Study of Risk Perceptions and Portfolio Management of Equity Investors| i A REPORT ON A STUDY ON RISK PERCEPTIONS AND PORTFOLIO MANAGEMENT OF EQUITY INVESTORS PDF

Preview

Summary

A REPORT ON A STUDY ON RISK PERCEPTIONS AND PORTFOLIO MANAGEMENT OF EQUITY INVESTORS By Aashita Sabharwal Enrollment Number- 19BSPHH01C0014 Name of the Organization: PNB MetLife India Insurance Co. Ltd. Study of Risk Perceptions and Portfolio Management of Equity Investors| i A REPORT ON A STUDY ON ...

Description

A REPORT ON

A STUDY ON RISK PERCEPTIONS AND PORTFOLIO MANAGEMENT OF EQUITY INVESTORS

By Aashita Sabharwal Enrollment Number- 19BSPHH01C0014 Name of the Organization: PNB MetLife India Insurance Co. Ltd.

Study of Risk Perceptions and Portfolio Management of Equity Investors| i

A REPORT ON

A STUDY ON RISK PERCEPTIONS AND PORTFOLIO MANAGEMENT OF EQUITY INVESTORS

By Aashita Sabharwal Enrollment Number: 19BSPHH01C0014 PNB MetLife India Insurance Co. Ltd.

A report submitted in partial fulfilment of the requirements of MBA program of IBS Hyderabad

Submitted to: Company Guide

Faculty Guide

Mr. Love Sehrawat

Dr. Anuja Agarwal

Chief Business Manager

Professor

PNB MetLife India Insurance Co. Ltd.

IBS Hyderabad

Study of Risk Perceptions and Portfolio Management of Equity Investors| ii

AUTHORISATION This report has been submitted as a part of partial fulfilment of the requirements of the MBA Program (2019-21) of IBS Hyderabad. The matter embodied in this document titled: A study of Risk Perceptions and Portfolio Management of Equity Investors ― is an original work carried out by Ms. Aashita Sabharwal, during the duration of 12 weeks i.e. 24th February, 2020 to 22th May, 2020, under the guidance of Mr. Love Sehrawat –Chief Business Manager – PNB MetLife India Insurance Co. Ltd., Delhi, along with Dr. Anuja Agarwal, Professor, IBS Hyderabad. PNB MetLife India Insurance Co. Ltd. is authorizing the submission of this project report to IBS Hyderabad. Date:21st May 2020

Study of Risk Perceptions and Portfolio Management of Equity Investors| iii

ACKNOWLEDGEMENT I would like to take this opportunity to extend my gratitude to all those who have helped me in completion of my project report and made my working on the project comfortable. Firstly, I would like to thank IBS Hyderabad for giving me the opportunity to work as an intern with PNB MetLife India Insurance Co. Ltd., Delhi. I would also like to extend my thanks to PNB MetLife India Insurance Co. Ltd., that they believed in me and gave me the opportunity to work so closely with their organization and provided me an experience of the professional world. It gave me a platform to understand real life situations and implement all those concepts which I had earlier come across only in textbooks as part of my course. I express my sincere gratitude to Mr. Love Sehrawat – Chief Business Manager – PNB MetLife India Insurance Co. Ltd., Delhi for his constant support throughout the internship. I thank him for his valuable guidance which has helped me thoroughly during the project. I would also like to convey my deep sense of gratitude and thanks to the Faculty Guide- Prof. Anuja Agarwal for her constant support and feedback throughout the internship. I extend my warm regards to my parents who have been my pillars of strength during all walks of life. Lastly, I want to thank my friends who helped me throughout the project by giving their valuable inputs as and when required.

Study of Risk Perceptions and Portfolio Management of Equity Investors| iv

TABLE OF CONTENTS Cover Page …………………………………………………………………………….…i Title Page …….…………………………………………………………………………..ii Authorisation ….…………………………………………………………………………iii Acknowledgement …...…………………………………………………………………..iv Table of Contents …….…………………………………………………………………..v Abstract .…………………………………………………………………………………vii 1. Introduction 1.1 About the Project …………………………………………………………….. 1 1.2 Purpose and Scope ...……………………………………………………….....2 1.3 Objectives ...………………...………………………………………………....2 1.4 Limitations ...……………………………………………….…….……...….....3 2. About the Company 2.1 PNB (Punjab National Bank) …...………...………………...………………...4 2.2 MetLife Inc. .…….………………………………………………………….....4 2.3 PNB MetLife India Insurance Co. Ltd. ……………..………………………...4 2.4 Core Values …………………......……………………...……………………..5 2.5 Life Insurance Products ………………………………...……………………..5 3. Literature Review ….……………………………………...………………………6 4. Research Methodology 4.1 Data Sources …………………………………………………………………...8 4.2 Research Approaches ………...………………………………………………..8 4.3 Research Instruments …………………………………………………………..8 4.4 Development of Questionnaire ………………………………………………...9 4.5 Sampling ……………………………………………………………………….9 5. Main Text 5.1 Risk, Behavioural Finance and Portfolio Management ……………………….10 5.1.1 Understanding Investors wrt Behavioural Finance ……………………10 5.1.2 Risk Perception of an Individual ……………………………………...11 5.1.3 Risk Appetite and Portfolio Management …………………………….12 6. Analysis 6.1 Demographic Profile of Respondents ………………………………………..13 6.2 Reliability analysis ………………………………………………………..…14 6.3 Risk Scale Construction ……………………………………………………..14 6.4 Objectives of Investors for Investment ………………………………………16 6.4.1 Capital Appreciation ………………………………………………….16 6.4.2 Dividends …………………………………………………………….17 6.4.3 Tax Benefits …………………………………………………………..17 Study of Risk Perceptions and Portfolio Management of Equity Investors| v

6.4.4 Protection against Inflation ………………………………………….18 6.4.5 Quick Gain …………………………………………………………..18 6.5 Chi-Square Analysis of Gender and Choice of Investor …………………….19 6.6 Chi-Square Analysis of Marital Status and Choice of Investment ………….20 6.7 Chi-Square Analysis of Risk Perception and Choice of Investment …….….22 6.8 Linear Regression Analysis 6.8.1 Scatter Plot ……………………………………………………….….23 6.8.2 Regression Analysis …………………………………………………24 6.9 Financial Literacy Analysis …………………………………………………26 6.10 Personal Interview Analysis ……………………………………….…….27 7. Conclusion ………………………………………………………………………30 8. Recommendations ……………………………………………………………….32 9. Annexure ………………………………………………………………………...33 10. References ……………………………………………………………………….34

Study of Risk Perceptions and Portfolio Management of Equity Investors| vi

ABSTRACT Risk is a crucial factor for any investor in making all types of financial investments. It is a psychological and mental process of decision making based on an individual’s frame of reference that changes from time to time. This report explores individual investor’s preference for portfolio choices and investigates impacts of risk tolerance and risk perception on their investment decision. An attempt is also made to understand the factors affecting risk appetite of a person. Primary and secondary research is conducted to gather the data from 100 respondents from Delhi, for this study and it is analyzed that the overall risk perception level of investors is moderate to high and there is no significant relationship between gender and investment choices. This implies that the sample does not prove that a particular gender has a higher or a lower degree of risk tolerance. It is also observed that experience in stock market has a higher significance on the level of risk appetite of a person and as experience increases, the risk-taking capability also increases. The reason for overall moderate-risk perception among these 100 respondents could be the average level of financial awareness and knowledge about markets and finance because 60% of the respondents belong to the age group of 18-40 years and hence it can be said that they have comparatively more knowledge about finance and investment. Yet, the knowledge about finance and financial market is not sufficient enough to increase their risk-taking capacity.

Study of Risk Perceptions and Portfolio Management of Equity Investors| vii

Introduction About the Topic Money plays an important role in one’s life. Be it a rich person or a poor, everyone wants to overcome the monetary problems of their present and future and smart ones do it by investing money. Investment is putting money into an asset with the expectation of capital appreciation, dividends, or interest earnings. In the words of Dr. P. Amaraveni and Mrs. M Archana (2017), “Financial Investment is an allocation of monetary resources to assets that are expected to yield some gain or return over a given period of time.” People invest money to derive a future income in the form of interest, dividends etc. A person who saves money and put it in investment avenues is called an investor. An investor can be any person, an individual, a government, or a corporation and in all of the aforementioned cases, the investor is trading a known rupee amount today for some expected future stream of payments that will be greater than the current outlay. An investor has many investment choices where he can invest in, such as, Life Insurance, Mutual Funds, ULIPs, Stock Market, Real-estate, Gold and other metals, banks, EPFs, PPFs and so on. Each investment avenue comes with a different level of risk and return. This allocation and diversification of monetary funds into different investment avenues is called portfolio management. Portfolio Management is an art of identifying, selecting, creating and maintaining a collection of different securities in which the total risk is minimised and total return is maximised while simultaneously meeting the long-term financial objectives of an individual, client, company or an institution. It is investment of funds in different securities in which the total risk of the portfolio is minimized, while expecting maximum return from it. It primarily involves reducing risk rather than increasing return. All personal objectives are different according to needs and risk perception of any investor. The ultimate objective of any investor or portfolio manager is to achieve a level of required return with minimum possible risk. The definition and measure of risk perception is different for different investors and this measure is analysed by behavioural finance. Behavioural finance is a crucial arm of finance that plays an important role in an investor’s decision-making process and tries to explain the irrationality of investors. This report aims to analyse the behaviour that affects any investor’s choice. Preferences of individual investors are based on various factors like psychological, socio- cultural and environmental factors. These factors build up the perception of an individual and makes him either a bold investor (highly risky) or a safe investor (risk averse). According to Lopes (1987), “risk refers to situations in which a decision is made whose consequences depend on the outcomes of future events having known probabilities.” Risk perception analyse the reactions and opinions of people when they are exposed to certain activities that can be harmful or can possibly create a loss. There are various factors that influences one’s behaviour and decision-making power, such as levels of literacy, income, future goals and so on. For the purpose of this study, individuals Study of Risk Perceptions and Portfolio Management of Equity Investors| 1

who are expert investors and people who have a keen interest on investing are chosen to do the study and analyse their perceptions on risk and choices of investment avenues. Though many researchers and professionals have often investigated about the factors that affects investment choices and risk perception and it has been observed that the decision-making process is complicated and it does not only depend on risk-return relationship. For this reason, variables affecting the investment preferences and risk perceptions of individual investors have been investigated in this research. Studies say that the risk perception of an individual is formed due to various factors like age, income level, marital status, experience in the stock market, gender, future goals, education level, knowledge about stock market and so on. It is also said that people are usually risk averse. They like to invest in such avenues where risk is minimum and returns are higher or in other words, at a given level of returns, risk is least. Risk perception is a vital constituent in several assessments and, hence, psychologists are continuously attempting to find out the best way of measuring risk perception. Singh and Bhowal (2008) gave a theory that if a person is aware about the different factors of risk perception, his risk perception could be controlled. However, in this study we try to analyse what factors affect the risk perception, in what direction and to what extent.

Purpose and Scope The purpose of the report is analysing the risk perceptions of current and potential investors and understanding how the decisions are made based on an individual’s risk tolerance capacity. An attempt is also made to find out the factors that forms an investor’s risk perception. This is done by identifying the needs and goals of customers, understanding their psychology, finding out their financial problems and then offering them a suitable investment product and create a profitable portfolio for them during the course of internship. The investor could be a novice who has no prior experience about investment market or a wizard in the same market. The analysis of risk perception of equity investors also helps the companies who are into the business of asset management or stock broking to identify and target the appropriate market and individuals with suitable products available in their basket.

Objectives • • • • • • •

To understand the scope of Capital Finance. To prospect for financial planning and to analyse risk profile. To understand the perceptions of the investors by interviewing them while selling products. To have an in-depth knowledge about investment options and tools available to investors and their judgement and approach towards such opportunities. To measure the level of risk perception of investor towards equity share investment. To identify the factors that influences the risk perception of the equity investors. To help the company understand the needs of the customer and later offer the customer suitable investment products. Study of Risk Perceptions and Portfolio Management of Equity Investors| 2

• • •

To find out the objectives behind investments. To know about the Investors knowledge and experience of investing in equities. To understand the goals of the potential investor and to select the optimum asset allocation for the client’s portfolio.

Limitations •

• • • •

The demographic and environmental conditions of the country highly effect the results and perceptions of the equity investors and hence, the ongoing threat of corona virus pandemic could highly influence the decisions of the customers and investors as the market is highly volatile as compared to regular days. The economy is at the verge of entering into recession which could affect the market scenario and hence, the decisions of the investors could be biased. There were time constraints to gather adequate data, analyse and interpret the market scenario and investors’ psychology. There was a lack in the consistency of the responses given by a few customers. The study could be biased because it is restricted to a certain pre-defined geographical area that is Delhi and it could/ could not be proven true for any other city because of the fact that the study is entirely based on psychology and psychological factors highly depends upon culture, ethnicity, religious background and other things.

Study of Risk Perceptions and Portfolio Management of Equity Investors| 3

About the Company PNB (Punjab National Bank) has always been a people’s bank since its inception in 1895 and is serving millions of customers in India currently. PNB is known to have served famous personalities like Lal Bahadur Shastri, Smt. Indira Gandhi and many more. PNB is a wellknown brand of providing various types of financial services like drafts, loans, etc., among Indian customers and is famous due to its strong fundamentals, a huge franchise value, loyal word of mouth and a brand value which has helped the company come a long way and maintain its position even at the time of cut-throat competition of private and public sector enterprises. Apart from these achievements, the bank also has its foreign presence in countries like United Kingdom (U.K), Hongkong, Dubai. As per fortune 500 India ranking of 2019, PNB stands at 32nd rank. MetLife, Inc., the holding corporation for the Metropolitan Life Insurance Company, popularly known as MetLife, was founded in 1868. MetLife is one of the largest global providers of insurance, annuities, and employee benefit programs and asset management with a customer base of around 90 million in over 60 countries including United States, Japan, Europe and so on. MetLife is serving almost 90 of the World’s TOP 100 Fortune Companies including Walmart, P&G, Pepsi, Microsoft, IBM and many more. The product variety of the company comprises of Unit Linked Group and other traditional products which are almost half of their basket. MetLife has always been profitable in its business apart from some ups and downs in its trajectory of becoming successful. PNB MetLife India Insurance Co. Ltd. PNB MetLife India Insurance Co. Ltd. was incorporated in India in 2001. It is an amalgamation of two companies (Punjab National Bank-PNB and MetLife, Inc.) which are known to be the leading brands of their own separate domains. PNB MetLife India Insurance Company Limited (PNB MetLife) is one of the leading life insurance companies in India. PNB MetLife has its major shareholding with MetLife International Holdings LLC (MIHL), Punjab National Bank Limited (PNB), Jammu & Kashmir Bank Limited (JKB), M. Pallonji and Company Private Limited. PNB MetLife has its presence in over 105 locations across the country with access to over 100 million customers in more than 11,000 locations. All this could be achieved through its strong banking partnerships with PNB, JKB, KBL and other bank partners. The brand value and vast customer reach of PNB coupled with the expertise of MetLife in the area of insurance makes PNB MetLife a strong and trusted brand of insurance provider. PNB MetLife helps its customers for their entire ‘Circle of Life’ covering their 4 different stages of life – Child Education, Family Protection, Long Term Savings and Retirement. One of the most innovative products of this venture is ‘PNB MetLife Grameen Ashray’ which is a micro insurance non participating term plan which focuses on short term life insurance protection for rural market including death benefit.

Study of Risk Perceptions and Portfolio Management of Equity Investors| 4

Core Values 1. Put Customer First: Caring for and respecting customers is core to everything PNB MetLife does. It defines their work and shapes the culture for their people, radiating out to their shareholders and communities. 2. Be the Best: PNB MetLife is relentless in their search for new and better ways of doing things. Being the leader of the industry, they operate in, they try to constantly raise the bar, take calculated risk, and learn from their mistakes and try not to repeat them by working on them. 3. Make Things Easier: The finance industry is very volatile and complex. Hence, PNB MetLife is always at the lookout of finding new, simpler, interactive and creative ways to connect to the customers to provide them best solutions. They believe that they can build trust into their customers by making things easier for them. 4. Succeed Together: United by their purpose, PNB MetLife live by a collective commitment to honesty, integrity and diversity.

Life Insurance Products The company has over 15 insurance benefit plans to help its customers in all the stages of their life from childhood till death and benefits for the family after death. These plans also come up with riders (ad on benefits) that a customer/ investor can alter according to his/ her needs. Out of the numerous plans, I got the opportunity to learn and work on 3 of the best plans which PNB MetLife offers. The plans are briefed below. 1. PNB MetLife Guaranteed Income Plan- In this plan, the insured gets regular annual income ranging from 11% to 13% of Basic Sum Assured (BSA), based on the Premium Payment Term. Also, in addition to the guaranteed income benefit, insured get 30% to 55% of Basic Sum Assured (BSA) ...