Throughout this Adani-Hindenburg saga, there’s a concern that the LIC Funding portfolio is over-exposed to Adani Group firm’s shares. I feel this concern seems to be misplaced. Out of the entire capital of LIC, solely 17% (INR 60.6 lakh crore) is invested in shares. My estimate is that, out of those 60.6 Lakh crores, LIC’s publicity to Adani shares is under 0.8% (lower than 43,000 Crore). Learn extra on the place LIC invests its cash.
Life Insurance coverage Company of India (LIC) is a state-owned insurance coverage firm and the biggest life insurance coverage supplier in India. As per the annual report of LIC for the monetary yr 2020-21, the corporate has invested its funds in numerous property to generate returns and fulfill its policyholder obligations. On this write-up, we’ll uncover the LIC Funding Portfolio.
LIC’s funding portfolio is managed by its funding division. It’s a staff of skilled fund managers. The portfolio of LIC is well-diversified and consists of varied asset courses, together with authorities securities, shares, the infrastructure sector, actual property, and so forth.
On this article, we’ll begin by exploring how LIC’s complete funds are allotted. Then, we will even uncover how the funding portfolio of LIC is structured.
“LIC is thought for its conservative funding strategy and long-term holding technique within the inventory market.”
– Dhiraj Relli, Managing Director & CEO, HDFC Securities
So let’s begin exploring the small print:
#1. Whole Capital Accessible With LIC
In keeping with the annual report of LIC for March 2021, the complete capital sourced by the corporate is a mixture of fairness and liabilities. The sources of capital are as follows:
- Shareholder’s funds: The shareholder’s funds embrace the corporate’s paid-up fairness capital, statutory reserve, and different reserves that amounted to INR 6,98,324 lakhs.
- Borrowings: LIC additionally raises funds by borrowings, which embrace debentures, bonds, and time period loans from banks and monetary establishments. This quantity is INR 366.5 lakhs.
- Policyholder’s funds: The policyholder’s funds signify the funds generated by the sale of insurance coverage insurance policies. This quantity is roughly INR 37,39,41,422 lakhs.
Subsequently, the entire capital sourced by LIC as of March 31, 2021, is the sum of the shareholders’ fairness, borrowings, and the policyholder’s funds. This complete quantities to INR 37,46,40,446.83 lakhs.
You possibly can see that 99.81% of the complete capital is sourced from the policyholders. On this article, our primary goal is to discover how the policyholder’s cash is utilized by LIC.
#2. Utilization of The Whole Capital
As per the annual report of LIC for March 2021, out of the entire sourced capital of Rs.37,46,40,446 lakhs, 93.4% is parked beneath the top “investments” and 0.9% beneath the top “property held for linked liabilities” (which can be an funding).
It means, that 94.4% of the entire capital of the LIC is parked as an funding. That is totally different from how capital is utilized by different corporations (say manufacturing). The most important portion of the capital of different corporations will get locked beneath fastened and web present property. However within the case of LIC, solely about 2.8% is allotted beneath these two heads.
That is what makes the enterprise mannequin of insurance coverage corporations distinctive. That is additionally one motive why, we retail traders, can take learnings from how LIC’s portfolio is structured.
Investments – Shareholders & Policyholders
Within the annual report of LIC (March 2021), within the stability sheet, beneath the applying of funds, there are two line gadgets referred to as Investments Shareholders and Investments Policyholders.
- Investments Shareholders: It refers back to the investments made by LIC utilizing its shareholders’ funds. These investments are made with the objective of producing returns for the corporate and its shareholders. Out of the entire funding portfolio dimension, solely 0.01% (Rs.42,640 Lakhs) is allotted right here.
- Investments Policyholders: It refers back to the investments made by LIC utilizing the funds collected from its policyholders. These investments are made with the objective of producing returns for the policyholders and fulfilling the obligations of the insurance policies. Out of the entire funding portfolio dimension, greater than 99% (Rs.34,98,44,073 Lakhs) is allotted right here.
LIC’s funding coverage is designed to make sure that the corporate’s funding portfolio is well-diversified and aligned with its funding goals. The allocation of funds is predicated on the next parameters:
- Security: LIC offers utmost significance to the security of the invested capital. Therefore, the corporate invests the vast majority of its funds in authorities securities and high-rated bonds.
- Liquidity: LIC additionally offers significance to the liquidity of its investments. The corporate invests in property that may be simply liquidated in case of any emergency or want.
- Diversification: As the highest precedence of the LIC’s invested cash is security and liquidity, most of its cash is parked in fixed-income property. But it surely additionally makes positive to maintain the portfolio well-diversified. It not solely reduces the chance of focus but in addition helps to maintain the yield at acceptable ranges.
- Lengthy-term perspective: It’s also important for LIC to comply with a long-term investment perspective. Therefore, it invests in property which have the potential to generate steady and constant returns over the long run.
- Policyholder Obligations: Now we have seen that 99.81% of the entire capital accessible with LIC is the policyholder’s cash. Therefore, its main goal is to meet its policyholder obligations. The corporate makes use of its funds to meet the claims and pay out the maturity advantages of its insurance policies. In FY 2020-21, the declare settlement (maturity & loss of life) of LIC was INR 2,38,681 Crores (at a declare settlement ratio of about 97%).
#3. LIC Funding Portfolio
Listed below are a number of the ways in which LIC makes use of the cash collected as premiums from the policyholders:
As we’ve seen within the usage of the capital section above, LIC has invested INR 35,31,84,209 Lakhs in numerous funding choices.
- Out of this, 92.29% is distributed between authorities securities, shares, and the infrastructure sector.
- Furthermore, 66.7% is invested alone in authorities securities like bonds and treasury payments.
- About 17.18% is invested within the shares of listed corporations.
LIC Funding in Inventory Market
Fairness investments kind a big a part of LIC’s funding portfolio. As per the annual report of 2020-21, LIC had invested INR 6,06,63,051 Lakhs in fairness shares. The corporate invests in blue-chip corporations with a long-term funding technique.
A couple of inventory holdings of LIC are listed under:
|SL||Title||LIC’s Holding in %||Market Cap (Rs.Cr.)||Portfolio Measurement (Rs.Cr.)||Portfolio Weight (%)|
|6||IDBI Financial institution:||49.24%||50,643.93||24,937.07||4.81%|
Check here for more stocks in LIC’s portfolio
Influence of LIC’s Investments on the Indian Capital Markets
LIC is likely one of the largest traders within the Indian capital markets and has a big impression available on the market. The corporate’s funding selections can have an effect on the costs of the property it invests in. For example, if LIC invests a big amount of cash in a specific inventory, it may possibly push up the inventory worth. Equally, if LIC decides to promote a big quantity of shares, it may possibly result in a decline within the inventory worth.
- Finance To Authorities: 96% of LIC shareholding is of the Authorities of India (GOI). Therefore it is just logical that it ought to come in useful for the GOI. Its funding in authorities securities and bonds offers stability to the Indian capital markets. The corporate invests a good portion of its funds in authorities securities and high-rated bonds, which helps in financing the federal government’s fiscal deficit. LIC’s investments additionally present liquidity to the bond market and assist in setting the benchmark yield for the bond market.
- Inventory Market’s Confidence: As reported within the March 2021 annual report, about 60.2 Lakhs Crore value of LIC’s capital is invested within the Indian inventory market. Its funding in equities additionally has a constructive impression on the Indian capital markets. The corporate’s funding in blue-chip corporations helps in boosting investor confidence and liquidity within the inventory market.
“LIC is a significant participant within the Indian inventory market and its funding selections have a big impression available on the market.”
– Rakesh Jhunjhunwala, Indian Investor
As a public sector insurer, LIC performs a big function in selling social and infrastructure spending within the nation. As of March 2021, about 8.38% of the entire capital of LIC was invested in numerous authorities schemes and bonds. These schemes had been aimed toward selling infrastructure improvement and supporting social welfare applications.
The LIC funding portfolio is well-diversified and consists of varied asset courses, together with authorities securities, bonds, equities, and actual property. The corporate’s funding coverage is designed to make sure that its funding portfolio is well-diversified and aligned with its funding goals. LIC offers utmost significance to the security of its investments, liquidity, yield, diversification, and long-term perspective.
LIC makes use of its funds primarily to meet its policyholder obligations, pay out claims, and supply maturity advantages. Within the March 2021 annual report, the corporate reported an “earnings from funding” of Rs.2.95 lakhs crore. LIC’s EBIT was 1.101 lakhs crore. At an employed capital of Rs.366.32 lakhs crore, the return on capital employed (ROCE) for LIC is about 0.3%. It’s estimated that the Weighted Common Price of Capital (WACC) of LIC is about 6%. Therefore, a ROCE of 0.3% is simply too low. As an investor, I’d personally keep away from investing in such an unprofitable enterprise.
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