Every few months, whenever the news talks about India planning a sovereign wealth fund, the same question appears again.
“Why doesn’t the government just use LIC for this?”
It sounds reasonable at first. LIC is huge. It has been around for more than 65 years. Almost every family in India knows someone who has an LIC policy. It manages more than ₹50 lakh crore. And whenever the government needs support during an IPO or when markets are falling, LIC is usually the first one to step in.
So people think if LIC already behaves like a national financial back-up plan, why not simply make it India’s sovereign wealth fund?
To understand the answer, we need to start from the beginning.
What Is a Sovereign Wealth Fund?
A sovereign wealth fund is a pool of money owned by a country.
It is created using extra money the country does not need for day-to-day expenses.
Different countries create these funds from different sources:
- Some nations earn extra money from oil, like Norway and the UAE
- Others earn it from exporting goods and services, like Singapore
- Some use a small part of their foreign exchange reserves
The purpose of this fund is very simple:
- save for the future
- invest in good opportunities
- protect the country during tough economic times
And if the investment goes wrong, the loss is taken by the government, not by the citizens directly.
So a sovereign wealth fund is like a country’s emergency savings not household savings.
Why LIC Looks Like It Could Do the Job
LIC is not a small organisation. It is the largest life insurer in India and one of the biggest investors in the country. Over the years, LIC has:
- invested in government bonds
- bought shares in public sector companies
- supported government disinvestment
- helped stabilise the stock market during difficult periods
Because of this, many people compare LIC to companies like Temasek in Singapore or Khazanah in Malaysia. These are government-owned investment firms that help shape national strategy.
So on the surface, the idea feels simple:
“If other countries use such institutions to invest for the nation, why can’t India use LIC?”
The problem is that LIC and a sovereign wealth fund are not built for the same purpose.
Why LIC Cannot Become a Sovereign Wealth Fund
Here is the most important point: sovereign wealth funds are created using a country’s surplus money.
LIC does not have surplus money.
LIC uses policyholder money.
Every rupee comes from:
- people buying insurance
- long-term savings plans
- retirement and pension policies
These are not government funds.
These are personal savings of millions of Indian families.
LIC’s main responsibility is very clear:
- keep the money safe
- give stable returns
- pay claims whenever needed
Its job is to protect people, not to take bold investment risks for the country.
If LIC suddenly starts acting like a sovereign wealth fund, its purpose changes completely.
What Could Happen If LIC Tries to Play That Role
There are a few serious problems that could appear.
1. Risk Shifts to Policyholders
A sovereign wealth fund can afford losses because the money belongs to the state.
But if LIC makes a risky investment and it fails, the loss would affect ordinary families who trusted LIC with their life savings.
Insurance money should never become risk capital.
2. Confusion in Purpose
An insurance company and a sovereign wealth fund work very differently.
Insurance companies aim for:
- safety
- slow and steady returns
- long-term stability
Sovereign wealth funds often:
- invest globally
- take higher risks
- look for large strategic opportunities
If both roles are mixed, LIC’s original purpose may get diluted.
It might start focusing on national strategy instead of policyholder safety.
3. Legal and Regulatory Barriers
There is also a practical issue.
Indian insurance rules do not allow LIC to freely invest policyholder funds outside India. Only very rare exceptions are allowed with special approvals.
But a sovereign wealth fund must invest globally to spread risk and earn foreign income.
So even if the idea sounds attractive, the law does not support it.
4. Governance Challenges
Sovereign wealth funds usually have:
- independent boards
- clear investment rules
- detailed public reporting
LIC does not work in the same way, especially when it is asked to support government-linked decisions. Without full transparency and independence, using LIC as a sovereign fund could create serious trust issues.
So What Can LIC Continue Doing?
LIC still plays an important role in India’s financial system, and that will not change.
It can:
- invest in infrastructure bonds
- act as an anchor investor in IPOs
- help maintain market stability
- support long-term national projects
But all of this should happen within clear limits, with proper disclosures, and without risking policyholder money.
LIC can support the country, but it should not replace a sovereign wealth fund.
How India Can Create a Real Sovereign Wealth Fund
If India wants a proper sovereign wealth fund, it must be built using the right kind of capital. There are three possible options.
1. Asset Monetisation
The government owns valuable assets like:
- airports
- highways
- ports
- land
- shares in public companies
Instead of using all the money from these assets in the annual budget, a part of it can be saved and invested through a sovereign wealth fund just like Singapore did.
2. A Small Share of Foreign Exchange Reserves
India has nearly $700 billion in reserves.
Even using 1–2% can create a meaningful starting fund without harming financial stability.
3. Future Budget Surpluses
As the economy grows and government income increases, extra money from:
- spectrum sales
- disinvestment
- non-core asset sales
can be saved instead of spent immediately.
Countries like Norway followed this model successfully.
A fund created from these sources will be structurally different from LIC and will not put household savings at risk.
The Bottom Line
LIC may look like a sovereign wealth fund from the outside because of its size and influence. But the purpose is completely different.
A sovereign wealth fund is meant to invest extra money for the future of the country.
LIC is meant to protect the essential money of individual families.
One is about national strategy.
The other is about personal security.
Both are important, but they cannot be the same.
BY -RINAL RATHI
