Throughout this Adani-Hindenburg saga, there’s a concern that the LIC Funding portfolio is over-exposed to Adani Group firm’s shares. I believe this concern appears misplaced. Out of the whole 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 most important 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 are going to 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 assorted asset lessons, 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 may also uncover how the funding portfolio of LIC is structured.
“LIC is thought for its conservative funding method and long-term holding technique within the inventory market.”
– Dhiraj Relli, Managing Director & CEO, HDFC Securities
So let’s begin exploring the main points:
#1. Whole Capital Accessible With LIC
In response to 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 means of 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 means of the sale of insurance coverage insurance policies. This quantity is roughly INR 37,39,41,422 lakhs.
Subsequently, the whole 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 may see that 99.81% of the complete capital is sourced from the policyholders. On this article, our foremost 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 whole sourced capital of Rs.37,46,40,446 lakhs, 93.4% is parked below the pinnacle “investments” and 0.9% below the pinnacle “property held for linked liabilities” (which can be an funding).
It means, that 94.4% of the whole capital of the LIC is parked as an funding. That is totally different from how capital is utilized by different firms (say manufacturing). The foremost portion of the capital of different firms will get locked below fastened and web present property. However within the case of LIC, solely about 2.8% is allotted below these two heads.
That is what makes the enterprise mannequin of insurance coverage firms distinctive. That is additionally one motive why, we retail buyers, 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, below the applying of funds, there are two line objects known 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 purpose of producing returns for the corporate and its shareholders. Out of the whole 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 purpose of producing returns for the policyholders and fulfilling the obligations of the insurance policies. Out of the whole 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 targets. 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 nearly all 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. Nevertheless it additionally makes certain to maintain the portfolio well-diversified. It not solely reduces the chance of focus but additionally helps to maintain the yield at acceptable ranges.
- Lengthy-term perspective: It is usually important for LIC to observe a long-term investment perspective. Therefore, it invests in property which have the potential to generate secure and constant returns over the long run.
- Policyholder Obligations: We have now seen that 99.81% of the whole capital out there with LIC is the policyholder’s cash. Therefore, its main goal is to satisfy its policyholder obligations. The corporate makes use of its funds to satisfy the claims and pay out the maturity advantages of its insurance policies. In FY 2020-21, the declare settlement (maturity & demise) of LIC was INR 2,38,681 Crores (at a declare settlement ratio of about 97%).
#3. LIC Funding Portfolio
Listed here are among 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 firms.
LIC Funding in Inventory Market
Fairness investments kind a major 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 firms with a long-term funding technique.
A couple of inventory holdings of LIC are listed under:
|SL||Identify||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
Affect of LIC’s Investments on the Indian Capital Markets
LIC is among the largest buyers within the Indian capital markets and has a major influence in the marketplace. The corporate’s funding selections can have an effect on the costs of the property it invests in. As an illustration, if LIC invests a big sum of money in a specific inventory, it may push up the inventory value. Equally, if LIC decides to promote a major quantity of shares, it may result in a decline within the inventory value.
- Finance To Authorities: 96% of LIC shareholding is of the Authorities of India (GOI). Therefore it’s only logical that it ought to turn out to be useful for the GOI. Its funding in authorities securities and bonds supplies 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 price of LIC’s capital is invested within the Indian inventory market. Its funding in equities additionally has a optimistic influence on the Indian capital markets. The corporate’s funding in blue-chip firms helps in boosting investor confidence and liquidity within the inventory market.
“LIC is a serious participant within the Indian inventory market and its funding selections have a major influence in the marketplace.”
– Rakesh Jhunjhunwala, Indian Investor
As a public sector insurer, LIC performs a major position in selling social and infrastructure spending within the nation. As of March 2021, about 8.38% of the whole capital of LIC was invested in numerous authorities schemes and bonds. These schemes have been aimed toward selling infrastructure improvement and supporting social welfare packages.
The LIC funding portfolio is well-diversified and consists of assorted asset lessons, 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 targets. 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 satisfy its policyholder obligations, pay out claims, and supply maturity advantages. Within the March 2021 annual report, the corporate reported an “revenue 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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