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Saturday, March 03, 2007

Up to 40% of Ulip funds Allowed in Money Market

Source: The Economic Times.

You needn’t fear anymore about declining returns from unit-linked insurance policies (Ulips) that you invested in, especially when stock markets start to slide or become excessively volatile. Life insurers will now have the option to withdraw funds from the equity market and invest to the extent of 40% of an individual policyholder’s fund in money market instruments that offer a relatively stable return on investments in the short term.

In order to enhance flexibility of operations of unit-linked policies, Insurance Regulatory and Development Authority (IRDA) has just allowed life insurers to invest 40% of an individual policyholder’s funds in money market instruments. Earlier, this was capped at 20%. Money market instruments refer to commercial paper, treasury bills, government of India securities with unexpired maturity up to one year, call money, certificates of deposit, subordinated bonds corporate deposits and any other short-term instruments specified by the Reserve Bank of India (RBI).

Analysts said that insurers could park their funds in the short run to hedge against downside risk in equity markets, or in case of falling bond prices. Insurers will, however, have to educate policyholders on the implications of parking funds in such instruments. Senior analysts with a private insurer said, “These instruments provide insurance companies with the option of shifting from government securities and bonds with a longer tenure to short-term ones if the interest rates start to climb. Bonds and government securities with long-term maturities tend to underperform when interest rates rise. Instruments with short term maturity in such scenarios tend to perform relatively better than the ones with longer maturity.”

IRDA chairman CS Rao said: “The insurers were asking for an enhancement in the limit because they wanted to park larger quantum of fund in case the stock market starts fluctuating. This was done with the view to offer policyholders the flexibility of investment and offer better returns on their Ulip policies.”

This option, incidentally, was already available when insurers were allowed 20% investment in money market instruments. Now, with the investment threshold getting doubled insurers will have a bigger play of such instruments.

“The recent policy will allow insurers to park funds in instruments with shorter term maturity of less than a year and hedge against falling stock markets so that insurers can offer better returns to their policyholders,” they said.

Officials from a large insurance company said: “Ulips that invest a large portion of its funds in debt may, however, not be able to gain from the new guidelines because such policies already have a high exposure.”

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