IRDAI's stringent measures make ULIPs an unfavourable investment vehicle
Equity investment option within unit-linked investment plans (Ulips) just got a tad poorer with the regulator tightening the norms. According to the Insurance Regulatory and Development Authority of India (IRDAI), insurers can invest in equity shares of any listed company where at least 10 per cent dividend has been paid for at least two consecutive years under the approved investment category. This is a shift from the earlier 4 per cent in the last eight of the nine years.
Under the IRDAI regulations, insurers can invest 75 per cent of the corpus in approved securities and 25 per cent in unapproved securities. Approved securities are those stocks that have dividend paying record and are liquid. As per the liquidity criteria, in a month, 50,000 shares, or a value of Rs.5 lakh crore, should be traded for a stock to qualify. Traditional funds invest primarily in government securities: 50 per cent in both state and central government, 15 per cent in infrastructure, and the remaining in corporate bonds, equities and unapproved securities.
The move is likely to change the portfolios of several existing funds of Ulips by moving investments from approved to non-approved before paring some of the investments. It also indicated that the IRDAI wants insurers to stay away from investing in companies which are financially weak. It further states, “Where any segregated fund invest in either mutual fund, ETF or bank fixed deposit, for a period less than 91 days at the time of placing the investment, the value of funds invested therein, shall be reduced for computing the fund management charges.”
IRDAI has also asked insurers to close the fund within six months, if the size of the fund is less than Rs.5 crore. They will have to move policyholders to another fund within this period. Likewise, the IRDAI regulation states that every insurer will have a separate fund manager for debt and equity up to a fund size of Rs.10,000 crore for both shareholder and policyholder funds taken together. For a fund size of over Rs.10,000 crore, every fund will need to have separate fund manager for life, pension, annuity and group fund and unit linked. All these moves are towards policyholder protections, however, in the process they also reduce the growth from these instruments, making Ulips an unfavourable investment vehicle.