Mutual fund schemes should not include bundled insurance or other products, says SEBI

21 Jun 2022 , 03:20 PM

The Securities and Exchange Board of India (SEBI) has instructed the Association of Mutual Funds in India (AMFI) to notify its members that no existing or new mutual fund schemes would include bundled insurance products. Simply put, fund companies are unable to provide new products that provide extra benefits in addition to current mutual fund schemes.

As one of the approaches to attract long-term investors, mutual funds have started combining insurance with schemes.

Mutual fund institutions have been selling bundled insurance and systematic investing plans (SIP) for more than a decade. The amount and duration of the SIP are usually related to the sum guaranteed. To be eligible for this benefit, fund companies would set a minimum SIP duration of three years, with the sum insured ranging between 100 and 120 times the SIP amount.

Some fund firms used to provide a target sum guaranteed, which meant that when SIP payments came in, the death benefit would be reduced. The target total promised at the start of the SIP would be equal to the SIP amount plus the number of installments desired. SIPs in equity and hybrid plans were generally eligible for insurance benefits.

The coverage would end when the investor reaches the age of 55 when the SIP matures, or if the investor cancels the SIP for any reason, whichever comes first. In most circumstances, the insurance would begin to pay off as soon as you signed up for a SIP. Suicide is the first year of SIP was the sole exception. The asset management organizations were responsible for the costs of providing life insurance.

This benefit was previously only available on a voluntary basis. Investors seeking goal-oriented investments can benefit from the insurance feature. The death benefit in these products ensures that investors will get money according to their investment plans even if one of the investors committing SIP passes away. This product was utilized by mutual fund firms to attract long-term money into their programs.

If the fund houses must discontinue extending this provision to current SIP enrolments made before June 17, 2022, the date on which the regulator published the circular, more clarity is necessary.