Mumbai: The large-scale surrender of unit-linked insurance plans (Ulips) by investors and extensive redemptions in equity mutual funds (MFs) have forced domestic institutions to sell Indian equities worth a record Rs.55,000 crore in 2012 so far, even as foreign institutional investors (FIIs) have pumped a net $23 billion (around Rs.1.3 trillion today) into domestic stocks.
According to data from the websites of stock exchanges and capital market regulator Securities and Exchange Board of India (Sebi), most of the sales in equity holdings by domestic institutional investors (DIIs) came in the second half of the calendar year. DIIs primarily include life insurers and mutual funds.
Such firms sold equities worth at least Rs.36,580 crore between July and 24 December as investors in mutual funds rushed to redeem investments after the benchmark indices started rising, following several policy measures undertaken by the government. Policyholders in Ulips chose to exit with their minimum lock-in period ending.
Mutual funds have sold as much as Rs.14,101.7 crore in equities in the past six months, between July and December. In the past decade they have sold more only once—Rs.19,152.9 crore in July-December of 2010. The 44-fund house mutual fund industry, which currently manages assets worth Rs.7.93 trillion, saw continued redemptions in equity-oriented schemes till November, according to industry body Association of Mutual Funds in India (Amfi).
As a result of this, the growth in equity assets of mutual funds has been only 11.28% in the past year—between December 2011 and November 2012 (the latest data available)—while the Sensex, the bellwether equity index, rose 20% during that period.
As Indian markets rose, investors in equity schemes rushed to withdraw their investments and book profits. The Sensex has risen 25.64% since January to 19,417.46 points, making India one of the most attractive emerging markets. A large part of this growth came after September with the government announcing big-ticket policy measures in retail and financial services industries to attract foreign investors.
FIIs have bought Indian equities to the tune of $23.3 billion this year so far, the second highest after 2010 when they had bought equities worth $29.3 billion. The Sensex has risen 11.5% since September.
Meanwhile, 24 life insurance firms, which manage assets of around Rs.16.6 trillion currently, have seen investors who bought Ulips in 2007 and 2008 with a three-year lock-in period surrendering policies worth Rs.25,000-30,000 crore, according to top insurance executives.
“Everyday, all life insurers, including us, are selling equities due to redemption requests from investors. Before the change in Ulip norms in 2010, these products were sold as instruments with three- and four-year lock-ins. With the lock-in periods coming to an end, investors are withdrawing old policies. We are seeing redemption requests of Rs.40-50 crore every day and this number is higher for the bigger insurers,” said Sampath Reddy, chief investment officer at Bajaj Allianz Life Insurance Co. Ltd. His company has collected first-year premium of Rs.1,352.25 crore till October in fiscal 2013.
T.R. Ramachandran, chief executive officer and managing director of Aviva Life Insurance Co. India Ltd, said that although a balance was achieved between traditional and Ulip products in the portfolios of life insurance companies after the change in Ulip norms, new inflows (premium income) into life insurance products have declined. “In the absence of renewals in Ulips, surrenders are leading to sell-offs in equity on a net basis,” he said.
Aviva Life collected first-year premium of Rs.320 crore in the first seven months of the current fiscal.
In an effort to curb mis-selling in Ulips and make these investments more attractive, the insurance regulator, in 2010, reduced agent commissions on Ulips and increased the lock-in period. With this, sales of the hybrid products fell with agents shifting to traditional life insurance plans such as term assurance, endowment and money-back policies where they earn higher commission.
Under the new norms, Ulips now have a minimum lock-in period of five years compared with three years earlier. According to the latest annual report of the Insurance Regulatory and Development Authority, life insurers paid surrender benefits worth Rs.71,208 crore in fiscal 2011-12, of which Life Insurance Corporation of India paid Rs.41,531 crore and private insurers, Rs.29,677 crore.
“In the earlier regime, expenses for investors in Ulips were high. So after the three-year lock-in is over, they are opting to exit. This is likely to continue for some more time,” added Reddy of Bajaj Allianz.
Since June, the mutual fund industry has not seen a single month without net outflows from equity schemes. According to Amfi, investors have redeemed at least Rs.10,952 crore from equity schemes till November.
Most of those exiting funds are retail investors who feel that the recent growth in stock markets will not continue, said Sunil Singhania, head (equities) at Reliance Capital Asset Management Ltd.
“Mutual funds are selling off due to the redemption requests from investors. The market has improved after long and retail investors feel that this growth will not last. This is despite the fact that equity-oriented schemes are outperforming real estate and gold in terms of returns,” said Singhania.
According to him, institutional investors remain optimistic about equity and retail investors too will return once they realize that equity as an asset class beats all others in the long term.
Historically, domestic investors have sold equities whenever FIIs have rushed to buy them, although the reverse doesn’t seem to hold true. However, in calendar year 2011, DIIs bought equities worth Rs.27,800 crore while FIIs sold equities worth $500 million. In 2010, DIIs sold Rs.21,400 crore of equities while FIIs bought $29.3 billion worth of equities.