on his views on equity market, strategies and increasing role of insurance players in the stock market. What role does the Indian insurance industry play in the Indian equity markets today?
The Indian insurance industry is emerging as an important player in the Indian equity market. It is growing at a robust pace with total assets of over Rs 150,000 crore in March 2007. In the first six months of FY08, insurance players have pumped in a whopping $3-4 billion in equities. We alone have invested approximately $0.5 billion in this period on the back of our assets growing at 100 per cent a year over the last six years. For FY08, it is estimated that investments by insurance companies in equity markets will touch $10-15 billion.
Can we believe that the insurance sector will match the role of foreign institutional investors (FIIs) and mutual funds in future?
The insurance industry's investment of $3-4 billion in the first half of FY08 is far higher than the amount invested by mutual funds.
As we move ahead, insurance players are going to be considered as significant as FIIs. For years, we have been afraid of the adverse consequences if FIIs pull out money. But now there is credible evidence that though there might be short-term hiccups, domestic investors, especially insurance players, can act as a counter balance on a long-term basis and can support the markets.
How far has the introduction of Unit linked insurance plans (Ulips) helped?
Ulips have played a significant role in the equity markets with the increase of investments by the retail investor through insurance companies. For the industry, Ulips form over 80 per cent of the incremental sales. For us, of our total assets under management of around $6 billion, two-thirds or around $4 billion is invested in equities.
Ulips are designed to satisfy three basic needs of an individual "� building wealth, protecting life and health "� under one convenient umbrella. The flexible and transparent nature of the product, along with handsome returns in the Indian equity market, has enhanced the importance of Ulips.
What is the future outlook for Ulips?
Ulips are already a dominant insurance product in several countries in Asia and Europe and the Indian scenario is unlikely to be very different. Thus it is quite likely that Ulips will continue to dominate in India and its share will remain in excess of 60-65 per cent of the total business since the segment is growing at a very healthy rate.
How does the investment strategy of an insurance company differ from a mutual fund?
A mutual fund is essentially a short-term product and for their managers liquidity - inflows and outflows - is a big worry, which is why the churning of portfolios is relatively higher. However, this is not the case with life insurance for two reasons. One, there is tremendous potential for growth as there is a large untapped market available.
Hence, liquidity is not an issue as life insurance companies always witness net inflows not only from the new policies but also from renewal premium of old policies on a regular basis. The other advantage is that Ulips are long-term products that help investors to save systematically to achieve their financial goals such as retirement or child's future amongst others. Thus, the objective of the life insurance fund manager is to give a superior risk adjusted return over a long term period.
Being a long-term investor, are you predominantly large-cap focussed?
We adopt a conservative investment philosophy as we sell a lot of policies in tier-II and tier-III cities and the average premium size is between Rs 20,000-25,000 per annum. The primary objective of most of our customers is to achieve their long-term financial goals, rather than playing the markets. Thus, bulk of our investments is in large-caps.
Historical data suggests that in the long run large-caps tend to outperform mid-caps on a risk adjusted basis, though both may perform equally well in absolute terms. However, we selectively invest in mid-caps and small-caps as well. Having said that, the mix also depends on the objective of the underlying fund option. For example, we have a range of flexi funds where the exposure to mid and small caps would be significant.
Would you be a buyer in the current market? What is your view on the recent correction?
Our view on the market is for five-ten years. As long as the quality of management of a company is good and the stock trades at reasonable valuations, in the long term we would be buyers. Thus, we are unaffected by short-term gyrations and perceived high valuations.
The recent correction is healthy for long-term investors like us as it gives better opportunity to buy quality stocks. Our experience of the past three corrections in March, August and May (last year) is that there has been more buying into equity from investors to re-adjust the asset allocation mix.
What kind of returns should one expect from the current levels?
The economy is expected to grow at a nominal rate of 14-15 per cent considering inflation of 5-6 per cent. Thus, it would be reasonable to expect an annual return of 14-15 per cent though it will be accompanied by considerable volatility. Also, though the current rate of profit growth for the Indian corporate sector is in the mid-twenties, one can conservatively assume that profit growth will definitely remain in the mid-teens over the long run.
What sectors are you looking at?
We are bullish on sectors, which are interest rate sensitive and also benefitted from the country's economic growth (capital goods and engineering) and domestic consumption (retail and telecom).
