The Securities and Exchange Board of India (Sebi) has barred asset management companies (AMCs) in India from offering insurance products bundled with mutual fund schemes.
In a letter addressed to the Association of Mutual Funds in India (Amfi), Sebi said it has observed several mutual fund schemes offering bundled insurance products like ‘SIP Insurance’. It added that going forward, no mutual fund company should offer such a product.
"I believe the recent Sebi letter barring SIP to be combined with insurance offerings is not going to change or impact any part of the investor’s investments. Investors should select mutual funds based on the funds performance, style and philosophy and not whether they provide free insurance or not. Investors should always keep buying of insurance and investment products separate and should never mix insurance and investments within products,” says Rusabh Desai, founder, Rupee with Rushabh Investment Services.
ICICI Prudential Mutual Fund’s MF SIP Plus, Aditya Birla Sunlife’s Century SIP, Nippon India SIP Insure and PGIM’s Smart SIP are some of the SIP+Insurance plans in the market.
What Were The Drawbacks Of SIP+Insurance?
Rachit Chawla, founder and CEO, Finway, a financial services company, says that for over a decade mutual fund firms have been bundling insurance policies with SIPs to attract investors. “Through this, the SIP in equity and hybrid schemes was eligible for insurance benefits. To increase the popularity of its investment schemes, mutual funds added insurance benefits at no additional cost,” he adds.
The insurance coverage for life in these policies were mostly in the range of 100 to 120 times the SIP amount, but subject to mandatory payment of instalments till a certain time. Deepesh Raghaw, founder, PersonalFinancePlan, explains that although SIPs were recommended for the long term, people who bought this SIP+Insurance had to mandatorily contribute to SIPs for a predefined term even if the underlying scheme was lagging behind its peers or was not performing well.
Experts advise that insurance and investment needs should be kept separate. Chawla says that while the SIP+Insurance combo sounded good for some, especially new investors, buying a term insurance is better for investors with insurance needs.
“Insurance on mutual fund SIP can also lead to a situation of underinsurance if an investor has no other insurance plans. Since the average SIP limit is just Rs 3,500 per month, the insurance cover decreases automatically and that can be insufficient for an investor,” added Chawla.
On the face of it, the insurance component in these plans was available for free, but a higher expense ratio may have compensated for it. "The expense ratio of the respective scheme may have been increased to factor in for this (insurance),” added Raghaw.
Does Anything Change For Existing Investors?
After the Sebi issued the letter, several mutual fund investors were seen expressing their confusion on social media on what they should do. To start with, not all mutual funds were offering this bundled SIP+Insurance product.
However, this new ruling does not mean that the existing investors of these SIPs would lose insurance coverage.
“The Instalments falling due under Nippon India SIP Insure registered prior to the Effective Date will continue to be processed under the respective Plans/Options of designated schemes as per the existing terms and conditions of Nippon India SIP Insure,” read a notice by Nippon mutual fund.