Insurance regulator IRDAI has tweaked its policy thereby allowing insurance companies to invest in alternative investment funds (AIF) which are classified as fund of funds (FoF). This will ensure investments by insurers in Indian startups.

A fund of funds is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. This type of investing is often referred to as multi-manager investment.

According to the IRDAI circular, insurers cannot invest in AIFs which undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted by the Securities and Exchange Board of India (SEBI).

Here is the important part: Insurers can only invest in FoF that comply with the requirement of Section 278 of the Insurance Act, 1938. Further, as in case of the 2016 regulation the new IRDAI circular also states that insurers cannot invest in an AIF, which in turn has exposure to a FoF, in which the Insurer has taken an exposure. They also cannot invest in AIFs that fund overseas companies.

On March 15 this year, the Finance Ministry through a notification allowed domestic private provident funds to invest up to 5 per cent of their surplus in AIFs.