IRDA allows insurers to invest in equity ETFs

The Insurance Regulatory Authority of India (IRDA) has allowed insurance companies to invest in equity Exchange Traded Funds (ETFs) with certain conditions, a move which would help boost inflows into the country's stock market.

IRDA, however, said the investments should be only in passively managed schemes of the mutual funds which are registered with SEBI and governed by SEBI rules.

Since ETF is a security that tracks an index, a commodity or a basket of assets like an index fund, but with the flexibility of trading like a stock on an exchange, IRDA said such investments could mitigate some of the investment problems of insurers.

"Investments ETFs may mitigate the concentration risk and ETFs also offer management of funds with operational convenience," it said, adding that exposure to stocks through ETF would not be reckoned for the overall exposure norms prescribed for individual stocks.

The valuation of ETFs would be in line with the equity shares, IRDA said.

ETFs, IRDA said, "are benchmarked and tracked to publicly available index," adding, these instruments would be listed on at least one exchange which has connectivity with nationwide terminals.

Because an ETF trades like a stock, it does not have its net asset value (NAV) calculated every day like a mutual fund does.

By owning an ETF, investors get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share.

The expense ratios for most ETFs are also lower than those of the average mutual fund. When buying and selling ETFs, investors have to pay the same commission to their broker that they would pay on any regular order.

Currently, there are about 33 ETFs, mostly gold ETFs, with assets under management of close to Rs11,500 crore and 6.2 lakh investors.

IRDA has also prescribed a standard format for life and non-life insurance policy to improve transparency and help people take informed decisions.

"All the insurers are advised to make available all the policy servicing forms also in languages recognized under the Constitution of India so as to meet the requirements of policyholders," IRDA said in a notification.