SEBI tells mutual funds; invest but don’t insure

SEBI bars AMCs to offer insurance products

by 5paisa Research Team Last Updated: 2022-06-23T09:36:13+05:30

I am sure you have heard of Smart SIPs. Now these are systematic investment plans of mutual funds, which also have an insurance built into it. Here is how it works. Let us say, you start a SIP for your child, but there is the uncertainty about what happens to your child’s future if your family was stuck with a tragedy.

The answer is in SIP with attached insurance. Most of the large mutual funds offer this facility of insurance policy attached to the SIPs. As per the latest SEBI order, that practice has to stop going ahead.

There are a number of smart SIPs from reputed fund houses in India today. For example ICICI Pru MF SIP Plus, Nippon India SIP Insure, Aditya Birla Sunlife Century SIP and PGIM Smart SIP facility are some of the popular smart SIP that come with insurance attached.

However, going ahead, SEBI has clarified that SEBI has barred Mutual Fund AMCs in India from offering insurance products bundled with their mutual fund schemes. This is like cross selling insurance through mutual funds, which is technically not permitted.

How exactly does a SIP insurance plan work?

Normally, under SIP insurance plans, mutual funds offer a free life cover on starting SIP investments. This SIP cover is normally a multiple of around 100 times the standard SIP amount.

For example, if your monthly SIP is Rs.10,000, then the insurance policy attached gives a life cover to the tune of Rs10 lakhs with the policy. In the event of the death of the sponsor of the SIP plan, the proceeds of the SIP insurance can be used to ensure that the SIP continues without disruption for the plan.

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SEBI had highlighted this dichotomy even in the past. However, on 17th June, SEBI has written a detailed letter to the Association of Mutual Funds in India (AMFI). In this letter, SEBI had observed that some of the AMCs are either proposing to introduce bundled products while some existing schemes already had such bundled products.

The SEBI letter also clearly states that no existing scheme or the schemes proposed to be launched can have bundled products; combining fund management with insurance protection.

However, many of the fund houses have also been fairly proactive and have discontinued this practice of bundling the insurance policy with the mutual fund investment. Now, SEBI has officially written to the AMFI and it has asked to individually communicate this to all the mutual funds registered with AMFI, so that there is no ambiguity on this subject. Some of the existing players are making changes. For instance, Nippon India MF informed it was stopping SIP Insure product with effect from 23rd June. 

What happens to the existing bundled schemes?

Most likely, they would be allowed to continue their commitment to the investors since the originator of the product cannot go back once the commitment is already made to the customer.

Nippon India Fund has clarified explicitly that all existing SIPs already registered under SIP Insure will continue unchanged with insurance benefits. However, it has put a ban on any fresh collections or fresh issue of such SIP insure products that combine mutual funds and insurance under one head.

The typical life cover in the case of bundled schemes was offered at 100-120 times the SIP amount. However, this was subject to a ceiling of Rs.50 lakh. So, if you do a monthly SIP of Rs.10,000, you get an insurance cover of Rs.12 lakhs, but if you do a monthly SIP of Rs.100,000, then your insurance cover would be limited to just about Rs.50 lakhs. SIP insure was normally provided on equity and hybrid schemes and was normally only provided to persons in the age bracket of 18 years to 51 years. Now any fresh such scheme shave go.

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