Mutual funds barred from bundling schemes with insurance or any other products

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Securities and Exchange Board of India (SEBI) has advised Association of Mutual Funds in India to inform all members that no existing or new mutual fund schemes shall have bundled insurance products. Put simply, the fund houses cannot launch new products offering any additional benefits along with their mutual fund schemes.

Mutual funds have been bundling insurance with schemes as one of the ways to attract investors for the long term.

For more than a decade mutual fund houses have been offering bundled insurance along with systematic investment plans (SIP). The sum assured is typically linked with the SIP amount and tenure of the SIP. Fund houses would stipulate the minimum tenure of the SIP to be eligible for this benefit, typically around three years and the sum assured would range between 100 and 120 times of the SIP amount.

Some fund houses used to offer target sum assured which would reduce the death benefit as SIP instalments come in. Target sum assured at the beginning of the SIP would be equal to SIP amount and the number of instalments one wants to invest. In most cases, SIP in equity and hybrid schemes were eligible for insurance benefits.

The cover would cease by the age of 55 years of the investor, or as SIP matures or if the SIP gets cancelled for any reason by the investor, whichever is earlier. In most cases, the insurance would kick in immediately after signing up for an SIP. And the only exclusion was suicide in the first year of SIP. The costs towards providing the life insurance were born by the asset management companies.

Fund houses such as Nippon India, Axis, DSP, ICICI Prudential, Aditya Birla Sunlife, PGIM had offered SIP with insurance facility to their investors in the past. While Nippon India continues to offer the product, ICICI Prudential has stopped offering it to new investors, but continued to offer it to existing SIP enrollments. Aditya Birla Sun Life AMC recently relaunched this facility for investors, after suspending it for some time last year.

This benefit has been optional. The insurance feature is targeted at investors looking for goal based investments. The death benefit in these products would ensure that the investors get an assurance that there will be money as per their investment plans even in case of a death of the investors committing SIP. Mutual fund houses used this product to attract long term money in their schemes.

Clarity is awaited if the fund houses have to stop offering this facility to existing SIP enrolments done before June 17, 2022, the date on which the circular was issued by the regulator.

(This is a developing story. We will update it as we get more updates.)

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