LIC OF INDIA: - THE REAL TRUTH

Does anyone complain about too much interference of Ambanis in Reliance? Does anyone complain about Interference of Tatas in Tata group of companies? Then why we hear lot of criticism when it comes to Life Insurance Corporation of India. It is a Government of India’s Company, if Government will not interfere then who will interfere?

Life insurance of India was constituted by Government of India in 1956 with specified objectives which are still intact. Among all the objective following few objectives are noteworthy

Maximize mobilization of people's savings by making insurance-linked savings adequately attractive. 

Bear in mind, in the investment of funds, the primary obligation to its policyholders, whose money it holds in trust, without losing sight of the interest of the community as a whole; the funds to be deployed to the best advantage of the investors as well as the community as a whole, keeping in view national priorities and obligations of attractive return. 

Conduct business with utmost economy and with the full realization that the moneys belong to the policyholders. 

Act as trustees of the insured public in their individual and collective capacities.

Meet the various life insurance needs of the community that would arise in the changing social and economic environment. 

Considering these objectives the role of Lic of India can clearly be understood from individual perspective and also Nation as a whole.

We simply cannot forget the past from where India as a nation started its journey after independence with all the meagre resources it had and role played by Lic of India in this vast journey and mission of Nation building.

There is lot of scepticism, criticism and also apprehensions about lic`s investment pattern. These criticism are generally made by self-proclaimed investment gurus, fund managers, authors who have written few books, or analysts often funded for their articles from big investment broking houses. The only objective behind this is to create a confusion and disillusionment among investors, shake their confidence and trust in Lic of India and divert their investment to equities or Mutual Funds.

They advise investors to break their endowment policy and invest in mutual fund or equities. They will simply advice/dictate it without any understanding of family background or financial standing of the client (as seen on some TV shows). This is simply like advising to remove the ground floor and directly construct the second floor.

Another allegation is that Lic Returns does not meet inflation. It gives 6% - 7% returns and inflation is 8%. So after long term of investing in lic endowment plans the returns are not going to meet your needs. So why to invest in lic endowment plans. So better buy a Term insurance plan, rather “a CHEAP TERM INSURANCE plan” and remaining invest in Mutual Fund. Term insurance will give risk cover and Mutual fund will give returns 12% - 15% returns. Wow!! Eureka!! But I really wonder about the accountability and moral responsibility of these Investment Messiahs towards humble investors. Many investors have broken their long Term savings and diverted their savings in Mutual

Funds and/ Equities. We all know how much returns investors have actually received since the recent corrections in the market or BJP coming to power in 2014. How many people actually got 10% to 12% returns on their investments investing in market? But almost all the investors (policy holders of Endowment plans) in Life Insurance Corporation of India received 6% - 7% returns on their investments. And receiving money on right time in right hands and right amount is important and not ROI (Return on Investment). Most of the people buy endowment plans not just for risk cover but for a purpose like child marriage, child education, retirement etc. Can one expose these important duties to Market risk? We all know what happened to millions of investors in 401k scheme in United States of America in 2008 when market crashed. Now the question comes how important is ROI when it comes to Child marriage or Child education or retirement. Why to put entire future of your beloved family just for extra returns of 3% - 5% when you compare Endowment policy returns of 6%-7% with Mutual Fund returns of 10%-12%. The risk reward ratio is also to be considered.

Investing in Lic endowment policies does not mean not to invest in any other investment options like Mutual Funds or equities. They are also important but not at the cost of lic endowment policies. Lic endowment polices are like Foundation of a Building construction with less returns and Mutual fund and equities are alike 2nd and 3rd floor. You cannot build a strong building without solid foundation. There is no replacement for Lic Endowment policies. But the advice given now a days in the market is break the foundation and directly build 2nd floor, i.e break your endowment policies and invest in 2nd and 3rd floor. This is not a right advice.

Now there is new discovery of allegations that Lic of India is a “BAD INVESTOR”. It invests in bad stocks, loss making companies, funds five year financial planning, subdues to the whims and fancies of Government of India and plays with the investor money. So again save your hard earned money and stop investing in lic. Well the total investment portfolio of Life Insurance Corporation is nearly 19 lac crore rupees. How many mutual fund are actually of that size and how many fund managers have handled this quantum of money. The objectives are different for everyone so is with Life insurance Corporation of India. We need to understand that insurer cannot do investment as per their whims and fancies or under pressure of any third party. All the investments done are governed by Sec 27 of Insurance Act 1938 as shown in following table.

 

Sr.No Type of Investment Percentagei) Government Securities     25%ii) Government Securities or other approved

Securities (including (i) above)           

Not less than 50%

iii) Approved Investments as specified in Schedule I Not less then 15%

a) Infrastructure and Social Sector Not exceeding 35%b) Others to be governed by Exposure          

 norms as specified in regulation 5. Investment in “other than approved Investments” can in no case exceed 15%of the fund. 

Not exceeding 15%

Following table shows the total investment in different segments as directed by sec27 insurance act 1938.

TYPE OF INVESTMENT AS ON31.03.13 31.03.14 31.03.2015

01 Central Government Securities 470254 543636 63536502 State Government & other GovtGauranteed Marketable Securities

261852 327861 424599

Sub – Total (A) 732106 871497 105996403 Housing & InfrastructureInvestment

(a) Housing 46276 45317 56825(b) Power 93317 104450 117759(c) Irrigation / Water Supply

& Sewerage3388 3051 2670

(d) Road, Port & Bridges, Railway

11208 10187 10119

(e) Others (Incl. Telecom) 35076 35267 39433Sub – Total (B) 189265 198272 226806Total A+B 921371 1069769 1286770

Considering the above tables it is clear that investments of Life Insurance Corporation of India is not a risky investment and no specific segment in reality can affect the policy holder’s money. It is 100% safe and also enjoys the sovereign guarantee by the Government of India which no other organisation enjoy.

We need to understand that all these allegations are done just to scare the common investors whose primary job is not to study market and become an investor and earn from their investments. But to cut down their expenses and save the portion of their income for certain future needs like retirement or child marriage with some growth in it, be it 6% or 7% growth along with very less or no risk on the capital amount saved. This is what we call as foundation and ground floor of financial tower you ought to build. But the advice given is break the ground floor and directly start with second floor i.e break your endowment policy and invest in Mutual funds or equities.

The highest return one can get is from the profession he is involved in and not from any other source. Saving is very important and saving and investment in multiple options is a very good advice. But breaking one investment and investing in other option is not a good advice. The purpose should decide the choice of asset or investment options and not return on investment (ROI). In Indian culture long term saving was always advised and also not to put all the eggs in one basket. But recently the Ganga is flowing in opposite direction. All the investors should focus on principle of investment and not just on ROI