution:

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SYSTEMATIC TRANSFER PLAN:

Here there are two schemes viz Scheme 2 and Scheme 2

SYSTEMATIC WITHDRAWAL PLAN

Likewise it runs for month 3, month 4 etc.

BENEFITS OF SYSTEMATIC WITHDRAWAL PLAN:

 It meets liquidity needs for regular expenses
 Assuming the scheme is profitable, the re-purchase ensures that some of
the profits are being regularly en-cashed by the investor.
 Under SWP, if Kamlesh Kamat decides to redeem Rs. 5000 every month,
the number of units he will sell will depend on the NAV, less any exit
loads as applicable ie.,
- Month 1 : NAV is INR 100. Hence units sold = 5000/100 = 50.00
units
- Month 2 : NAV is INR 110. Hence units sold = 5000/110 = 45.45
units.
- Month 3 : NAV is INR 80. Hence units sold = 5000/80 = 62.50
units.

Therefore by selling the investments over a period, Kamlesh Kamat avoids

selling the entire units when markets are in a more volatile position.

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FUND SELECTION:

This will be a more valid point for the bank officials to convince the customers,
during discussions.

As already discussed, the main purpos eof investing in a Mutual Fund is that
there are multiple stocks in the market and you are not clear as to which one
should be selected. How do I invest and where do I invest like: Infosys-
State Bank of India or HDFC etc.,??????????

Selection of a Fund broadly depends on the following:

a. Market Conditions
b. Risk Profile of the customer.

These will help you to decide on the category of fund like Equity, Debt,
Balanced fund etc., The factors to be evaluated for selecting a Mutual Fund
within the same category are:

i) Absolute Returns - History

ii) Relatives Returns - As compared to a bench mark
iii) Negative Returns - Relative Performance in a falling market
iv) Risk Adjusted Returns - Study the risks involved in the fund.

TEST YOUR UNDERSTANDING:

1. What is Mutual Fund. Explain its objectives?

2. Describe the various Features of Mutual Funds.
3. Name the entities who are eligible to invest in a Mutual Fund
4. Name the key terms used in Mutual Funds
5. Write notes on Growth Schemes, Sectoral Funds, Income Schemes. What
is the difference between Gilt Funds and Regular Funds?
6. State different types of Investment Plans. State the special features
available in an SIP.
7. What are the precautions to be taken in a fund selection?

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MODULE 9: CHAPTER 1
THIRD PARTY PRODUCTS -INSURANCE

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What is Insurance?
It is a Contract where a person gets reimbursement for losses incurred, from
the Insurance Company, as a consideration for a fixed sum paid.

Insurance involves two parities

The person who insures pays a fixed amount.

The insurance company takes care of the losses faced by the insured Either on
property, health, life or otherwise.

KEY TERMS:
Now, let us go through the various key terms used in an Insurance product.

(1) Claim:
A claim is a request made to an insurance company requesting for a payment
on the insurance policy contract document.

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(2) Free Look Period:

This relates to the period the insurance holder tests the policy and opts to
return it back or surrender if he is not satisfied with certain things.

(3) Policy Document/Holder:

This refers to the person holding the document which is the legal document
issued by Insurance Company.

(4) Premium:
This refers to the payment made by the insured ..

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There are various options of paying the insurance premium. The policy holder
has to pay the premium every month, till the term of the policy. If Mr. Ram
pays the first premium of INR 1000, on the 5th of January, he will then have to
pay the premium of INR 1000 on the 5th of every month, for the entire duration
of the policy.

(5) Policy Lapse:

When a Policy Holder fails to pay his/her premium, the insurance will get
cancelled. This is referred to as Policy Lapse.

Insurance Products are classified in to two categories viz Life Insurance (LI) and
Non Life Insurance or General Insurance (GI). They can be further classified as
under:

LIFE INSURANCE NON LIFE INSURANCE/GENERAL INSURANCE

1. Term Insurance 1. Health Insurance (GI)
2. Traditional Insurance 2. Home Inurance
3. ULIPs (Unit linked insurance) 3. Auto Insurance
4. Healthcare and Disability Insurnce 4. Travel Insurance

Health Insurance is sold by both Life Insurance companies and General

Insurance Companiews. The difference will be discussed later in this chapter.

LIFE INSURANCE:

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Name Mr. Ramkumar

Age 35 years
Occupation Proprietor

He wants to secure the future of his wife and children in case something
happens to him. Such Life Insurance policies cover ther isk of death for a
specific period or term and the term is typically 5 to 30 years. There are two
possibilities during this period.

a. Mr. Ramkumar dies during the term of the policy

b. Mr. Ramkumar survives the term of the policy

Life Insurance policies insure risk of death and are classified in to 4 types as
described above.

Different insurers have different insurance schemes as per the following chart:

a) Term Insurance:
The following chart explains more about the Term Insurance.

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Here no money is returned to Mr. Ramkumar, if he survives, since the premium

paid was for covering the risk of death.

b) Traditional Insurance:
The two types are: i) Whole of Life and ii) Endowment

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i) Whole of Life:
Here the insurance is for the entire life span of the insured (‗whole life‘) or till
the age of 100

 If he survives beyond 100 he would receive the survival benefit + Bonus.

 The survival benefits depends on the insurance company providing the
policy.
 Also this policy unlike term insurance includes both a risk cover along
with an investment return. See the following chart showing Ramkumar‘s
example.

As he keeps paying the premium, the policy starts accumulating a 'Cash Value'.
Cash Value is, the amount of saving with the insurance company, along with
the investment income this money has earned.

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SURRENDER VALUE:
This is the amount the insured gets on surrendering the policy before its
maturity. The surrender value of the Policy is calculaed as under:

See the following example of Mr. Rebellow and the working towards
calciulation:

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ii) Endowment :
Now we shall go through the Endowment Policy details. It has fixed maturity
period after which a lumpsum is paid back. Term of policy is 10 years and
maximum period is 30 years.

The following chart gives a broad difference between a whole life policy and an
Endowment Policy.

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In the event of Mr. Ramkumar‘s demise, during the term of the policy the
amount is paid to the beneficiaries as shown below.

If Mr. Ramkumar survives the policy term, the amount with the bonus is paid to
he insured/policy holder.

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CASE STUDY
Of the three clients, who approach you for a suitable policy, which policy would
you recommend to them, according to their status/income/age and other
criteria – Whole Life Policy, Endowment Policy or Term Policy?

Solution
Following gives you the details of policy suggested to these individuals in line
with their profiles:

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A broad comparison between the above three policies can be shown as under in
a nutshell

c ) ULIP – UNIT LINKED INSURANCE PLAN:

These are a form of insurance, where the premium paid covers the risk of
death, plus an amount for invesgtment. This is very popular among customers.
In our above example, if Mr. Ramkumar, buys a ULIP of INR 20 lakhs, for 15
years and pays an annual premium of INR 10,000 then out of the total amount
INR 5,000 will go towards insuring the risk of death and the balance INR 5,000
will go towards investment in equities, bonds etc., (amount quoted is only
illustrative which can vary).

The salient features of such policies are:

 the customer decides where he wants the amount to be invested.

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 the total premium after deducting charges and premium for risk covfer is
pooled together to form a Fund ie., TOTAL PREMIUM PAID – CHARGES
AND PREMIUM FOR RISK COVER = FUND
 These are the funds invested in Instruments like Equities and
Government Bonds.
 The policy holder holds a certain number of shares, or units, in the fund,
proportional to his investments.
 The return is based on the way the markets perform.
 There is no guaranteed return. Hence thepolicy holders bear the
investment risk.
 Additionally the policy holders also can change their investment options
during the plan.

One can maximise his/her gains by investing in ULIP as under:

d) Healthcare and Disability Insurance.

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These types of Insurance cover the risk of loss of income or cost of illness,
accidents etc., The four categories of such Insurance are:

Following are its speical features.

 It ensures a regular monthly payout.

 In case the insured is temporarilyk unemployed, because of a disease, he
will receive a monthly payment.

 This covers the occurrence of life threatening diseases andpays a lump

sum.
 If the insured is diagonised with cancer, he receives an amount from the
insurance company that will cover the cost of his treatment.
 Other illness covered are Heart Attack, Strokes/Paralysis, Burns etc.,
 This can cover your dependents as well (wife, children, dependent
parents etc.,)


NON LIFE INSURANCE/GENERAL INSURANCE

GENERAL INSURANCE

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1. All Insurance other than Life Insurance is called General Insurance

2. General Insurance is used to Insure the value of the property of the
policy
holder and not the person himself.
3. Best examples include Home, Vehicle, Plant and Machinery, House
hold
items, Jewelry , Insurance etc.,

Further, General Insurance can be broadly classified as under:

a. Health Insurance
b. Home Insurance

General Insurance company also offers Health Insurance which is bit different
which will be discussed in the forthcoming chapters.

As the name suggests, this typeof policy covers costs related to medical care.
i) A health insurance policy covers both, hospitalization (>24 hours) and
outpatient treatment costs, including diagnostic tests
ie., Health Insurance = Hospitalization costs + Treatment Costs.
a) Health Insurance (GI)
Cashless Treatment means the insurer pays the hospital directly.

Example:
a. Varsha has a Health Insurance plan from Best Insurance
b. She is admitted to Goodhope Hospital for treatment.
c. Here Best Insurance pays the bill directly to the hospital.

What happens if Good hope Hospital does not have any tie up with Best
Insurance? Here Insured will make the payment and claim the amount from
the Insurer.

CASE STUDY:
Mr. Rajnath wants to take an Insurance policy for his daughter who is 14 years
and his father who is 67 years. For whom do you think an insurance company
will provide the insurance? Whether only the Father, or Father and Daughter
both or only the Daughter?

Solution:
Most insurance companies do not provide insurance for senior citizens beyond
the age of 65 years. Even if they do so their premiums are so high that it Is
not worth it. Hence the company will cover the insurance only for Rajnath‘s
daughter who is of 14 years age.

HEALTH INSURANCE (GI) Vs. HEALTH INSURANCE (LI)

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Health Insurance Health Insurance

(General Insurance) (Life Insurance)
In GI, Insurance Company reimburse In LI, fixed amount is paid as per the
the expenses incurred due to policy, regardless of the actual
hospitalizatin like room charges, expenses incurred.
medicines etc.,
Policy term is usually 1 year The policy term is generally for longer
durations like 10 years, 15 years or
even more.
The premium has to be paid one time The premium can be paid monthly,
for the entire term quarterly or annually
Premium differs from one year to the Premium is generally fixed for three
next, depending on the claim during years, after that, it may change.
current year
If you have more than one Health You can claim Health Insurance
(General) Inurance policy then the Company, even if you have already
claim is shared by such Insurance claimed it from a General Insurance
Companies. Company.

CASE STUDY:

Mr. Pramod Gosavi has Health Insurance from two General Insurance
Companies, viz Best Health Insurance and Get Well Insurance for a sum of INR
2 lacs each. One day Mr. Gosavi was admitted to a nearby hospital for heart
ailment. Which of the following would be a better option for Mr. Gosavi to make
a claim?

Solution:
The better option would be to claim the amount from both the Insurance
Companies. Following is the explanation for making a claim from both the
companies.

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HEALTH INSURANCE WITH GENERAL INSURANCE AND LIFE INSURANCE

COMPANY (BOTH)

CASE STUDY:
Mr. Rajan, a self employed Educationist, lives in Pune. He has Health Insurance
from three companies as detailed below:

SNo Name of Insurance Company Insurance Policy amount

1. Best Health Insurance INR 5 lakhs
(A General Insurance Company)
2. Get Well Insurance INR 5 lakhs
( A General Insurance Company)
3. Heavenly Insurance INR 7 lakhs
( A Life Insurance Company)

What would be the amount tht each company would pay towards the claim
amount of Rs. 7 lakhs? Which of the following options is correct?

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Correct Solution:

The bill amount of INR 7 lakhs will be shared by General Insurance companies
viz Health Insurance (GHI) and Health Insurance (LI) equally ie., INR 3.5 lakhs
each. In addition the insured may also claim the amount from the Life
Insurance Company. This is because the Life Insurance company will still make
the payment, irrespective of whether it is claimed from General Insurance
Companies or not.

Essentials:

Health Insurance (General Insurance:

If you have more than one Health (General) Insurance Policy, then the claim is
shared by such insurance companies.

Health Insurance (Life Insurance)

You can claim Health Insurance from a Life Insurance Company, even if you
have already claimed it from a General Insurance Company.

b) HOME INSURANCE
Home Insurance safeguards the hosue of the insured person, against any
contingency events. It has two covers viz Structure Cover and Contents Cover.

STRUCTURE COVER CONTENTS COVER

The structure of the house is The second basic cover is for the contents
cofvered against damage caused of the home like Television, Fridge,
by various reasons like fire, riots Washing machine etc.,
etc.,

The advantage of the Home Insurance is that it can be clubbed with the Home
Loan and a customer who inisists on a loan obviously agrees for the insurance
and complies with.

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c) AUTO INSURANCE
Here, Insuraed is paid towards the cost of damage caused to the vehicle.
Insurance is compulsory in our country. Cost of damage caused to the vehicle
is paid in this case and insurance is compulsory in our country.

Case Study:
Which of the following can be sold as bundled product with an Auto/Motor
insurance?

a) Diability Insurnce b) Trvel Insurance c) Home Insurance

SOLUTIOIN:
Some Companies club the death/disability insurance together with the auto
insurance, since there exists a risk of death as also disability in case of an
accident.

Third party cover:

Auto Insurance can thus be said to be covering both property as also liability
insurance. Here the insurance covers cost of damage to the third party.
How?
Let us take an Example. Ramu‘s car hits the pedestrian path. Who was injured
and what happens? His car is insured with BEST INSURANCE which pays for
the repair. Karnik is injured in the accident. BEST INSURANCE pays for the
injured.

d) TRAVEL INSURANCE
Travel Insurance is meant to cover the medical expenses and other losses
incurred during a travel. Mr. Rajkumar wants to visit USA and comes to the
bank to get a VISA for his proposed visit. Thus the said insurance is taken for a
travel abroad especially to the Western Countries.

They are more so, useful while a person travels throughout the world on
business requirements.

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BANCASSURANCE

CASE STUDY:
Out of the following select whch contains items which are beneficial both to the
Bank and the Third Party (Insurer), select only the items beneficial to the
insurer.

1. Get new Business, Leveraging on Bank‘s Relationship

2. Customer Satisfaction and Retention improves
3. Provide more products to customers
4. Easier Access to Customers.
5. Commission
6. Wider Distribution Channel

Solution:
All items mentioend are benefiticial both to the Insurer and the Insured.
However, in a nutshell, the benefit to the parties concerned can be summarized
as under:

THIRD PARTY BANK

 Gets access to Bank‘s customer  Earns comission, additing to
directly profitability of the bank
 Gets business, leveraging the bnk‘s  Will be able to provide more
relationship products to customers.
 Bank‘s branch network gives access  Customer satisfaction and hence
to a much bigger distribution retention improves.
channel.

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IRDA (INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY)

IRDA stands for Insurance Regulatory and Development Authrotiy. It is the

apex statutory body that regulates the insurance industry in India. Different
insurance products have different commission payable which varies between
15% to 30% which are controlled through IRDA. RBI has permitted Banks to
have tie up with multiple Insurance Companies for selling the insurance
products. Now let us see as to how banks sell the Insurance Products.

Following chart shows the different modes of selling insurance products by

Banks.

Now let us understand more about Bundled Insurance:

 Bundled Insurance means jointly selling one product with another bank
product
 Here the Insruance is jointly sold with another Bank Product say a Term
Deposit or others
 Precisely, Insurance + Banking Product = Bundled Insruance.
 Example could be –Bundled with Home Insurance + Home Loan
Auto Insurance + Auto Loan
 The bundling of products has been successful since the customer follows
the Banker‘s advice here and focuses on the Loan Product more.

PHYSICAL CROSS SALE:

A Physical cross sale refers to the Sales Officer directly approaching the
customer for selling the product. Policies with a value less than INR 20,000 are
normally sold during such interaction.

Cross Sale
Here, the customer who already deals with a bank product, goes for another
product, when the Sales Officer tries to sell it additionally. This is known as
Cross Sale. Apart from Physical cross sale, banks also use the services of

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alternate channels viz Net Banking, Mobile Banking, SMS messages, Blgs etc.,
to reach out to the customers. Let us now go through what it is.

ALTERNATE CROSS SALES:

TELE SALES:

Interacting with the customers, over phone and doing business is known as Tele
Sales. It is one of the popular media under Alternate Channels System. Here
a telephonic talk is established by the Bank Officer with the busomer for doing
business as stated above.

Doing business through an Alternate Channel like Telephone, is cost effective,

but only difficulty here would be to keep track of the business. The Officer of
the Bank, should identify the prospective customers, for a particular product,
and through different channels must be able to sell the product selected.

CASE STUDY:
Match the following :

SlNo Details Policy Name

1 Bank Officer uses these means for selling BUNDLED INSURANCE
Insurance.
2 Bank Officer approaches a customer in ALTERNATE CROSS SALE
Bank
3 Customer buys Home Loan and IRDA
Insurance cover from Bank
4 Regulator of Insurance Industry in India PHYSICAL CROSS SALE

SOLUTION:

SlNo Details Policy Name

1 Bank Officer uses these means for selling ALTERNATE CROSS SALE
Insurance.
2 Bank Officer approaches a customer in PHYSICAL CROSS SALE
Bank
3 Customer buys Home Loan and BUNDLED INSURANCE
Insurance cover from Bank

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4 Regulator of Insurance Industry in India IRDA

Test your Understanding:

1) What is Insurance? Define the Terms Claim, Free look Period, Policy
document, Premium, Policy lapse.
2) What is the different between Term Insurance and Traditional Insurance?
3) Explain about four types of Life Insurance.
4) Match the following:
S Narration Term used
No
1. The Type and extent of risk detailed in the policy Policy Lapse
2. Failure to pay the premium of a policy results in Sum Assured
3. A formal request to an Insurance Company asking for Coverage
payment
4. The amount paid to the beneficiary on the occurrence Claim
of the event mentioned in the policy

5) Calculate the Surrender Value and Cash in the case of Mr. Praveen Mirgal,
Insured
Whole life policy INR 50 lacs
Policy Buying Date 20th Jan 2016
Annual Premium paid INR 30,000
Policy surrender date 20th Nov 2016
Investment Returns INR 30,000
Surrender Charge 5% of cash value

i) Insuring the Risk INR 20,000

ii) Invested on behalf of Mr. Mirgal INR 40,000

6) Match the Insurance Policies against the correct features given herein
SlNo Details Policy Name
1 This policy has fixed maturity period Term Policy
2 This type of insurance provides ULIP
protection against the risk of loss of
income or cost of illness, accidents etc.,
3 The insurance covers the life span of the Health Policy
individual or till the age of 100
4 This insurance policy covers the risk of Whole Life
death for a particular period
5 In this policy the customer makes the Endowment Poloicy
choice as to where he wants the saving
amount to be invested.

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MODULE 9: CHATPER 3
Third Party Products – GOLD

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We, the Indians, have a passion for Gold since a long time. Many people feel
that Gold is very sacred and are eager to buy Gold jewelry during festival
seasons or other important days.

Let us go through a Notification on Gold which reads as under:

NEW DELHI: The craze for Gold was on full display today, especially in the
South, on Akshaya Tritiya, as people rushed to buy the metal, pushing Jewelry
sales up by 10-20 per cent although prices fell across major cities, except
Chennai. Shops in Chennai were open over-night for people to make their
purchase on a day which is considered auspicious for buying Gold on belief that
it heralds more prosperity in the year.

Advance bookings were also entertained along with gift schemes to attract
buyers who also thronged stores in Kerala. Jewellers and bullion traders said
retail demand remained robust in most parts of the country as prices have
declined by about 10 per cent from last year's 'Akshaya Tritiya'. In South India,
which contributes about 60 per cent of total sales on this day, Gold sales
remained brisk? In some parts of the country, good demand was seen for
diamonds as well due to less price volatility, jewelers said.

In the National Capital, Gold prices fell by Rs 100 to Rs 27,100 per 10 grams.
Similar was the trend in other cities, except Chennai where prices went up by
Rs 80. Delhi-based Khanna Jewelers‘ Chairman Vijay Khanna said sales are up
by 10-15 per cent and are better than last year. "Jewelry sales are 12 per cent
higher on year-to-year basis as prices are down by 10 per cent at Rs 26,800
per ten grams today as compared with Rs 30,200 per ten grams in the year-
ago, "Mumbai-based All India Gems and Jewelry Trade Federation Chairman
Manish Jain said told PTI.

He, however, said that sales of Gold coins and bars for investment purpose
were lower by almost 25-30 per cent. Madras Jewellers and Diamond Merchants
Association President Jayantilal Challani said, "The response has been very good
and as good as it was last year."

Kerala-based Kalyan Jewelers, which has 66 stores across the country, said it
expects a sales growth of 5-7 per cent.

"Sales are very good. Seeing the trend from the morning, we expect 5-7 per
cent growth in sales in each of our store. But our overall growth in revenue
would be 30 per cent as the company has opened 11 new stores, "The
Company‘s Director Rajesh Kalyanaraman said.

To meet the contingent expenses, Gold is considered to be handy and a safe

investment. Making jewels, involves additional charges and wastage, whereas
Gold Coins and Bars are more attractive for investment. Also we get good
returns through sale of Gold.

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FEATURES OF GOLD COIN/GOLD BAR

a. Making Jewels involves additional charges and wastage where as Gold Coins
and
bars are more attractive for investment.
b. Also here we get good return through sale of Gold
c. Coins are measured through their purity and weight
d. Carat ―K‖ is a term used to measure the Gold purity and is used for a
maximum of
24 carats.
e. A certified 22k or 24 k which is considered to be pure is the one which is
offered in India, which means the customers are assured of its purity.

Also Gold Coins are offered by banks in diffeent shapes. To quote a few:

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In case of a Retail Trader, Gold is sold in the following Mode(s)

POINT TO NOTE:

 Cheques drawn on other Banks should primarily be cleared and funds

received by the Bank.
 Then only the Gold is delivered to the customer. Following is the flow

Before taking up the Gold Transaction, a prescribed form along with details of
the order is duly filled:

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Mr. Dharmendra is a business man and a Customer who is a regular purchaser

of Gold. He has purchased Gold from Hema Jewelers and doubts the quality of
Gold purchased. Hence he is interested in buying Gold from Bank‘s Counter
towards investment. He inquires as to whether Gold Coins are sold by Banks.

 Gold Coins are sold by Banks in various denominations.

 Gold Coins sold by banks are of internationally certified quality which is 24
carat and 99.9% purity
 The prices are quoted as per market quoting.
 A PAN card is required to be submitted by the party if the cash paid by the
customer for such purchase exceeds INR 50,000.

CASE STUDY:
Go through the following flow of transacrtions and put them in the correct
order.

1. Customer submits the documents at the cash counter, along with cash.
2. Customer receives the Gold Bars and the payment receipt.
3. Customer fills the application form and submits it with the ID Proof.
4. Customer deposits the receipt with the Bank Officer and receives invoice.
5. BOM verifies the form and other doucuments.

SOLUTION:
The correct steps involved are:

1. Customer fills the application form and submits it with the ID Proof.
2. BOM verifies the form and other doucuments.
3. Customer submits the documents at the cash counter, along with cash
4. Customer receives the Gold Bars and the payment receipt
5. Customer deposits the receipt with the Bank Officer and receives invoice.

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FACTORS AFFECTING DAILY PRICE OF GOLD:

 Following are the factors which affect the daily price of Gold.
 Daily International price of Gold
 Foreign Exchange rate, basis from where the Gold is imported
 Costs of Storing, Transporting, Security, Customs Duty etc.,
 Bank‘s margin and sales tax.

Further, there is preference from Corporate in buying Gold for their business
excellence and services.

These coins can be sold in two ways viz:

CASE STUDY:

Let us take the example of Sonali Enterprises, and see how these two ways of
distribution work.

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FLOW IN RESPECT OF ONWARD DISTRIBUTION:

FLOW IN RESPECT OF DISTRIBUTION THROUGH BRANCH NET WORK:

TEST YOUR UNDERSTANDING:

1. What is the threshold amount above which banks insist for submission of PAN
details in respet of Gold Purchase by Cash?
2. Which are the Factors which affect the daily pricing of Gold?
3. Describe the steps involved in a Gold Transaction.
4. Explain about the two ways of selling Gold to a Corporate.

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MODULE 9: CHATPER 4
IPO RELATED

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An introduction to IPO

 Initial public offering (IPO) is a type of Public Offering by a Company,

wherein shares of a company are sold to both Institutional Investors and
also Retail Investors.
 An IPO is underwritten by one or more Investment Banks.
 These Investment banks also arrange for listing of these shares one or more
Stock Exchanges.
 This process is otherwise referred to as FLOATING or going public through
which a Privately Placed Company is transformed in to a Public Company.
 Initial public offerings can be used:
i. to raise new Equity Capital for the company concerned;
ii. to monetize the investments of private shareholders such as company
founders or private equity investors and
iii. to enable easy trading of existing holdings or future capital raising by
becoming publicly traded enterprises.

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 Once the IPO shares are freely traded in the open market, they are
termed as FREE FLOAT.
 Normally, Stock exchanges stipulate a minimum FREE FLOAT
 both in absolute terms (the total value as determined by the share
price multiplied by the number of shares sold to the public) and
 as a proportion of the total share capital (i.e., the number of
shares sold to the public divided by the total shares outstanding).
 The offerings through IPO also involves costs like Banking and Legal
Fees, and obligation to disclose important and even sensitive information.
 Details of the proposed offering are disclosed to potential purchasers in
the form of a lengthy document known as a Prospectus.
 Most companies float IPOs with the help of Investment Banking firms
who act in the capacity of an Underwriter.
 Underwriters provide several services like:
 Help in correctly assessing the Share values
 Establishing a Public Market for shares (during initial sale)

Advantages of an IPO
1. The money paid by the investing public for the newly-issued shares goes
directly to the company (primary offering)
2. IPO enables a company to tap into a wide pool of potential investors to
provide itself with capital for future growth, repayment of debt, or working
capital.
3. After the IPO, when shares are traded freely in the open market, money
passes between public investors
4. After the IPO process is over and once shares are traded in the open
market, investors holding large blocks of shares can sell those shares either
in piecemeal in the open market or sell a large block of shares directly to the
public, at a quoted price through a secondary market offering.
5. A company issuing an IPO gets a better rating
6. It also attracts talent.

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Disadvantages:
 There is lack of privacy in an IPO since several of the actitivities are
transparent
 There is a possibility of losing control over the company which may
suddently go to loss or face problems during unforeseen circumstances.
 Normally IPOs tend to go up on the first day of trading and in the long run
they have a tendency to underperform.
 Buy and hold stock returns is a strategy which can help sometimes but not
always.
 This is especially true with young companies and Start Ups where there is
even a great amount of risk involved.

Advance Planning

An IPO‘s success depends on how you do your Planning in advance. There are
certain important steps to be taken note of while making a plan:
1. Ensure to develop an impressive management and professional team
2. Business growth should be aimed by keeping an eye on Public
Marketplace
3. Go through the Audited Financial statements of the company, with the
help of Accounting Principles acceptable for an IPO
4. Follow the Company Law regulations. Clean up the company's act
5. Bring confidence about company‘s stability in the public mind
6. Always grow good corporate governance
7. Ensure to take advantage of IPO windows and follow the internal
guidelines.

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Retention of Underwriters:

 An IPO is associated with UNDERWRITERS who are the Investment banks.

 The company offering its shares, who is known as the "issuer", enters into a
contract with a lead underwriter to sell its shares to the public.
 The underwriter then approaches investors with offers to sell those shares.
 Normally, a large IPO is underwritten by a ―Syndicate‖ or group of
investment banks
 The largest of such Syndicate takes the position of "Lead underwriter".
 Upon selling the shares, the underwriters retain a portion of the proceeds as
their fee which is known as UNDERWRITING SPREAD
 The spread is calculated as a discount from the price of the shares sold
(which is otherwise called the GROSS SPREAD)
 The components of an underwriting spread in an initial public offering (IPO)
typically include the following (on a per share basis):
 Manager's fee,
 Underwriting fee—earned by members of the syndicate, and
 the Concession—earned by the broker-dealer selling the shares.
 The Manager would be entitled to the entire underwriting spread.
 A member of the syndicate is entitled to the underwriting fee and the
concession.
 A broker dealer who is not a member of the syndicate but sells shares would
receive only the concession
 However, the member of the syndicate providing the shares to the broker
dealer would retain the underwriting fee.
 Usually, the managing/lead underwriter, who is also referred as the
BOOKRUNNER is the underwriter who sells the largest portion of the IPO.
 The BOOKRUNNER takes the highest portion of the GROSS SPREAD

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 Multinational IPOs may have many syndicates to deal with allied legal issues,
which relates to both the Issuer‘s Domestic Market and other regions.
 To quote an example, let us say that an Issuer is based in the European
Union, and is represented by the main selling syndicate in its domestic
market, Europe and this is in addition to separate syndicates or selling
groups for US/Canada and for Asia. Usually, the lead underwriter in the main
selling group is also the lead bank in the other selling groups.
 Due to varied legal requirements which is otherwise a very expensive
process, IPOs also typically involve one or more law firms.

Allocation and Pricing

 The issuer usually allows the underwriters an option to increase the size of
the offering by up to 15% under a specific circumstance known as the
GREENSHOE or overallotment option.
 This option is always exercised when the offering is considered a "hot" issue,
by virtue of being oversubscribed.
Pricing
 The Book-runner is a person appointed by a company planning an IPO
 The Book-runner who is the Lead Manager, helps in arriving at an
appropriate price at which the shares should be issued.
 There are two primary ways in which the price of an IPO can be determined.
 With the help of its Lead managers, company would fix a price by following
the Fixed Price Method or the price is determined through analysis of
confidential investor demand data which is compiled by the borrower by
following Book Building process.
 In the past, it has been observed that many IPOs have been under-priced.
 The effect of such under-pricing is to generate additional interest in the
stock on its public trading.
 Immediately selling the shares for a profit might lead to adequate profit for
the investors, who get allotment through IPO at the offered price.

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 However, under-pricing an IPO results in Loss in potential capital for the

issuer.
 Example:
 [Link] IPO which was instrumental in creating a great
demand for IPO in late 1990s internet era was underwritten by Bear
Stearns on 13 November 1998
 the IPO was priced at $9 per share.
 The share price quickly increased 1,000% on the opening day of
trading, to a high of $97.
 Selling pressure from institutional flipping eventually drove the stock
back down, and it closed the day at $63.
 Though the company raised about $30 million from the offering, it is
estimated that with the level of demand for the offering and the
volume of trading that took place they might have left upwards of
$200 million on the table.
 If a stock is offered to the public at a higher price than the market will pay,
the underwriters may have trouble in meeting their commitments while
selling the shares.
 Even if they sell all the shares issued, the stock may fall in value on the first
day of trading.
 Thus, the stock might lose its marketability and more so its value.
 This could result in losses for investors, many of whom would be the most
favored clients of the underwriters.
 Perhaps the best-known example of this is the FACEBOOK IPO in 2012.
 Hence, Underwriters, take several factors into consideration while pricing an
IPO, and make an attempt to reach an offering price that is low enough in
order to stimulate interest in the stock adequate to raise an adequate
amount of capital for the company.
 Underwriters, while pricing an IPO, take several performance indicators into
consideration.
 The process of determining an optimal price usually involves
the Underwriters (Syndicates) in arranging share purchase commitments
from leading institutional investors.

Dutch Auction:

 A Dutch auction allows shares of an initial public offering to be allocated

based only on price aggressiveness, with all successful bidders paying the
same price per share.

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 One version of the Dutch auction is Open IPO, which is based on an auction
system designed by Nobel Memorial Prize-winning economist William
Vickrey.
 This auction method ranks bids from highest to lowest, then accepts the
highest bids that allow all shares to be sold, with all winning bidders paying
the same price.
 This is something similar to the model used to auction Treasury bills, notes,
and bonds

Test your Understanding:

1. What is IPO and what are its advantages?
2. Write short notes on
a. Advance pricing
b. Dutch Auction

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Glossary Section
A
Account Number- Numbers representing the account details
Auto Insurance – Insurance of Vehicle covering cost of damage to vehicle
Alternate Cross Sales- Selling insurance through internet, SMS etc.,
Advance Planning – A system followed by a company in issuing IPO

B
Balanced Funds – Funds with both equities and Fixed income securities.
Bankassurance – Sale of insurance via Banking Channel
Bundled product- Insurance bundled with a banking product
Book-Runner – A person appointed by a company issuing IPO

C
Closed Ended funds – Funds available for investment only once.
Claim – A request by the Insured to the company for payment of contractual
amount
Cross Sale- Customer going for another product along with the product that is
sold by the Sales officer.
Carat K- A term used to measure purity of a 24 Carat Gold
Certified 22K or 24K – Considered to be pure Gold offered in India.

D
Document- Policy document and other papers connected with Insurance.
Distribution through Branch Network- Gold coins distributed through branches
Dutch Auction – Shares under an IPO allocated on basis of price aggressiveness

E
Entry load – Commission paid by investor while buying a fund
Exit load – Commission paid while redeeming the Mutual Fund units.
ELSS- Equity linked Savings Scheme.
Endowment policy – Policy having a fixed maturity period

F
Face Value – Value of one unit when purchased
Fund Corpus – Current value of investment made by the scheme
Fixed Maturity plans- Fixed income related securities
Funds of Funds – Funds of one MF invested in other funds.
Free Look period- The testing period of the policy after its issue
Foreign Exchange Rate- Rate quoted in a Foreign Currency

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G
Growth schemes – Invest in Equity and look to increase the investment
General Insurance – All insurance other than Life Insurance

H
Health Care Insurance- Insurance covering loss of income or cost of illness
Home Insurance – Insurance of Home

I
Insurance – Means of protection from a financial loss
Income Scheme – Gilt funds and Regular funds
Index Funds – Funds which invest in Benchmark index or industry specific index
IRDA – Insurance Regulatory and Development Authority
IPO – Shares offered by a company to both public and institutional investors.
Issuer- Company offering its shares who enters into a contract with
underwriters

J
Joint Venture – A venture or initiative taken up jointly by more than one person

K
Key Terms- Important terminologies used in any product handling process

L
Large Cap – Stocks which are part of index with market value > 10,000 crore

M
Mutual Fund- Trust created by pooling investors‘ funds
Money market instrments- Issued by Govt or Corporates for a shorter duration
Mid Cap- Stocks with capitalization between Rs.250 to Rs. 10000 crore

N
NAV- Net Asset Value ( Investments/No. of units outstanding till date)

O
Open ended funds – Funds which can be bought or sold at any time
Onward Distribution of Gold- Gold coins directly delivered to Companies

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P
Payment System – Mode through which payment is made which are many
Policy document- the legal document issued by the insurance company
Premium- payment made by the insured at regular intervals
Policy lapse- Insurance gets lapsed on non-payment of premium
Physical cross sale – Officer directly selling to a customer
Pricing- Fixing a rate or price for an IPO while being issued

R
Redemption – Process of selling of units back to the Mutual Fund

S
Subscription – Amount paid while buying units of the scheme
Small Cap- Funds having market capitalization upto Rs. 250 crore
SIP- Systematic Investment Plan
STP – Systematic Transfer plan
SWP – Systematic Withdrawal plan
Surrender value – Amount received on surrendering a policy
Syndicate- A group of investment Bankers.

T
Third Party Products – Products other than bank‘s own products
Trail Commission – paid in percentage of daily average net assets of Investor
Third party Insurance- Cost of damages covered to the third party
Travel insurance –Insurance covering medical and other expenses during travel
Tele Sales – Sales done over phone

U
Un-utilized funds- Funds which are not used in a OD account
Unreconciled entries- Entries which are not reconciled (or mapped)
ULIP- Unit Linked insurance plan covering risk, death and investment amount
Underwriters- Investment bankers who assist in issue of an IPO
Underwriting fee- a fee earned by members of Syndicate.

V
Value Date- A date as of which transaction is done in an account.
Valid Date- A date which is relevant and acceptable by a banker

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Whole life insurance- Insurance done for full life upto 100 years

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