While Insurance Regulatory and Development Authority in March 2013 through a circular permitted insurers to invest in Category I AIF and clarified that such investments would be restricted to infrastructure and small and medium enterprises (SMEs),on August 23 it allowed investment even in category II where at least 51 per cent of the funds of such Alternative Investment Funds can be invested in four classes infrastructure entities, venture capital undertaking, SME entities or Social Venture entities.
The Irda has imposed three restriction on such investments they cant invest in fund of funds, overseas funds and it cant be a leveraged fund but insurers say that the small steps taken by the regulator are going to be beneficial in the long run.
The move encourages insurers to go for risk taking and while the limit has been put at 3 per cent of the insurers fund size and up to 10 per cent of the AIF/venture fund size, it will help generate higher return for the investors in the long run, said the chief investment officer of a leading life insurance company.
How investors benefit
Industry insiders say that on an average, traditional plans currently are generating returns between 5 and 8.5 per cent depending upon the maturity period of the investment but with more flexibility at the hand of fund managers these returns may go up and benefit the investor.
The illustration below tries to explain how the flexibility in investment of up to 3 per cent of the fund size may impact the returns on the investment.
Under old norms
If the fund size of the insurance company is 10,000 crore and earns 8.5 per cent (by investing in traditional instruments) every year over a 5-year period, then the fund grows to 15,036 crore.
Result of new changes
If the insurer invests Rs 9,700 crore in traditional instruments and earns 8.5 per cent on that and invests the remaining 3 per cent of the corpus or Rs 300 crore in venture capital funds that suppose earns 15 per cent every year then his corpus will grow to Rs 15,189 crore. This comes to a yield of 8.72 per cent.
So this small step raises the earning per year by 22 basis point for the investor. For higher tenures the returns will be even higher because of the compounding benefit. Successful venture capital funds may earn returns several times the investment amount of 5-10 years.
Insurers are hopeful that going forward with the experience of the industry, Irda will look to increase the investment component and may even open more channels.
The regulator has already allowed debt derivatives as an investment option and going forward we hope that it will allow investment into equity derivatives too, said the official.
As of now, only 3 per cent has been permitted so a higher return on 3 per cent of the fund size will not alter the returns dramatically but as this component increases and more such steps are taken by the regulator, investors can hope for superior returns, said a top official with another life insurance company.
Insurers, however, say that such investments will be for the long run as venture capital funds tend to generate superior returns than equity and debt in the long run and therefore investment into these funds will have to be for at least 5-10 years.
The move is certainly going to be beneficial for investors.
* Irda, in March 2013, permitted insurers to invest in Category I AIF and clarified that such investments would be restricted to infrastructure and SMEs
* On August 23, it allowed investment even in category II where at least 51% of the funds of such AIF can be invested in four classes infrastructure entities, venture capital undertaking, SME entities or Social Venture entities.
*Traditional plans currently are generating returns between 5-8.5% but with more flexibility these returns may go up and benefit the investor