IRDAI has included gilt ETFs under its ‘Approved Investments’ basket. Simply put, insurance companies can now invest in gilt ETFs offered by fund houses.
Gilt ETFs invest in government securities and track the 10 year government securities. Gilt ETFs aim to provide liquidity to investors at a low cost. These ETFs aim to cater to large investors like institutional investors, primarily banks, insurance companies and HNIs.
In a circular, IRDAI said, “Insurers are permitted to invest in the exhaustive asset classes under the provisions of Insurance Act, 1938. Gilt-ETF launched in India, has been after due consideration, permitted for insurers to invest as a part of ‘Approved Investment’.”
The insurance regulator has mandated insurance companies to investment a maximum of Rs.50 lakh under each creation unit. Typically, each creation unit consists 1 lakh units of ETF’s size. However, the fund changes the size of creation unit to equate it with marketable lots of the underlying instrument.
Also, the insurance regulator has allowed insurance companies to spend a maximum of 0.5% of daily NAV of the scheme on management fees.
Currently, only LIC Nomura MF has launched a gilt ETF called LIC Nomura G-SEC Long Term Exchange Traded Fund (ETF). Launched in December 2014, the fund has delivered absolute return of 5% since inception, shows Value Research data. The fund has an expense ratio of 0.29% as on March 2015.
Such schemes perform well when interest rates are expected to fall, because there is an inverse relationship between the price of the G-Sec and interest rates. A fall in the interest rate leads to a rise in the bond prices as well as the NAV of the gilt fund and vice-versa. Also, longer the duration of the securities/portfolio higher will be the capital appreciation and vice-versa.
Recently, Reliance and SBI have filed offer documents with SEBI to launch gilt ETFs. While Reliance MF’s R* Shares Long Term Gilt ETF will be benchmarked against GSEC10 NSE, SBI MF’s SBI-ETF 10 Year Gilt is going to mimic CRISIL 10 Year Gilt Index.
Earlier this month, the Labour Ministry has started investing 5% of the incremental corpus of Employee Provident Fund Organization or EPFO in equity markets through SBI Mutual Fund’s ETFs. An industry estimate shows that over Rs.7,000 crore will be invested through two ETFs of SBI Mutual Fund – SBI ETF Nifty and SBI Sensex ETF.
