A week ago, the Insurance Regulatory and Development Authority (Irda) allowed insurance companies to invest funds in Category II Alternative Investment Funds (AIF) thereby providing them greater flexibility in managing their funds and giving them more room to generate better returns for investors.
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 can’t invest in fund of funds, overseas funds and it can’t 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