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