Globally, Ulip fund options cover a range of asset classes, sectors, geographical areas, currencies and investment styles to address the varied needs of investors. For instance, property funds that invest in commercial property, listed real-estate investment trusts and real-estate securities; global funds that invest in international equities and bonds using derivatives to hedge inherent risks; capital and return guaranteed funds that employ investment strategies using a mix of fixed income, equities and derivatives to provide a positive return despite market volatility.
In India, while the use of fixed-income derivative instruments is allowed, it is restricted to hedging interest rate risks. Investment in equity derivatives for hedging purposes is currently not permitted. This restricts Ulip funds to primarily plain vanilla options.
As the industry develops and more regulatory parity is brought in between market participants, new Ulip options may emerge. Allowing insurance companies to invest in equity derivatives and structured guarantees will lead to innovations such as capital or return guaranteed equity funds, absolute return funds and inflation-protected funds. Insurance companies are uniquely placed to offer these options, with the regulatory and capital structure in place to manage the portfolio risks and ensure solvency.
The Irda has set strict solvency and risk management norms. Insurance firms are the only long-term investment providers that are adequately capitalised to ensure that the underlying guarantees are met.
Also, insurance companies can invest in real estate but not under the Ulip platform. Given the long-term nature of insurance plans, Ulips would be an ideal platform for introducing realty funds. The Indian investor has displayed an appetite for many of the above-mentioned fund categories.
Insurance companies, with their risk management, capital strength and long-term investment horizon, would be ideally suited to provide these to the investor.
— Anil Sahgal is Director (Strategy) and CIO, Aviva India