When one does a course in Marketing Management at a management institute, one of the things students are thought is product positioning. Product positioning is knowing where your category of product stands amongst all other competing products. It also gives an idea of the market segment where one should market one’s products and the strengths and weaknesses of our product vis-a-vis other competing products. We therefore learn where and how to market our products

A similar exercise for financial products will be very revealing to understand the exact market segment to which life insurance belongs. To do so we need to understand the basis on which individuals buy financial products. That is to say: What are the considerations that engage an investor’s mind before he or she invests in a particular financial product. Product positioning will also help us understand the market for traditional endowment and the market for ULIP.

Three Considerations in Investment Decisions

An investor has three main considerations while undertaking an investment decision. The 3 considerations are

• Risk and Return
• Liquidity
• Duration

Risk and Return

Read my article Explained: Risk and Return for a more detailed understanding of the concept of risk and return. Risk and return are 2 sides of the same coin. If we describe an investment in terms of risk, we are simultaneously and automatically defining the return and vice versa. Investors are concerned therefore as much about risk as they are of return. Some investors may want to take risks in investments in the hope of earning more money. But that does not mean that all such investors will earn more money. Very often the money is lost. Yet the hope and the desire to earn more money leads investors to invest in more risky investments.

When an investor decides to invest, one of the considerations in the investor’s mind is the degree of risk in that investment. If the investor is risk averse, he or she in all probabilities will not invest in a risky investment. So it is essential to know the investor’s risk appetite before suggesting a risky investment. It is the investor’s money and the investor should be allowed to take a knowledgeable decision.

Liquidity

The second consideration investors have is the liquidity in an investment. The investor will be keen to know whether the invested money will be available on demand as and when he or she needs the money. However all decisions based on the liquidity consideration are not for liquidity alone. For many needs investors want an non-liquid asset. For example if an investor is saving for retirement, or for children’s education or for their marriage, or to buy a house, most investors will prefer non-liquid assets. This is because, if the asset is not liquid, they are sure they will get their money when it is needed. If money for long term needs is kept in liquid investments, investors fear that the money will bne used up for needs other than which was planned for.

Most long term financial needs require non-liquid investments. Short term financial needs on the other hand usually require liquid investments. This is the reason why people invest in banks as well as in life insurance endowment. Both have different advantages for the investor. And both advantages are important to the investor.

Duration

The third consideration is the duration of holding the investment. The exact date when money will be required in future cannot be predicted. The future is not known with certainty. But the rough period in which it will be required can be estimated. Hence if the investor’s child is 8 years old, in roughly 15 years the investor will require money for the child’s higher education. The investment (also called asset) chosen will be one that matures in 15 years. This is referred to as Asset Liability Matching. That is to say we match the number of years in which the financial liability is likely to occur with the number of years of the asset maturing.

Since risk/return, liquidity and duration are the basis on which investment decisions are taken let us classify all financial products on this basis. Given below are 2 charts.

Risk-Duration Matrix

The first chart is the Investment Risk-Duration Matrix. In this chart Duration in on the x-axis and Risk is given on the y-axis. This creates a matrix with 4 boxes. All financial products can be put in one or the other of the 4 boxes. You can observe that life insurance endowment and ULIP Bond Fund are in the Low Risk, Long Term segment, along with Provident Fund.

Risk-Liquidity Matrix

In the second chart a matrix has been shown that combines Investment Risk and Liquidity. You can observe that in the Low Risk and Low Liquidity segment there is only life insurance endowment. ULIP Bond Fund has high liquidity. With the changes in the Provident Fund rules for withdrawals, even PF has become a liquid asset, not really suitable for long term financial goals. So life insurance endowment is the only financial product which meets the demand for non-liquid asset for long term needs.

What the segmentation teaches us

Each of the segments identified above has a set of special characteristics, which interest investors. For example those investor who have a higher risk appetite and also have concerns for higher liquidity will be in the box High Risk High Liquidity. Or those customers who want low risk and higher liquidity with short term needs will prefer to be invested in the box Low Risk and Short Term.

For the financial needs of the long term investors would prefer Low Risk, Low Liquidity and Long Term investments. In this segment there is only one product that is traditional life insurance endowment. For shorter duration, for investors not willing to take investment risks, we have the option of ULIP Bond Fund. And for those investors who with a higher risk appetite, but the investment horizon is of the short term with a concern for higher liquidity the ULIP Growth and Secured Fund is the answer.

The application of investment theory concepts and undertaking a product positioning exercise gives us the exact market to which we should our products. With adequate home work on a customer and with a proper fact find and needs analysis, we will be able to suggest the correct product along the lines indicated in this article. This will increase the trust the customer has on you and at the same time increase your ticket size.

Do write or connect with me if you want me to explain this article or any point in this article to you.

Remember WE SELL RISKS NOT RETURNS