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SEBI tells MFs to discontinue bundling SIPs with insurance cover

BL Mumbai Bureau | | Updated on: Jun 21, 2022
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Concept image | Photo Credit: mtreasure

To retain SIP investors, AMCs have been paying insurance for SIPs

SEBI has directed mutual funds (MFs) to stop providing insurance cover as an attraction for wooing systematic investment plan (SIP). In a direction to the Association of Mutual Funds in India, SEBI had told the industry body to notify its members to not bundle insurance facility with new MF schemes and also discontinue the option in existing schemes.

Insurance benefit was usually combined in SIPs started in equity and hybrid plans, and the asset management company paid the life insurance which is usually very low given the huge volume generated.

In a bid to make investors continue with SIP for a longer term, MFshave started combining insurance with schemes. Since most of the large fund houses have an insurance company within the group, it was sort of additional business for them.

Criteria for insurance cover

MF institutions have been bundling insurance and SIPs for over a decade. The amount and duration of the SIP are usually related to the sum guaranteed.

To avail the insurance benefit, fund houses 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 instalments desired.

Benefited goal-based investors

The coverage would end when the SIP matures or the investor attains the age of 55, or if the investor cancels the SIP for any reason. In most circumstances, the insurance would begin to pay off as soon as you signed up for a SIP. Suicide in the first year of SIP was the sole exception.

Investors seeking goal-based investments benefited the most 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.

Published on June 21, 2022
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