Business Growth
Track Record so far: The gross premium income of HDFC, for the year ending March 31, 2007 stood at Rs. 2,856 crores and new business premium income at Rs. 1,624 crores. The company has covered over 8, 77,000 lives year ending March 31, 2007. Company also declared our 5th consecutive bonus in as many years for our ‘with profit’ policyholders.
Key Strength
Financial Expertise: As a joint venture of leading financial services groups. HDFC standard Life has the financial expertise required to manage long-term investments safely and efficiently.
Range of Solutions: HDFC SLIC has a range of individual and group solutions, which can be easily customized to specific needs. These group solutions have been designed to offer complete flexibility combined with a low charging structure.
Strong Ethical Values: HDFC SLIC is an ethical and Cultural Organization. False selling or false commitment with the customers is not allowed.
Most respected Private Insurance Company: HDFC SLIC was awarded No-1 Private Insurance Company in 2004 by the World Class Magazine Business World for Integrity, Innovation and Customer Care.
CORPORATE OBJECTIVE
Vision
'The most successful and admired life insurance company, which means that we are the most trusted company, the easiest to deal with, offer the best value for money, and set the standards in the industry'. 'The most obvious choice for all'.
Values
Integrity.
Innovation.
Customer centric.
People Care One for all.
Teamwork.
Joy and Simplicity.
PRODUCTS & SERVICES
The right investment strategies won't just help plan for a more comfortable tomorrow -- they will help you get “Sar Utha ke Jiyo”. At HDFC SLIC, life insurance plans are created keeping in mind the changing needs of family. Its life insurance plans are designed to provide you with flexible options that meet both protection and savings needs. It offers a full range of transparent, flexible and value for money products. HDFC SLIC products are modern and contemporary unitized products that offer unique customer benefits like flexibility to choose cover levels, indexation and partial withdrawals.
PLANS THAT ARE OFFERED BY HDFC STANDARDS LIFE INSURANCE
Development Insurance plan is an insurance plan which provides life cover to members of a Development Agency for a term of one year. On the death of any member of the group insured during the year of cover, a lump sum is paid to those member beneficiaries to help meet some of the immediate financial needs following their loss.
- If any person fails to comply with sub regulation (previous point) above, he shall be liable to payment of a fine which may extend to rupees five hundred
INTROUCTION TO UNIT LINKED FUNDS
Unit linked plans are based on the component of the premium or the contribution of the customer towards the plan. This contribution can be in different modes like yearly, half yearly, quarterly and monthly. Unit linked plans have multiple benefits like life protection, rider protection, savings, transparency, investment choices, liquidity and planning for taxes. These plans work like mutual funds. The premium is collected from the policy holder. He is allotted a certain number of units based of his contribution. The Net Asset Value is the value of each unit of the fund. It is found by subtracting the charges and current liabilities from the current assets and investments and dividing this number by the total number of outstanding units.
UNIT LINKED VERSUS OTHER FINANCIAL INSTRUMENTS
I found that life insurance unit linked plans is a good area to invest money in as it provides liquidity, safety, high returns, life cover and tax benefits in a single plan. HDFC SLIC offers the option of indexation to beat inflation. Risk is reduced to a large extent as the company invests in a diversified portfolio of stocks.
Why HDFC Standard Life?
HDFC Standard Life believes that establishing a strong and ethical foundation is an essential prerequisite for long-term sustainable growth. To ensure this, we have concentrated our focus on expansion of branch network, organising an efficient and well trained sales force, and setting up appropriate systems and processes with optimum use of technology. As all these areas form the basic infrastructure for establishing the highest possible customer service standards. Our core values are drilled down to all levels of employees, as these are inviolable. We continue to promote high integrity in business practices and shun short cuts and unethical practices, as we wish to be perceived as an institution with high moral standing. Since our inception in 2000, when the Indian insurance space was opened for private participation, we have consistently focused on setting benchmarks in all aspect on insurance business. Being the first private player to be registered with the IRDA and the first to issue a policy on December 12, 2000, our differentiators are: Strong Promoters
HDFC Standard Life is a strong, financially secure business supported by two strong and secure promoters – HDFC Limited and Standard Life. HDFC Limited excellent brand strength emerges from its unrelenting focus on corporate governance, high standards of ethics and clarity of vision. Standard Life is a strong, financially secure business and a market leader in the UK Life & Pensions sector.
Preferred and Trusted Brand
Our brand has managed to set a new standard in the Indian life insurance communication space. We were the first private life insurer to break the ice using the idea of self-respect instead of ‘death’ to convey our brand proposition (Sar Utha Ke Jiyo). Today, we are one of the few brands that customers recognize, like and prefer to do business. Moreover, our brand thought, Sar Utha Ke Jiyo, is the most recalled campaign in its category.
Investment Philosophy
We follow a conservative investment management philosophy to ensure that our customer’s money is looked after well. The investment policies and actions are regularly monitored by a formal Investment Committee comprising non-executive directors and the Principal Officer & Executive Director.
As a life insurance company, we understand that customers have invested their savings with us for the long term, with specific objectives in mind. Thus, our investment focus is based on the primary objective of protecting and generating good, consistent, and stable investment returns to match the investor’s long-term objective and return expectations, irrespective of the market condition.
Need-Based Selling Approach
Despite the criticality of life insurance, sales in the industry have been characterized by over reliance on tax benefits and limited advice-based selling. Our eight-step structured sales process ‘Disha’ however, helps customers understand their latent needs at the first instance itself without focusing on product features or tax benefits. Need-based selling process, 'Disha', the first of its kinds in the industry, looks at the whole financial picture. Customers see a plan not piecemeal product selling.
Risk Control Framework
HDFC Standard Life has fully implemented a risk control framework to ensure that all types of risks (not just financial) are identified and measured. These are regularly reported to the board and this ensures that the company management and board members are fully aware of any risks and the actions taken to ensure they are mitigated
Focus on Training
Training is an integral part of our business strategy. Almost all employees have undergone training to enhance their technical skills or the softer behavioural skills to be able to deliver the service standards that our company has set for itself. Besides the mandatory training that Financial Consultants have to undergo prior to being licensed, we have developed and implemented various training modules covering various aspects including product knowledge, selling skills, objection handling skills and so on.
Focus on Long-Term Value
HDFC Standard Life do not focus in the business of ramping up the topline only, but to create long-term value for policyholders, shareholders, and partners. Today, we are extremely satisfied with the base that we have created for the long-term success of this company.
Transparent Dealing
We are one of the few companies whose product details, pricing, clauses are clearly communicated to help customers take the right decision.
Strict Compliance with Regulations
We have initiated and implemented many new processes, some of which were found useful by the IRDA and later made mandatory for the entire industry.The agents who successfully completed this training only, were authorized by the company to sell ULIPs. This has now been made compulsory by IRDA for all insurance companies under the new Unit Linked Guidelines.
Diversified Product Portfolio
HDFC Standard Life’s wide and diversified product portfolio help individuals meet their various needs, be it:
- Protection: Need for a sound income protection in case of your unfortunate demise
- Investment: Need to ensure long-term real growth of your money
- Savings: Save for the milestones and protect your savings too
- Pension: Need to save for a comfortable life post retirement
- Health: Cover for health related exigencies
An Overview of Net Asset Value (NAV)
The Net Asset Value NAV mainly determines the value of each holdings of the mutual fund. It is expressed as per-share amount. In a majority of the mutual fund holdings, the Net Asset Value is calculated on a daily basis after the trading closes in some specified financial exchange. However in some of the mutual funds, the net asset value is calculated many times in a day during the trading period. The open-end schemes in mutual funds sell as well as exchange their shares at the net asset value. The closed-end schemes in mutual funds are allowed to sell their shares at either higher or lower price range than their actual net asset value. This system is known as the premium or discount in mutual fund industry. In the mutual fund industry, when a fund is divided in varied groups of shares, each group has its own NAV which clearly determines the difference in fees and expenses payable by various groups.
Net Asset Value of Mutual Funds-
A Mutual Fund is a fund which is operated by an investment company which collects money from various shareholders connected with the mutual fund and invests them in a group of assets. The money generated from the selling of shares is used in buying various investment instruments like stocks, bonds, and money market vehicles. The shareholders receive an equity position in the fund depending on the units they hold and succumbing to the underlying securities of the fund.
Some mutual funds in India have securities which are not sold on formal exchange on a regular basis. These securities widely include shares in small scale or insolvent companies, derivatives, and private investments in any unregistered stocks or non-public company. The fund manager forms an estimation of the value of these securities while calculating their net asset value and accordingly determines the amount of fund's assets to be invested in such securities as these securities usually lack a public market.
It is one of the most misunderstood concepts in the financial world. Net Asset Value can be an invaluable tool for an intelligent investor. However, it can also be frighteningly misleading at the hands of an ignoramus. Otherwise, how can you explain the common perception that a low NAV is a smart investment opportunity and a higher NAV is a risky option?
It is mostly because most people confuse NAV of a unit of a mutual with stock prices. It is a big mistake. A stock price is an indication of future prospects of a particular company. Investors may be using formulas or technical charts to justify the price. Alternatively, it may be pure speculation based on some unconfirmed news .
However, NAV of a mutual fund is a very different concept. It tells you the total value of investment of the unit of a mutual fund scheme. In order to calculate the NAV of a scheme, every asset and liability of the scheme should be valued. The formula for calculating NAV is: value of all assets minus value of liabilities other than to unit-holders. The other way to calculate NAV is: Unit capital plus reserves.
NAV Calculation
The net asset value of the fund is the cumulative market value of the assets fund net of its liabilities. In other words, if the fund is dissolved or liquidated, by selling off all the assets in the fund, this is the amount that the shareholders would collectively own. This gives rise to the concept of net asset value per unit, which is the value, represented by the ownership of one unit in the fund. It is calculated simply by dividing the net asset value of the fund by the number of units. However, most people refer loosely to the NAV per unit as NAV, ignoring the "per unit". We also abide by the same convention.
The most important part of the calculation is the valuation of the assets owned by the fund. Once it is calculated, the NAV is simply the net value of assets divided by the number of units outstanding. The detailed methodology for the calculation of the asset value is given below.
Asset value is equal to
Sum of market value of shares/debentures
+ Liquid assets/cash held, if any
+ Dividends/interest accrued
Amount due on unpaid assets
Expenses accrued but not paid
Most commonly used in reference to mutual or closed-end funds, net asset value (NAV) measures the value of a fund's assets, minus its liabilities. NAV is typically calculated on a per-share basis.
A fund's NAV fluctuates along with the value of its underlying investments. The formula for NAV is:
NAV=
NAV Calculation NAV
How It Works/Example:
Let's assume at the close of trading yesterday that a particular mutual fund held $10,500,000 worth of securities, $2,000,000 of cash, and $500,000 of liabilities. If the fund had 1,000,000 shares outstanding, then yesterday's NAV would be:
NAV = ($10,500,000 + $2,000,000 - $500,000) / 1,000,000 = $12.00
Details on the above items
For liquid shares/debentures, valuation is done on the basis of the last or closing market price on the principal exchange where the security is traded
For illiquid and unlisted and/or thinly traded shares/debentures, the value has to be estimated. For shares, this could be the book value per share or an estimated market price if suitable benchmarks are available. For debentures and bonds, value is estimated on the basis of yields of comparable liquid securities after adjusting for illiquidity. The value of fixed interest bearing securities moves in a direction opposite to interest rate changes Valuation of debentures and bonds is a big problem since most of them are unlisted and thinly traded. This gives considerable leeway to the AMCs on valuation and some of the AMCs are believed to take advantage of this and adopt flexible valuation policies depending on the situation.
Consider another example: you are considering investing in a diversified equity fund. The NAV of a unit of ABC mutual funds scheme is Rs 10 and XYZ is Rs 12. What does that mean? It means that ABC funds corpus is Rs 50,000 and total number of units is 5,000. Hence, it has an NAV of Rs 10 (Rs 50,000/5000). On the other, NAV if XYZ funds scheme is Rs 12 because it has a corpus of Rs 60,000 and units of 5,000.
Now, should you make your decision based on the difference in NAV? As you can see, it has nothing to with the future performance of the fund. It simply means that schemes investments are worth a particular amount and you have to pay that price to buy a unit of the scheme. The future performance of the fund will determine your future returns. There is nothing stopping XYZ fund from outperforming ABC fund.
In short, lower or higher NAVs should not influence your investment decision. Your criteria to invest in a scheme should be based on the reputation of the fund house and its performance record. One should also take a look at the portfolio and style of managing money.
Say, you have Rs 10,000 to invest. Say one Fund A has an NAV of Rs 10 and another Fund B has NAV of Rs 50. You will get 1000 units of Fund A or 200 units of Fund B. After one year, both funds would have grown equally as their portfolio is same, say by 25%. Then NAV after one year would be Rs 12.50 for Fund A and Rs 62.50 for Fund B. The value of your investment would be 1000*12.50 = Rs 12,500 for Fund A and 200*62.5 = Rs 12,500 for Fund B. Thus your returns would be same irrespective of the NAV.
NAV Fluctuation Of HDFC Standard Life Insurance Company limited
We considered period up to 3 years from Jun-2006 and studied fluctuation of various funds mentioned in table below under HDFC unit link plans.
On Half Yearly Basis:-
On Yearly Basis:-
Comparative Analysis between HDFC Standard Life and Competitor Companies
Here we are comparing growth fund of HDFC Standard Life with growth funds of its other Competitor Companies on monthly, half yearly and yearly basis.
On Half Yearly Basis:
On Yearly Basis:
For calculating the returns that these companies have provided to their customers let us considered two case where a customer is depositing Rs. 10000 as premium amount half yearly and yearly over the period of three years. Here I have considered the period of three years as any fund deposited in any unit linked policy has a lock-in period of three years i.e. the customers can not withdraw money for at least three years. Though the above condition is mandatory I have considered Max New York Life Insurance under this study though its NAV is only two years old, but in recent recession time also this company have provided satisfactory returns. And it is another tough competitor for other companies in the business to look for.
On yearly basis:
On half yearly basis:
Analysis: Considering above example HDFC Standard Life have given less returns after Bajaj Allianz and ICICI prudential, but more than Max New York life. This has happened because of global slowdown and recession all over the world. All companies were going through a bad patch. In that condition also these companies have given satisfied returns. Bajaj Allianz could manage to prevent their customer’s loss to the greatest extent.
Investment management
Investment management is the professional management of various (shares, bonds etc.) and (e.g., ), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via e.g. ).
The term asset management is often used to refer to the investment management of , whilst the more generic fund management may refer to all forms of institutional investment as well as investment management for private investors. Investment managers who specialize in advisory or discretionary management on behalf of (normally wealthy) private investors may often refer to their services as wealth management or portfolio management often within the context of so-called "private banking".
The provision of 'investment management services' includes elements of , asset selection, stock selection, plan implementation and ongoing monitoring of investments. Investment management is a large and important global industry in its own right responsible for caretaking of of dollars, euro, pounds and yen. Coming under the remit of many of the world's largest companies are at least in part investment managers and employ millions of staff and create billions in revenue.
Fund manager (or in the U.S.) refers to both a that provides investment management services and an individual who directs fund management decisions.
Industry scope
The business of investment management has several facets, including the employment of professional fund managers, research (of individual assets and ), dealing, settlement, marketing, , and the preparation of reports for clients. The largest financial fund managers are firms that exhibit all the complexity their size demands. Apart from the people who bring in the money (marketers) and the people who direct investment (the fund managers), there are compliance staff (to ensure accord with legislative and regulatory constraints), internal auditors of various kinds (to examine internal systems and controls), financial controllers (to account for the institutions' own money and costs), computer experts, and "back office" employees (to track and record transactions and fund valuations for up to thousands of clients per institution).
Investment managers and portfolio structures
At the heart of the investment management industry are the managers who invest and divest client investments. A certified company investment advisor should conduct an assessment of each client's individual needs and risk profile. The advisor then recommends appropriate investments.
Asset allocation
The different asset classes are , , and . The exercise of allocating funds among these assets (and among individual securities within each asset class) is what investment management firms are paid for. Asset classes exhibit different market dynamics, and different interaction effects; thus, the allocation of monies among asset classes will have a significant effect on the performance of the fund. Some research suggests that allocation among asset classes has more predictive power than the choice of individual holdings in determining portfolio return. Arguably, the skill of a successful investment manager resides in constructing the asset allocation, and separately the individual holdings, so as to outperform certain benchmarks (e.g., the peer group of competing funds, bond and stock indices).
Long-term returns
It is important to look at the evidence on the long-term returns to different assets, and to holding period returns (the returns that accrue on average over different lengths of investment). For example, over very long holding periods (eg. 10+ years) in most countries, equities have generated higher returns than bonds, and bonds have generated higher returns than cash. According to financial theory, this is because equities are riskier (more volatile) than bonds which are them selves more risky than cash.
Diversification
Against the background of the asset allocation, fund managers consider the degree of that makes sense for a given client (given its risk preferences) and construct a list of planned holdings accordingly. The list will indicate what percentage of the fund should be invested in each particular stock or bond. The theory of portfolio diversification was originated by Markowitz and effective diversification requires management of the correlation between the asset returns and the liability returns, issues internal to the portfolio (individual holdings volatility), and between the returns.
Investment styles
There are a range of different of fund management that the institution can implement. For example, growth, value, , small capitalisation, indexed, etc. Each of these approaches has its distinctive features, adherents and, in any particular financial environment, distinctive risk characteristics. For example, there is evidence that growth styles (buying rapidly growing earnings) are especially effective when the companies able to generate such growth are scarce; conversely, when such growth is plentiful, then there is evidence that value styles tend to outperform the indices particularly successfully.
Performance measurement
Fund performance is the acid test of fund management, and in the institutional context accurate measurement is a necessity. For that purpose, institutions measure the performance of each fund (and usually for internal purposes components of each fund) under their management, and performance is also measured by external firms that specialize in performance measurement.
The leading performance measurement firms (e.g. in the USA) compile aggregate industry data, e.g., showing how funds in general performed against given indices and peer groups over various time periods.
In a typical case (let us say an equity fund), then the calculation would be made (as far as the client is concerned) every quarter and would show a percentage change compared with the prior quarter (e.g., +4.6% total return in US dollars). This figure would be compared with other similar funds managed within the institution (for purposes of monitoring internal controls), with performance data for peer group funds, and with relevant indices (where available) or tailor-made performance benchmarks where appropriate. The specialist performance measurement firms calculate quartile and decile data and close attention would be paid to the (percentile) ranking of any fund.
Generally speaking, it is probably appropriate for an investment firm to persuade its clients to assess performance over longer periods (e.g., 3 to 5 years) to smooth out very short term fluctuations in performance and the influence of the business cycle. This can be difficult however and, industry wide, there is a serious preoccupation with short-term numbers and the effect on the relationship with clients (and resultant business risks for the institutions).
An enduring problem is whether to measure before-tax or after-tax performance. After-tax measurement represents the benefit to the investor, but investors' tax positions may vary. Before-tax measurement can be misleading, especially in regimens that tax realised capital gains (and not unrealised). It is thus possible that successful active managers (measured before tax) may produce miserable after-tax results. One possible solution is to report the after-tax position of some standard taxpayer.
Absolute versus relative performance
In the USA and the UK, two of the world's most sophisticated fund management markets, the tradition is for institutions to manage client money relative to benchmarks. For example, an institution believes it has done well if it has generated a return of 5% when the average manager (usually culled from amongst its peer class) generates a 4% return.
Risk-adjusted performance measurement
Performance measurement should not be reduced to the evaluation of fund returns alone, but must also integrate other fund elements that would be of interest to investors, such as the measure of risk taken. Several other aspects are also part of performance measurement: evaluating if managers have succeeded in reaching their objective, i.e. if their return was sufficiently high to reward the risks taken; how they compare to their peers; and finally whether the portfolio management results were due to luck or the manager’s skill. The need to answer all these questions has led to the development of more sophisticated performance measures, many of which originate in .
Modern portfolio theory established the quantitative link that exists between portfolio risk and return. The Capital Asset Pricing Model (CAPM) developed by Sharpe (1964) highlighted the notion of rewarding risk and produced the first performance indicators, be they risk-adjusted ratios (Sharpe ratio, information ratio) or differential returns compared to benchmarks (alphas). The Sharpe ratio is the simplest and best known performance measure. It measures the return of a portfolio in excess of the risk-free rate, compared to the total risk of the portfolio. This measure is said to be absolute, as it does not refer to any benchmark, avoiding drawbacks related to a poor choice of benchmark. Meanwhile, it does not allow the separation of the performance of the market in which the portfolio is invested from that of the manager. The information ratio is a more general form of the Sharpe ratio in which the risk-free asset is replaced by a benchmark portfolio. This measure is relative, as it evaluates portfolio performance in reference to a benchmark, making the result strongly dependent on this benchmark choice.
Portfolio alpha is obtained by measuring the difference between the return of the portfolio and that of a benchmark portfolio. This measure appears to be the only reliable performance measure to evaluate active management. In fact, we have to distinguish between normal returns, provided by the fair reward for portfolio exposure to different risks, and obtained through passive management, from abnormal performance (or outperformance) due to the manager’s skill, whether through market timing or stock picking. The first component is related to allocation and style investment choices, which may not be under the sole control of the manager, and depends on the economic context, while the second component is an evaluation of the success of the manager’s decisions. Only the latter, measured by alpha, allows the evaluation of the manager’s true performance.
Portfolio normal return may be evaluated using factor models. The first model, proposed by Jensen (1968), relies on the CAPM and explains portfolio normal returns with the market index as the only factor. It quickly becomes clear, however, that one factor is not enough to explain the returns and that other factors have to be considered. Multi-factor models were developed as an alternative to the CAPM, allowing a better description of portfolio risks and an accurate evaluation of managers’ performance. For example, Fama and French (1993) have highlighted two important factors that characterise a company's risk in addition to market risk. These factors are the book-to-market ratio and the company's size as measured by its market capitalisation. Fama and French therefore proposed a three-factor model to describe portfolio normal returns. Carhart (1997) proposed to add momentum as a fourth factor to allow the persistence of the returns to be taken into account. Also of interest for performance measurement is Sharpe’s (1992) style analysis model, in which factors are style indices. This model allows a custom benchmark for each portfolio to be developed, using the linear combination of style indices that best replicate portfolio style allocation, and leads to an accurate evaluation of portfolio alpha.
Fund Performance HDFCSL Individual Life plan:
Liquid Fund:-
Secure Managed Fund:-
Defensive Managed Fund:-
Balanced Managed Fund:-
Equity Managed Fund:-
Growth Fund:
Stable Fund:-
Credit rating
A credit rating estimates the of an individual, , or even a country. It is an evaluation made by credit bureaus of a borrower’s overall credit history. Credit ratings are calculated from financial history and and . Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a . However, in recent years, credit ratings have also been used to adjust insurance premiums, determine employment eligibility, and establish the amount of a utility or leasing deposit. A poor credit rating indicates a high risk of on a loan, and thus leads to high , or the refusal of a loan by the creditor.
Credit rating
A credit rating is an opinion on the relative degree of risk associated with timely payment of interest and principal on a debt instrument. A simple alphanumeric symbol is normally used to convey a credit rating.
A credit rating agency provides an opinion relating to future debt repayments by borrowers. A credit bureau provides information on past debt repayments by borrowers. Trade creditors are generally the main users of credit bureau information, while financial investors typically use credit ratings. Information relating to a company's track record in debt servicing, supplied by credit bureaus, is one of the inputs that is used by a credit rating agency while assigning a rating.
A credit rating is not a recommendation to buy, hold or sell a debt instrument. A rating is one of the inputs that is used by investors to make an investment decision. Investors also look at the returns being offered on the debt instrument. Normally investors expect higher returns for lower rated instruments to compensate for the increased risk profile. Rating agencies do not comment on the return being offered on a debt instrument. Also, investors use several other factors like level of portfolio diversification and liquidity levels of the instrument etc. in making investment decisions.
Credit ratings are assigned to debt instruments while equity research relates to equity shares. The risk and return characteristics of debt and equity instruments are fundamentally different, even though issuers service both out of business earnings. Debt instruments offer a guaranteed but fixed return while equity instruments offer a potentially unlimited though non-guaranteed return. Therefore, while equity research is focused on growth possibilities, for that is what drives equity valuations, a credit rating is focused on the risk of non-payment, the primary variable in debt instruments. This difference in orientation distinguishes credit ratings from equity research.
Standards of transparency in emerging markets have been improving in recent years. Moreover, during a rating exercise, issuers provide rating agencies with confidential information and insights into business strategy that are not normally available in the public domain, However, an experienced rating agency can arrive at a reasonably accurate credit rating based on publicly available information, peer analysis and an understanding of the industry. CRISIL believes that in an emerging market, interactions with an issuer's management are an important and necessary feature of the credit rating exercise. As a policy, CRISIL does not assign ratings without issuer interaction except when a previously rated instrument is outstanding or when a specific investor asks for a private exercise.
A credit rating is not an assurance of repayment of the rated instrument. Rather, it is an opinion on the relative degree of risk associated with such repayment. This opinion represents a probabilistic estimate of the likelihood of default. It is possible that some highly rated issuers could default. In the US, some instruments rated at even 'AAA' levels have defaulted. However, such defaults would be less frequent amongst highly rated instruments than amongst instruments with lower ratings.
The performance of credit ratings assigned by any rating agency against these expectations can be tested by studying the default behaviour of its rated instruments over a long period of time. These default studies published by most large rating agencies in the world, including CRISIL, reveal that credit ratings are able to make statistically robust distinctions between debt instruments based on their default likelihood. The capital market regulator regulates rating agencies in most regions. In India, the capital markets regulator, the Securities and Exchange Board of India (SEBI), regulates the rating agencies in the country. SEBI laid down an extensive set of regulations for rating agencies in 1999.Moreover, the credit rating industry has many structural features, which ensure that any rating agency aspiring for long-term success acts responsibly, failing which its credibility and consequently its business would be eroded. Regulation of rating agencies is typically concerned with ensuring that only reputable entities are allowed to set up rating agencies and that adequate safeguards are in place to manage the conflicts of interest that arise with respect to both the rating agency and its employees. Regulation that is more intensive or intrusive than this has not resulted in any incremental benefits.
Benefit from a credit rating
An independent and professional rating agency provides credible and continuing information on credit risk, a crucial component of all debt investment decisions. This service is particularly useful to investors when they are faced with an array of debt investment options that is much larger than what their own credit assessment resources can reliably support. Moreover, published ratings enhance the efficiency of the financial system by reducing the cost of obtaining quality credit information on debt instruments for all players in the system
Various Rating Symbols
Plus and minus symbols are used to indicate finer distinctions within a rating category. The minus symbol associated with ratings has no negative connotations whatsoever. In fact, ratings in a higher rating category such as ‘AA’ are stronger than ratings in a lower rating category such as ‘A’. Debt instruments rated ‘BBB-’ and above are classified as investment grade ratings. Instruments that are rated ‘BB+’ and below are classified as speculative grade category ratings. Instruments rated in the speculative grade carry materially higher risk compared to instruments rated in the investment grade. No, a speculative grade rating on a debt instrument does not mean that it is certainly going to default. All it indicates is that the instrument has risks associated with it that make it significantly more vulnerable to default than instruments in the investment grade.
Why do ratings change?
Ratings are assigned based on certain expectations and assumptions about variables that impact the issuer’s performance. These variables are either company-specific factors or factors relating to the business environment. Rating agencies use their best professional judgment on these factors while assigning the rating. However, these variables can change significantly over a relatively short time-frame, especially in emerging markets, causing the rated entities’ performance to deviate materially from expectations. This changes their future debt repayment capabilities and is reflected in their changed ratings.
Sensitivity Analysis
Non-Pension Funds
In order to give an idea to you, the likely impact that changes in the equity market could have on our respective funds, we have given two separate kinds of information.
-
Rescaled Graphical comparison between HDFCSL funds and market indices:
Here we have used as index, the BSE Sensex , which has 30 stocks, as well as the BSE 100, which is our benchmark index. We believe the BSE 100 has a more diversified composition as compared to the BSE Sensex and is a better reflection of our investment philosophy than the BSE Sensex.
Since the values of the different indices as well as our respective funds are of different scales, it will not be useful to just plot the historic prices/ NAVs. Hence we have rescaled the entire set to a starting point of 100 on the date of inception of our funds (2nd Jan 2004). The results have been plotted into a graph for your comparison purposes. The result of such a graphical representation would give an indication of how the market (represented by the indices) has moved at different points of time, and how our funds have responded during the same corresponding periods of time. Important point to note would be that while the Growth fund (which is a purely equity oriented fund) will display closer correlation with the market indices, our defensive managed and balance managed funds will not show such a high correlation as their exposures to equity are much lower
The above graph shows how our Growth fund (which is the closest in mandate to a full equity fund) when rescaled compares with the two indices. The Growth fund reacts very closely and sometimes more positively to market changes as compared to the indices.
The above graph shows how our Balance Managed fund (30-60% in equities, balance in debt/ cash) when rescaled compares with the two indices. The Balanced fund reacts positively to market changes but on a much smaller scale as compared to the indices, which is due to the smaller percentage of equity in the fund.
The above graph shows how our Defensive Managed fund (15-30 % in equities, balance in debt/ cash) when rescaled compares with the two indices. The extent of correlation between the Defensive fund and the indices is much smaller because of the small percentage of equity in the fund, which is presently at around 25%.
- Beta of various HDFCSL funds against market indices:
We have also calculated the Beta of our funds against the respective benchmarks.
Beta is defined as – “A measure of a security's or portfolio's volatility, or systematic risk, in comparison to the market as a whole, also known as ‘beta coefficient’.
Beta is the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. The beta less than 1 means than the security will be less volatile than the market and the beta greater than 1 indicates that the security's price will be more volatile than the market.
Given below is the Beta of our respective funds as compared with both the indices, BSE Sensex as well as BSE 100.
BETA Values: Weekly returns
We have calculated this beta taking the weekly closing values of the indices as well as our funds for the period of 2nd Jan 2004 to 29th May 09.
This can be explained as follows:
The Beta of the Defensive Managed fund as compared with the BSE 100 is 0.22579, which means that for every change of 10% on the BSE 100, there is a change of 0.023% on our Defensive Managed fund, and for every change of 10% on the Sensex, there is a change of 0.023% on our Defensive Managed fund. Also given below is the Beta of our respective funds as compared with both the indices, BSE Sensex as well as BSE 100 calculated on Monthly closing values:
BETA Values: Monthly returns
Important Note: -
- The above two comparisons are based on historic portfolio and values for both the indices as well as the HDFC SL funds and may not necessarily be the same correlation in future.
- The defensive and balanced managed funds have a significant debt portfolio and hence will influence the correlation as we are correlating them only with the equity markets.
- The differences between the Growth fund and the BSE 100 is symptomatic of our philosophy of value investments wherein we might not hold all of the smaller but better performing scripts in the BSE 100.
- The deviations from the BSE SENSEX may be largely due to the difference in weight ages given to different scripts as also due to holding a few stocks outside of the BSE 30.
Observations
- Insurance sector works like a trust where people will invest and companies will take care of their money and life risk.
- Any insurance company should not carry out business in its own interest.
- HDFC Standard Life strictly follows all the regulations prescribed by IRDA.
- HDFC Standard life is a very comfortable place to work at where managers are very friendly with employees.
- HDFC Standard Life lays more emphasis on training its employees and FCs in customer relation and benefit.
- HDFC Standard Life satisfies there FLS personnel with high commissions and incentives, so that employees should concentrate on need based selling for customers.
- In 2004 money invested in market was approx. 2% and now it has increased up to 4%, which will result in better market conditions in future if this continues.
Benefits
Benefits of insurance sector:
- Life insurance provides the biggest advantage of investment with life cover.
- Insurance provides options of endowment and unit linked plan at the same time.
- A customer can have better security with high returns.
- Returns from life insurance policy are tax exempt under income tax.
- The customer himself can manage his funds according to current market
conditions.
- There is a special facility of Top-up in unit linked plans where customer can put
his excess money in market for 3 years and can gain high returns.
- If a customer is in loss due to poor market condition, he can keep his money with
the company for another 5 years without any fund management charges.
Benefits of HDFC Standard life:
- HDFC SLIC is known amongst the private insurance companies with its customer
friendly approach and good service.
- HDFC SLIC follows the policy of front end charges i.e. it withdraws all the policy charges in one go from first premium payment. One may see the negative part of it i.e. low allocation charges, but because of this other police holders and the company will not have to pay the charges of a lapse policy of a defaulter customer.
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HDFC Standard life took care of their customer’s interest at the recession time and made a huge investment at lower NAV which will be beneficial to their customers on long term basis in terms of bonuses and returns. The company had NAV at Rs.81 which came down to Rs. 32 in Jan2008 when market crashed from 21000 to 8000. At this point of time managers of company suggested their customers to invest money on a very low NAV and get a huge benefit because as the market condition will improve and NAV will jump up to at least its previous highest value. Now in 18 months NAV has doubled i.e. 100% returns.
- HDFC Standard life has 675 branches which it is planning to increase up to 1350 by 2011 which will lead to more market penetration and further better service.
Conclusion
- Insurance is a very attractive option for investment for investors. The life insurance industry in India grew by an impressive 47.38%.
- Private insurance companies are providing better options to the customers and it also creating awareness amongst the people about life insurance.
- HDFC Standard Life has beta close to 1 so the NAV values fluctuate with market. Thus returns from the company will gradually increase as market conditions will get better.
- To increase their customer base and penetration HDFC Standard Life should come up with lower premium products.
- HDFC Standard Life has a much diversified portfolio which insures safety of their customers.
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