customer perceptions of innovative products in wealth management

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A REPORT

ON

CUSTOMER PERCEPTIONS ABOUTINNOVATIVE PRODCUTS OF WEALTH

MANAGEMENT

BY

ALOK RANJAN

IDBIFORTIS LIFE INSURANCE

CORPORATION LIMITED

A REPORT

ON

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CUSTOMER PERCEPTIONS ABOUT

INNOVATIVE PRODCUTS OF WEALTH

MANAGEMENT

BY

ALOK RANJAN

IDBIFORTIS LIFE INSURANCE CORPORATION

LIMITED

DATE: MAY 24, 2009

AUTHORIZATION

The report is submitted as partial fulfillment of the requirement of MBAprogram of IBS, Hyderabad.

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ACKNOWLEDGEMENTS

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

contributions and helped me in completing this project.

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

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

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

Corporation Ltd without whose consistent encouragement and timely feedback, the project

would not have been completed.

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I am immensely indebted to our faculty guideDr. D. Satish, for providing me with useful

inputs and guidelines that have added significant difference to the way the project is finally

shaped.

I offer my gratitude to all of my colleagues and faculties who were always ready for

providing suggestions which could be fruitful towards the accomplishment of intendedobjectives of the project.

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

Alok Ranjan

EXECUTIVE SUMMARY

The project titled Customer perception about innovative products in wealth

management is done during the course of summer internship of the management program

pursued by the researcher. The project covers the marketing and promotional aspects of

products and services of wealth management.

Marketing of unconventional products has always been a challenging task, but this

helps the marketers to come up with innovative ideas and plans which facilitates these

products to carve a niche for them in an unprecedented way. Wealth Management

righteously belongs to the unconventional group of products which require a totally

different approach, regarding the way they are introduced, marketed and eventually

perceived by their prospective customers.

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This project is prepared to study the aspects of wealth management, with prime

focus on understanding and meeting customer needs, which undoubtedly, is the key

indicator of any businesss success.

Recent volatility in the financial markets has in a way completely changed the way

in which investors make their investment decisions. Stock markets collapse and stagnationof traditional norms for investment compelled the financial sector to revise the way in

which it has been operating. This upheaval though can be viewed as an opportunity for

innovation, and calls for introducing new products and services that have the potential of

developing an optimistic mindset among investors.

Life Insurance, which was viewed only as an avenue to save, has used innovation as

a strategic tool to introduce products which offer varying benefits to its customers apart

from the usual benefits of insurance cover. The innovation and customization offered by

products such as ULIPs tend to serve the investors as per their investment needs. It is of

vital importance for any organization in this sector to properly assess the prospectivecustomers awareness levels and outlook which they posses about these products. The

project strives to provide useful insights to the organization in assessing and meeting

investors needs appropriately.

The project studies the changing perceptions of the retail investors, mostly

belonging to middle income group. The dynamic market conditions have led to a huge shift

in the mindset of individual investors, some overtly popular investment avenues have faded

away, giving way to the new products and services. The project focuses on the current

perception of investors about different options for investment available to them with main

focus on products offered by the Life Insurance Sector.

TABLE OF CONTENTS

AUTHORIZATION.. 3

ACKNOWLEDGEMENTS.. 4

EXECUTIVE SUMMARY... 5

1. INTRODUCTION.. 7

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2. BACKGROUND DETAILS ..... 7

3. OBJECTIVES. 9

4. SCOPE. 9

5. LIMITATIONS...

10

6. LITERATURE REVIEW...

10

7. RESEARCH METHODOLOGY...

15

7.1 Research Design

15

7.2 Data Collection

16

7.3 Sampling Procedure

16

7.4 Scaling Procedure

16

8. DATA ANALYSIS..

17

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8.1.1 Interpretation of data

17

8.1.2 Framework of Analysis

18

8.1.3 Findings and Analysis

18

8.1.4 Conclusion

24

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

27

10.ANNEXURES

29

11.REFERENCES

39

1. INTRODUCTION

Off late, a lot has been happening in the global economy, past two years have been

witness to the collapse of several well performing establishments, of the most influential

and strong nation in the world, the United States of America, leading to the worst recession

of all times. This global slump has caused a drastic change in the way business will be

conducted in the financial markets now. All the countries around the world are looking out

for ways to tackle the recession by making all the efforts to reshape their respective

economies.

The extremely volatile market conditions call for newer products and services in the

financial markets sector, as the customer perceptions have definitely changed a lot. Various

options of investment which they are looking at cannot provide them the certainty of returns

as per their expectations, due to the losses incurred in huge amounts and the helplessness of

different authorities to help them recover from their losses. This calls for introducing new

offerings in the market which assure returns.

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This project deals with the perceptions that an individual, as a retail investor has, of

different investment options available to him/her, and his/her say about the innovative

products and services offered by different players competing in the market.

2. BACKGROUND DETAILS

There are a lot of factors that are responsible for continuous change in the consumer

preference over the decades, about the investment decisions they make in different avenues

available to them.

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

foreign capital and foreign companies into Indian financial markets, increase in the income

and saving levels of investors, sudden hike in the capital markets led to a lot of business

activities in the financial sector. The untapped Indian Markets suddenly became wide awake

with entry of a lot of private players, coming up with different products and services,

catering to various needs of customers in different segments of market.

The highly competitive environment has caused the traditional norms of investment

to make way for the newer alternatives available to the retail investors. This facilitated the

entry of inactive sectors like insurance into the main stream. The products and services

offered by the insurance organizations are now competing with the traditional modes of

investment like in equities or reality.

Till the early 90s the investment pattern was pretty constrained due to various

restrictions imposed by the authorities. The options available to the customer were few.

Some of the conventional products which were consistently popular for over decades

among the retail investors included bank fixed deposits, investment in equities (stocks and

shares), debt (bonds, money market instruments), metals (gold, silver, diamond and other

jewels), etc.

With the change in the income level and economic conditions in the country, backed

by supportive regulatory norms by the government, entry of private and foreign players in

the Indian financial markets, led to the introduction of a whole new gamut of products and

services to the individual investors. Many innovative products and services of wealth

management have been introduced in the markets with many more queued up to be

launched. Some of them which have recently witness proliferating growth include:

Mutual Funds: These are the investment options in which investors pool in their

investments and a group of professionals and experts in the Asset Management

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Companies (AMC) invest this fund across various sectors with main objective of

diversifying the risk involved by investing across different sectors. They cater to the

individual investors whose income levels are small and it tries to manage their

portfolio in a way which promises regular income, growth, security, liquidity and

risk diversification.

Unit Linked Insurance Plans: Popularly known as ULIPs, they are investment

options offered by the Life Insurance sector. It provides the combined options of

investment and insurance. The amount invested in a Unit Linked Plan can be

invested as per the specifications preferred by the policy owner. The investors can

choose the investment avenues and amount to be invested in these plans, based on

his risk appetite, asset allocation, investment horizon, investment objective and

other factors. ULIPs can be considered as a good investment option if purchased as

a long term investment option.

Equity Linked Saving Schemes: Until recently, they did enjoy a preference statusamong investors as they offered returns from the capital markets while

simultaneously providing tax benefits, but the economic turmoil has changed the

way investors used to perceive them.

Art: investment in art is the latest inclusion to the investment options that are made

available to the retail investor. Considering the quick hike in the market values of

different art forms like paintings, antiques, vintage products; investment in arts

seems to be catching up pretty quickly with other investment options.

3. OBJECTIVES

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

To conduct a survey for obtaining customer perceptions about innovative investment

products.

To identify the factors that drive a retail investors decision of investing in innovative

investment avenues, with main emphasis on Life Insurance Products (ULIPs).

To study the demographic and psychographic profiles of retail investors and analyze

their investment habits.

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To identify new ways of marketing and promoting investment products and services

during volatile market conditions

4. SCOPE OF STUDY

The project will be useful in different dimensions to suit the requirements of different

segments; the project is made in accordance with the given parameters:

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

of innovative financial and insurance products.

b. Organizational goals : suggestions and findings from the survey which will add to

the organizations efforts to consolidate the products of wealth management during

volatile market conditions

c. Individual goals: the main aim at individual level is to gain an insight of current

trends in the investment sector with main focus on life insurance. The project will

aid in observing the actual performance of wealth insurance products in the market,

analyzing the factors that drive people to invest in innovative investment vehicles.

5. LIMITATIONS

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financing sources, can directly lead to the changes in the investment patterns of the

economy at both macro and micro levels. The sudden downturn in the US economy led to

the global turmoil and left the world with a deep recessionary period, which calls for

looking apart from banks and traditional source of capital and strengthening new

intermediaries as sources for capital.

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

investment, consumption and saving patterns of people. These changes will be reflected

differently in different economies. This change however can also be viewed as an

opportunity to introduce new alternatives for investment by improvising the financial

services market. The sudden change in the market conditions will lead to change in the

investment habits. Major sources of investment include the corporate sector, governments

and households.

While corporate and government investments are highly regulated and compliant

with the norms regarding investment and expenditure. Household sector, being largelyunregulated, often demonstrates large variations in the investment patterns from its

government and corporate counterparts. This leads to a relatively quicker change in the

investment preference of the individual investors which tends to fasten up when market

conditions are volatile.

The investment needs of the investors during the 1990s was to accomplish the

investment objectives such as portfolio diversification and professional wealth management

at relatively lower costs, which led to introduction of Mutual Funds, an elegant example of

introducing innovative financial products and services catering to the needs of individual

investors and utilizing the monetary resources more efficiently to generate higher returns.Fernando et al (2003)profile the growth of Mutual Funds around the world during past 2

decades. The households investment in Mutual funds in US alone made a transitional leap

from 6% in 1980 to 24% in 1992 and further up to 44% in 1998. Almost all the major

countries in the European Union have also seen a huge hike in their total mutual fund

assets.

Investment in Indian financial markets had been following a traditional and

consistent trend till liberalization and introduction of various monetary and fiscal reforms in

1990. Liberalization in policies, entry of private players and global firms due to

privatization and globalization in the Indian financial markets led to a sudden change in theinvestment habits of the investors. It also introduced a whole gamut of products providing

different services as per differing customers needs. Entry of private players in the mutual

funds market revived the stagnant mutual fund industry in India. The benefits of risk

diversification, fund management services etc. offered by the private firms with flexibility

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in options regarding fund selection triggered a wave of competition in the financial markets.

Luiz Ferotz & Cristina Ortiz (2006) in a study conducted to understand the investment

objectives of the investors and evaluate the performance of firms regarding management of

funds have found that investors display more confidence for firms having proper fund

management.

Thus the stiff competition in the financial services sector calls for continuous

innovation of products and services offered to the customer. Another popular vehicle for

investment is Private Equity. Private Equity market has always been an avenue well sought

by both the investors and firms. Investors look out for innovative products in private equity

funds to diversify their investment risk and maximize their returns; while financial firms

seek the private equities market to design and offer products that provide flexibility and

customization to the customers which are considered as important factors for any investors

purchase decision. According to a descriptive research byAlexander Peter Groh (2009),

apart from adequate governance investment protection is the main factor for firms while

allocating resources to tap market share in Private Equity segment.

For further diversification of the investors risk, another innovative tool called Fund

of Funds was introduced in the markets. As private equity funds provide diversification by

collecting capital from individuals and group of investors and investing them across a wide

range of portfolio firms, the fund of funds collect capital from investors and invest it in a

wide range of portfolio private equity funds.Achleitner et al (2009) while studying the risks

involved with private equity fund of funds have found that definitely investment in fund of

fund options provides greater risk diversification. However the strategies adopted by the

Fund of fund management companies like deciding the management charges play a

significant role in the risk perception of the investors.

Indian economic upsurge post liberalization has made Indian markets a highly

sought after destination both for the domestic and international investors and financing

institutions. High competition, huge market potential, heterogeneous customer base,

different investment objectives and preferences have caused traditional norms of investment

to make way for the new vehicles of investment. Considering the current recessionary

conditions, apart from traditional investment methods like share markets, fixed deposits,

new investment avenues available for investors at individual level include Mutual Funds,

Real Estate, Life insurance and commodities.

INSURANCE SECTOR

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Insurance sector around the world is about to attain huge market growth,

considering the concern people have about avenues for investment with safer returns after

the volatility in the stock markets. Even though recessionary conditions have brought about

a slowdown in various financial services markets, insurance sector has an opportunity to tap

higher market penetration. Life insurance industry will attain high growth rates as it fulfills

2 of the most crucial needs of the investors risk protection and wealth management.

Profiling the European life industry Close & Bertoni (2008) researched about the

inefficiencies in the European life insurance markets, and the results predictably describe

similar kind of inefficiencies across major countries of the European Union. The prime

reason for the inefficiency in insurance markets is the improper management of resources

available to the players in these markets.

In contrast to developed economies like the European Union, small and emerging

economies have a different perspective regarding insurance. Small countries like Mauritius

have a highly concentrated market for insurance with a fewer number of firms offering life

insurance products. In his research of life insurance industry of MauritiusDimitri Vitas

(2003) reveals that even though the life insurance market is highly concentrated, it operates

with high level of competition. The insurance market unlike EU is efficient as well as

profitable for the major players.

Insurance in India started early during the 19 th century without proper regulatory

framework. The first life insurance firm to operate in India was a British firm called

Oriental life Insurance Corporation which commenced operations in 1818, which was

followed by Bombay Assurance Company (1823), and Madras Equitable Life Insurance

Society (1829). Post independence insurance was nationalized and government owned Life

Insurance Corporation was the single player in the life insurance market with traditional life

covers being offered to investors with almost no scope of customization and innovation. But

with the liberalization of regulatory reforms and passage of the Insurance Regulatory

Development Authority (IRDA) Act in 1999, private entrants were allowed to introduce

market driven competition. The passage of the IRDA Act has ended the monopoly

commanded by LIC since 1956 and GIC since 1972 in the life insurance and non-life

insurance sectors respectively. The main intention behind the Act was to regulate and

effectively coordinate the activities in the insurance sector, as it segregated the life

insurance, general insurance and reinsurance domains into different lines of business.

Insurance markets in India have a promising future ahead due to favorable factors

like entry of private players in the industry, deregulation and de-tariffing norms introduced

by the government, introduction of new channels of distribution to name a few. Precisely

the life insurance market with the introduction of innovative products like Unit Linked

Insurance products have been at the forefront of sectors receiving high growth.

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Life insurance products after deregulation and innovation have merged various

investment and insurance options into different products. One such option is portfolio

insurance, the underlying concept on which the Unit Linked Insurance Products are based.

Suleyman Basak(2001) reveals that portfolio insurance aims at providing the dual benefits

of assured minimum returns on investment along with options to gain high returns from

investing in various stock market schemes.

Risk perception and expected returns play a major role in the life insurance market,

as the objectives for investing in life insurance policy can be significantly different on the

basis of parameters like age, mortality , charges commenced, protection(in terms of life

cover), tax planning and investment objectives of the investors.Dash et al (2007) infer that

different life insurance policies have different rate of returns depending upon the age and

mortality rates of the investors. It was also found that the unit linked plans provide better

returns if they are treated as a product for core investment instead of getting both the

options of life cover and investment.

Industry experts and policy owners all over have been evaluating the unit linked

insurance policies right from their inception. The general perception about these products

comes as a mixed reaction. Grosen and Jorgensen (1999) compared the Unit Linked

Policies with other participating policies, (also referred to as with profit policies) in which

the profit earned from investment is disbursed periodically to the owners, the main

components of these kind of insurance policies include the interest rate guarantees and the

options available to the policy owners to surrender or sell the policy back to the firm. These

flexibilities offered in the products make them all the more popular, and also calls for

standard regulatory norms for industry wide consistency in terms of offers made by the

insurers in these product categories. Cook & Cummins (1994) emphasize further on product

innovation in the actuaries market. Among different factors for gaining market share,

innovation in life insurance products in terms of flexibility, transparency and benefits

offered to the customer is of utmost importance.

However changing the product design strategies with innovative offerings alone

cannot solve the purpose of gaining competitive advantage. Other factors too, need to be

taken care of adequately.

Recent improvisation that took place in the actuaries sector is the innovation in

distribution channel management. While the insurance advisors and agents all over thecountry are still the main source of distribution of information and products to life insurance

customers, banks have come forward to provide exposure of their highly dense customer

base to the life insurance firms, thereby creating a win-win situation for both, banks as well

as insurance firms, with customer focus and satisfaction the top priority of their joint

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venture. Bancassurance, as a channel of distribution for life insurance policies has come as

a promising and profitable alternative to both the parties.Brahmam et al (2004) in a

descriptive study of this channel of distribution focus on the prospect of this innovation.

Bancassurance though has to face new challenges like excessive persuasion and providing

value-for-money for the customer as banks have customers from very disparate income

group levels.

Like any new product being offered, life insurance products too have to face the

challenge of increasing customer awareness, promoting through adequate channels and

quickly moving from the introductory phase to the growth phase of the product life cycle.

The amount of flexibility and options provided by new life insurance products to

facilitate customization makes them highly complex which might be beyond the

comprehension levels of the target customer. Due to lack of awareness and adequate

information regarding various products offered by life insurance, investors might choose to

invest in traditional investment channels rather than life insurance, or might end up buyinga wrong policy or plan which may not completely meet their investment objectives.

This calls for adequate education of the customers. The process of increasing

awareness among the customers should not be constrained to educating them about different

life insurance policies only, but they should be properly informed and educated about the

significance of developing the habit of savings and the gains associated with it. It is a

commonly found observation that customers or investors who are well educated tend to be

more aware of these innovative financial products and services. This notion is substantiated

by a research report submitted by Morisset & Revoredo(1995) to the world bank, studying

patterns of education and savings of 74 countries over a period of 30 years. It was foundthat level of education in the long run is positively correlated to the savings and growth rate.

It is quite obvious too because the increase in education levels lead to increase in the

disposable income of the individuals thereby increasing the savings and investment

components of their disposable income.

Hence it is of prime importance for the players of financial products and services, to

properly gauge the awareness, perception and preference of their target customers towards

the flexible but complex products being offered. This will help them in catering to the needs

of the customers in a more efficient way by offering products and services that suit the

needs and investment motives of the customers to the maximum possible extent.

7. RESEARCH METHODOLOGY

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7.1 RESEARCH DESIGN

As the main focus of this project is to gauge the performance of innovative investment

products, how effective they are and how do they drive an individuals decision to invest inthem. In order to identify the factors which influence investors investment decisions, the

research type selected is Problem Identification Research. The main objective lies in

finding out what factors are responsible for the preference, or non preference of customers

for products and services that offer innovativeness to cater to varying needs of different

target segments.

For adequate problem identification a two part research is conducted. During the initial

phase an Exploratory Research is done in order to identify the underlying management

problem more precisely, and, to identify the factors that innovative products should be

concerned about, using secondary data analysis. It is then followed by a DescriptiveResearch conducted through a cross sectional survey, to describe various aspects of retail

investors investment habits, demographic and psychographic profiles which play a

significant role during purchase decision making. The descriptive and exploratory

researches hence complement each other to provide a better picture of investor perceptions

about innovative products & services in finance and insurance. They also depict the

parameters which influence a customers decision to invest in innovative avenues, instead

of the traditional options that they have been using for so long, with primal focus on ULIPs,

the innovative offering from the Life Insurance Sector.

7.2 DATA COLLECTION

For Descriptive Research, Structured Data Collection is done. The data is collected from

respondents using Mall-intercept Survey method, in which the respondents were asked to

give their responses on a Questionnaire which was prepared using Fixed Alternative

Questions format.

7.3 SAMPLING PROCEDURE

The target population for the study is defined as follows:

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

Sampling Units: Include private professionals, public servants,

businessmen/businesswomen and households.

Extent: Hyderabad, New Delhi.

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

The research type being exploratory, Non Probability Sampling Technique is used and

samples are collected using Convenience Sampling. To determine the sample size the

commonly followed rule of choosing sample size as 5 times the total no. of variables is

adopted, and since the factor analysis studies 14 variables hence sample size is selected as

70.

7.4 SCALING PROCEDURE

To obtain the investment habits, demographic and psychographic profile of the respondents,

comparative scaling is done. Rank order scaling technique is used to measure the ordinal

characteristics and distinct categories of investment vehicle preferences for different

respondents.

However to obtain the factors that motivate a retail investors decision to invest in

innovative products, especially in life insurance products, Non Comparative Scaling is

used and the respondents were asked to mark their responses which are recorded on a 5-

point Likert Scale.

8. DATA ANALYSIS

For descriptive research, investment habits and various other demographic and

psychographic attributes of respondents were studied. Data analyzed for demographic

profile included educational level (see Annexure 1), Occupation (Annexure 2), and Annual

Income (Annexure 3). Psychographic profile included information on Investment

Experience (annexure 4), Investment Horizon (annexure 5), Returns Expected (annexure 6),

Confidence Level(annexure 7), Risk Category(Annexure 8), and Perception about

innovative products(annexure 9)

For exploratory research, the data obtained from the survey was analyzed using Factor

Analysis from the statistical tool SPSS (Statistical Package for Social Sciences).

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8.1 INTERPRETATION OF FACTORS

To start the interpretation and analysis, the Formulated Problem is stated as What are the

factors which influence the decision of a retail investor to invest in innovative avenues for

investment, especially Life Insurance Products (ULIPs)?

Information obtained from secondary data and qualitative analyses suggest 14 variables

which are enumerated below (chosen variable names are given alongside in brackets):

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

V2 Preference for innovativeness in the offering (Innovativeness)

V3 Impact of promotional activities (PromotionImpact)

V4 Core Benefits of life Cover (LifeCover)

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

V6 Tax Benefits offered in Life Insurance products (TaxPlanning)

V7 Degree of Customizability offered (Customizability)

V8 Awareness about applicable charges (TariffAwareness).

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

V10 Diversification of risk involved with investment (RiskDiversification)

V11 Long term investment objective (InvestmentHorizon)

V12 Perception about private players (Privatization)

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

V14 Expertise of professionals/AMC (Asset Management Companies)

(ProfessionalAssistance)

8.1 FRAMEWORK OF ANALYSIS

The respondents were asked to indicate on a 5 point rating scale, their agreement or

disagreement, on various aspects related to their investment decisions, with 1 indicating

Totally Disagree and 5 denoting Totally Agree. The respondents were asked 14

questions related to their perception and some attributes of innovative investment options,19


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especially (ULIPs) in life insurance. The responses obtained will help in identifying the

variables which are quiet similar to some other variables and thus can be grouped together

under a single component/factor, which eventually, will reduce the no of factors to analyze

and should also aid the management by identifying and focusing on the most important

factor obtained from the analysis.

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

investment avenue. Secondary data analysis and qualitative research suggested some of the

prominent factors which could probably facilitate the investors decision to invest in

avenues that offer them innovativeness and a lot of other benefits. Above mentioned list

contains the variables which seem to influence the investment decision of the investors.

8.2 FINDINGS & ANALYSIS

To identify the most prominent factors, chosen variables were factor analyzed using

Principal Component Analysis. The adequacy of the sample collected is verified by KMO

test of sampling adequacy. Table 1 show that the value of KMO statistic is 0.642 which is

acceptable as KMO value greater than 0.5 indicates that chosen sample is adequate and

correlation between a pair of variable can be described by other variables.

Table 1.

Bartletts test of Sphericity is used to justify the selection of Factor Analysis as the

appropriate analysis technique. For factor Analysis to be appropriate the variables should

demonstrate high correlation among each other. A null hypothesis is initially proposedwhich states that all variables under study are totally uncorrelated and that the correlation

matrix is an identity matrix. Large values of Chi Square Transformation under Bartletts test

of Sphericity support the selection of Factor Analysis as the appropriate analysis technique.

As evident from the table the Chi Square transformation is 231.996 with 91 degrees of

freedom, which is quiet high.

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The analysis conducted for the reduction of factors is done using principal

component analysis which aims to reduce the total number of variables, which are

interdependent on each other, and group these variables under individual factors leading to

fewer numbers of factors.

Table 2 shows the communalities, i.e. the amount of variance that a variable shares

with all other variables. Communalities of all the 14 variables before and after factor

extraction are shown below. Values under the columnInitialhave the default value as 1.0

for all 14 variables indicating the null hypotheses that there is no correlation between any

pair of variables.

Table 2

Table 3 shows the Eigen value and variance explained by each variable. The table also

contains information about the percentage of variance explained by all the variables and is

ordered in a descending order. Variable having high Eigen values, usually greater than 1 are

found to be easily explaining total variance. It can be seen that 5 components have Eigen

values greater than 1 and cumulatively these variables explain 64 % of the total variance,

which can be considered, since if the variables can cumulatively account for greater than 60

% of the total variance, it is considered satisfactory. Component 1 accounts for 25 % of the

total variance, component 2 explains 12.5% of total variance in the population, while

components 1 and 2 together account for 37.7 % of total variance. However after the fifth

component, including an additional component will lead to a marginal increase in the

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percentage of variance explained and it is not worthwhile to include any more additional

components apart from the 5 components, whose Eigen values are greater than 1.

Table 3

The total number of factors is determined on the basis of Eigen Values; all the

components with Eigen value greater than 1 are selected as factors. This provides a 5 factor

solution as 5 components have Eigen values greater than one. This is further substantiated

by the Scree plot (Fig-1) which suggests a 5 factor solution. It can also be seen in table 3

that first 5 components account for 64 % variance and the gain associated with going for a

6th

component is marginal.

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Fig-1

In order to group the variables showing correlation with a factor, orthogonal rotation

of the factors is done using the Verimax Procedure for rotation using Kaizer

Normalization. Table 4 shows the correlation or factor loadings of different variable with

respect to the 5 factors. It can be seen that variables which were showing moderate

correlations with more than 1 factor before rotation, are highly correlated with a single

factor and almost uncorrelated with all the other factors apart from the one to which they

show high correlation.

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Table 4.a

Table 4.b

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

variables which show high correlation with their corresponding factors and grouping them

together on the basis of factor loadings they have on each factor. The list given in table 5

shows the grouping of variables into different factors, following which, an appropriate

name will be given to the given factors.

______________________________Table5__________ ______________________________

Factor Variable Name Factor Loading

_________________________________________________________________________

___

1. LifeCover -0.654

TaxPlanning 0.739

TariffAwareness 0.774

RiskDiversification 0.590

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2. Familiarity 0.646

InvestmentSecurity 0.838

Privatization -0.617

3. Innovativeness -0.537

Customizability 0.626

InvestmentHorizon 0.809

4. Flexibility 0.590

Bancassurance 0.829

5. PromotionImpact 0.731

ProfessionalAssistance -0.645

Factor 1 is highly correlated (as given by the factor loadings in the brackets along

with the variable) with TaxPlanning(0.739) and TariffAwareness (0.774), and has moderate

factor loading forRiskDiversification (0.590) whereas negative loading forLifeCover(-0.654).

Factor 2 shows high factor loadings ofInvestmentSecurity (0.838) andFamiliarity

(0.646), but negative loading forPrivatization (-0.617) indicating negative correlation of

Factor 2 with Privatization.

Factor 3 is in high correlation withInvestmentHorizon (0.809) and Customizability

(0.626), againInnovativeness (-0.537) shows a negative correlation.

Factor 4 has high loadings forBancassurance (0.829) and moderate loading for

Flexibility (0.590) on it.

Factor 5 shows high factor loading forPromotionImpact(0.731) and high negative

factor loading forProfessionalAssistance (-0.645).

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8.3 CONCLUSION

The 1st factor consists of four variables, of which TaxPlanningand TariffAwareness

show a high positive correlation,RiskDiversification is moderately correlated andLifeCovershows a negative correlation with Factor 1. Thus Factor 1 may be likely termed

as INVESTMENT OBJECTIVES of the retail investors, as it indicates that the main

reason for investment can play a prominent role in guiding an investment decision about the

avenue one intends to invest in. An investor is likely to invest in an innovative investment

vehicle as it offers Tax Benefits, apart from this he may seek the benefit of risk

diversification which is offered by products like ULIPs and Mutual Funds. Knowledge

about the different charges applicable in any investment option emerges as the most

important factor to be considered. Regarding life insurance products, it can be said that life

insurance products should not limit themselves to offering core life cover only, they ought

to come up with innovation in product design, as like the existing ULIPs which offer

opportunities for investment apart from the usual life cover being offered in insurance

policies.

The 2nd factor comprises of 3 variables, namelyInvestmentSecurity,Familiarity, and

Privatization. Of these variablesInvestmentSecurity shows the maximum correlation with

the factor followed by Familiarity, which indicates that security of the invested capital is a

factor of prime importance to a retail investor and may indicate that innovation in the

product may be appreciated but only if it assures the security of invested capital. This is

further substantiated by the negative correlation displayed byPrivatization, which suggests

that people will not prefer private players against public establishments like LIC, which iswidely viewed as the trusted institution assuring security of the investment. This suggests

that the 2nd factor can be termed as SECURITY.

The 3rd factor consists ofInnovativeness, Customizability, andInvestmentHorizon.

InvestmentHorizon shows highest correlation which indicates that investors are likely to

invest in ULIPs as a long term investment and will not be looking at short term gains while

investing in other such products. A significant correlation displayed by Customizability

indicates that a single product which offers the option of getting both the insurance benefits

and investment opportunities under a single umbrella can gather attention of the investors.

However a negative correlation displayed byInnovativeness indicates that thoughcustomization is desirable but innovation is not a preferable reason to invest in financial

products owing to the risks involved with products offered in the Indian financial markets.

Looking at the perspective these variables try to point out, this factor could be interpreted as

PRODUCT DESIGN.

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The 4th factor comprises ofFlexibility andBancassurance. High correlation shown

by Bancassurance reveals that the usage of banks in the distribution channel of insurance

players can be viewed as a popular initiative. This can be verified by the fact that most of

the investors are quite familiar with the banks and they can trust these banks as an

intermediary in their investment decisions. Flexibility too is moderately correlating to the

factor which suggests investors preference for hassle free usage of their investments with

ease of switching from one option to other. This factor may be named as DISTRIBUTION

as it intends to describe the significance of efficient distribution practice of unconventional

products and services.

The 5th factor contains two variablesPromotionImpactandProfessionalAssistance,

high factor loading ofPromotionImpactindicates the preference for products and plans

which are more prominently visible to their target customers through various media

channels.ProfessionalAssistance though, negatively correlated with the last factor suggests

that during recessionary conditions investors confidence levels are down and they are not

willing to trust even the experts when it comes to their investment decisions. This factor can

be interpreted as MARKETING AND PROMOTION EFFORTS as it emphasizes on the

marketing efforts of an organization in context to promotion efforts applied and service

quality provided to the customer.

The study on investment habits of individual investors suggests about their

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

the preference of the respondents.

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It was found in the survey that Equity Markets are still ranked as the 1 st preference

for individual investors which hints about the confidence, investors are showing in themarkets. The 2nd place is shared by Mutual Funds and Bullion both, as the former offers

diversification of risk and latter promises assured returns during volatile market conditions.

This is followed by Real Estate (4th) and Debt Market (5th). ULIPs which were ranked 2nd

last at 6th position seem to have a long way to go as they need to gain popularity among

middle income group, this needs to be achieved by consolidating the marketing and

promotional efforts to educate the investors about them. At the last slot are the bank fixed

deposits (7th), which were traditionally considered as the best way to save for a long time.

9. MANAGERIAL IMPLICATIONS

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The take home from the information obtained through the survey is the insight and

identification of key areas on which companies need to focus on, in order to gain

competitive advantage and increase market share.

Proper knowledge about the options for investment available to them is a must for

the retail investors. Since, investment decisions involve financial risk hence itbecomes imperative for the investor to have a thorough understanding of the avenue

he/she intends to invest in. It is therefore advisable to educate the customers through

proper channels, making them aware of the investment options available to them,

guiding them clearly through the risks and returns associated with different options,

various charges that will be applicable and the investment objective the investment

option seeks to achieve.

Security of Investment obviously is among the prime criteria for an investor whiledeciding on selecting a particular investment. This is verified by the research which

indicates that it is most likely for an investor to select an option which assures him

of returns apart from securing the initial capital. For these reasons one would prefer

to invest in avenues through which one is quite familiar and can trust these options

for safeguarding the investments.

Players in the insurance and financial services market must come with products that

are lesser in complexity and offer them some, if not much, customization to deal

with their investment options. As found in the analysis, tax benefits offered by an

investment product are the main drivers in influencing an investment decision. This

indicates that products like ULIPs, ELSSs etc. which offer tax deductions under sec-

80(c) and sec-10(d) of the Income Tax Act, should be more prominently marketed

among the investors.

When it comes to life insurance the one size fits all proposition may not hold

good, owing to the differing needs of the middle income retail investor segment,

which again calls for either introducing a lot of products with different structures orprovide the option of customizability by altering the product design, as like in

ULIPs where the policy owner enjoys the discretion of Fund Selection, asset

allocation and risk appetites.

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Buyers and Non Buyers of life insurance differ widely in terms of their

psychographic characteristics like their risk perception/averseness, Investment

Objectives, Returns expected and prior knowledge and familiarity of the product

being offered. It should thus be tried to identify the specific needs of the investors

and provide them with products which cater to their specific needs.

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

use innovative marketing as its strategic tool to gain preference over its competitors,

by offering unique products and solutions to different customers.

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

catalyze the business activities, like using banks and financial institutions being used

as intermediaries in the distribution channel of insurance sector.

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ANNEXURES

ANNEXURE 1

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ANNEXURE-2

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ANNEXURE-4

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ANNEXURE-5

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ANNEXURE-6

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ANNEXURE-7

ANNEXURE-8

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ANNEXURE-9

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