25% of Ulip funds may be parked in government securities
If such a move is implemented, investor returns from funds will be lower as investment in G-sec have lower risks
Mumbai: The government is planning to use funds available with life insurers to finance its long-term plans with the Insurance Regulatory and Development Authority of India (IRDAI) planning to change the investment rules for Unit Linked Insurance Plans (Ulip).
In its internal draft circular on investment guidelines issued on 30 June, it has mandated that at least 25% of Ulip funds have to be invested in government securities (G-sec). If such a move is implemented, investor returns from funds will be lower as investment in G-sec have lower risks. This in turn may also affect the returns of insurance firms.
Ulip funds are market-linked insurance products where a part of the premium is invested in funds of policyholder’s choice. Such funds typically come with a mandate to invest at least 80% in equities. Till date, insurers can maximise equity investment or bring down to the minimum as specified by the investment pattern of the fund.
IRDAI has now asked for suggestions from insurers on the draft guidelines.
According to Aneesh Srivastava, chief investment officer, IDBI Federal Life Insurance Co. Ltd, most investors choose equity funds in Ulips expecting higher returns from equity investments in the long run. “So it’s going to be difficult for insurers to sell Ulip schemes to investors looking for pure equity funds," he said.
“However investors must understand that with 25% fixed income exposure, investment risks actually come down and except for in secular bull markets, returns of such funds would not be materially different from returns from pure equity funds," he added.
Ulips unlike traditional plans don’t have investment caps. “In the case of traditional policies under life fund, insurers need to invest at least 50% in central and state government securities. Ulips till now only need you to define the pattern of investment to the customers as approved by the regulator. However, the investment in approved investment category shall not be less than 75% at any point of time," said Sangramjit Sarangi, chief financial officer, SBI Life Insurance Co. Ltd.
There are broadly two categories of investments defined by Irdai: approved investments and other investments. Approved investment typically consists of high quality assets. For instance, it consists of bonds which are AA rated and above. Equities in approved investments should have given a dividend of at least 4% in the previous seven out of eight or nine years immediately preceding.
The IRDAI draft may benefit government but is bad news for Ulip funds.
“A 25% investment in government securities does limit the risk but this may have other repercussions as many policyholders looking for pure equity funds may not be interested to continue. In case of bond funds also the insurer may be restricted to invest only in the government securities. This suggested change in investment pattern will help the government spending on infrastructure development of the country." Sarangi said.
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