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Domestic insurers have largely remained on the sidelines even as mutual funds (MFs) have stepped up their purchase of shares in the past two years.
MFs have bought shares worth Rs 1.8 trillion from January 2016 to date. Domestic institutional investors (DIIs) as a category, which mainly comprise MFs and insurance companies, have purchased less than Rs 1.3 trillion. This means insurers have remained net sellers during this time, with estimated sales of more than Rs 400 billion.
Rich valuations and redemption requests from investors, predominantly in unit-linked insurance plans (Ulips), had led to the outflows, experts said.
Insurers are one of the largest drivers of Indian stocks, besides foreign portfolio investors (FPIs). In the past, insurance firms such as Life Insurance Corporation of India (LIC), the country’s largest insurer, have helped prop up the market against steep falls.
According to experts, Indian stocks have become expensive and there is a bias away from the same. Insurers have been cautious as the market has run up significantly in the past two years. Corporate earnings have also failed to meet expectations for several quarters now, which have dampened the buying sentiment of insurers.
“Insurers are long-term players and they do not try to outperform the market month-on-month. If they feel the valuations are expensive they would be more than willing to stay away,” said Aneesh Srivastava, CIO, IDBI Federal Life Insurance. “For MFs, a lot of asset chasing happens when the market is good, and that is when a lot of short-term money is deployed. That is not the case with insurance.”
In 2017, the BSE Sensex rose about 28 per cent. During this period, FPIs bought net shares worth Rs 528 billion, while MFs have shopped for stocks worth Rs 1.2 trillion. DIIs have purchased Rs 882 billion worth of shares. Insurers have sold shares worth about Rs 300 billion.
Ulip investors have a tendency to withdraw once their lock-in period is over, especially if the market is at high, according to experts.
The asset allocation in Ulip products varies from customer to customer, but typically about 75 per cent is invested in stocks. Traditional products such as term, endowment, and whole-life policies are more long term, and have 5-20 per cent invested in stocks. These products are driven more by fund managers than by investors.
FPIs have historically been the dominant player in Indian equities, given their size and trading patterns. However, that has changed in the past couple of years with DIIs, particularly MFs, stepping up purchases, and providing much-needed support to the market. A rise in the share of domestic investors reduces dependence on the more volatile foreign inflow.
In the last two calendar years, equity schemes have seen monthly inflows of Rs 40-60 billion via systematic investment plans (SIPs). MFs have pumped Rs 1.6 trillion into Indian equities during the period, more than twice the Rs 714 billion put in by FPIs.
“The equity investment culture is rising and is taking a more formal form. Most new-age investors are professionals earning a livelihood in other industries; stock markets are simply a vehicle for their savings. Given the lack of expertise, resources and time, these investors are investing through insurance schemes and MFs,” Jefferies said in a note.