Traditional plans for entire tenure

With these allowed to invest in PE and VC funds, which run a higher risk, one should stick to full tenure

Traditional insurance products have been a favourite with most individuals as these are considered safe, guarantee returns and pay extra by way of bonuses. However, these may become riskier. Reason: These can invest in private equity and venture capital funds.

The Insurance Regulatory and Development Authority (Irda) allows insurers to invest in Category-I (venture capital funds, SME funds, social venture funds, infrastructure funds and other such alternative investment funds or AIFs) and Category-II (private equity and debt funds) AIFs.

Says Nirakar Pradhan, chief investment officer at Future Generali India Life Insurance: “Investing in private equity and venture capital funds will be riskier, but it will boost returns. In five-10 years, the risk-return dynamics will favour investments.”

Insurers say returns from private equity funds could be at least five per cent higher than returns from the equity market. According to Venture Intelligence, a Chennai-based research firm which tracks PE and venture capital flows into India, there were 102 exits in 2012, which have given a 2.32 per cent average return on investment. In 2013, there have been 68 exits and the average return on investment has been 2.62 per cent. Private equity experts say many investors have not exited infrastructure entities in 12-18 months due to such low returns, compared to expected levels of 20-25 per cent.

“These investments will be for a longer term and we will consider this investment route after evaluating the probable returns. While liquidity could be a challenge, it will, however, enable portfolio diversification. Life insurance companies are long-term investors and this has opened another avenue for investments,” says Manish Kumar, head of investments at ICICI Prudential Life Insurance.

Despite many insurers looking at small allocation to AIFs (five-10 per cent), withdrawing from the product may become difficult in tough times.

Insurers say evaluating the performance of such investments may be a problem because the benchmark for judging performance of these funds could be different for different insurers. Each insurer may have its own benchmark.

According to Aneesh Srivastava, chief investment officer at IDBI Life Insurance, investors need not panic because returns will continue to remain guaranteed despite insurance companies’ investing in private equity and venture capital funds. Srivastava adds an insurer’s decision to invest in private equity and venture capital fund will depend on the risk appetite of the company.

Under these guidelines, Irda has allowed insurers to invest only in those Category II AIFs that have at least 51 per cent of funds invested in infrastructure entities, SME entities, venture capital undertakings or social venture entities.

This apart, the infrastructure sector depends on government spending, which has not taken off. More, in gloomy economic conditions when interest rates are high, there is little to cheer for the sector. Experts advise staying away from it. Even SMEs are going through a rough patch. Private equity funds prefer bigger companies for lower risk. There have been no profitable exits. Plus, there are information gaps about SMEs.

Many insurers try to compare investing in AIFs to investing in funds from traditional policies in equities. AIFs carry much more risk than equity.