Mutual Fund Protection Insurance: Coverage, Claim & Exclusions

Updated: 30-07-2019 09:43:11 AM

Mutual Funds (MF) are usually considered as one of the best investment options, both by new and experienced investors. With growing number of investors entering the market, there is a growing need for accountability which is one of the prime concerns for companies providing investment options. To counter such uncertainties and provide protection to the companies, there is Mutual Fund Protection Insurance.

What is Mutual Fund Protection Insurance?

Mutual Fund Protection Insurance is a scheme designed to protect the interests of asset management companies against the charges filed by investors. Just like SEBI is there to safeguard the interests of investors, mutual fund protection insurance offers coverage to companies dealing in mutual funds.

What All Mutual Fund Protection Insurance Covers?

• Errors, omissions, and misstatements, misleading statements, neglect, and breach of duty or breach of trust by a trustee, director or officer of the Corporate Trustee or Asset Management Company
• While managing assets, especially mutual funds, sometimes there can be errors or misstatements at the time of issuance which may result in loss to investors. When this happens, investors may file compensation charges. At such times, mutual fund protection insurance is quite beneficial
• Following claims are covered:
  • Improper trading
  • Inappropriate investment
  • Breach of duty/trust
  • Dispute over fees
  • Non-disclosure of risks involved
  • Inappropriate valuation of portfolio securities

Eligibility Criteria

Let us see who all are eligible to buy a mutual fund protection insurance.

• Asset Management Company or AMC
• Trustees
• Directors, Officers and Employees of the fund house
• Investment Manager
• Automatic cover for newly acquired or created subsidiaries

Claim Process for Mutual Fund Protection Insurance

Some general procedures set by every insurance providing company in India to follow are:

• Any financial loss or damage incurred needs to be brought to the notice of the insurance company immediately (Call/Email/Visit)
• Doing this will make your claim request officially registered in the claim department of the insurance company
• The business or the individual then needs to cooperate with the insurance company executives for an authenticity check of all the relevant documents such as accounts books, sales sheets, balance sheet, or any other document requested by the insurance executive
• An arbitrator would be appointed by the insurance company to calculate the value of loss or damage and suggest the sum assured and other benefits payable to the policyholder based on the policy
• Once all legal and internal procedures and formalities are completed, a final report will then be submitted to the internal panel for approving compensation to the policyholder
• In such a scenario the policyholder(s) will have to submit their ID proofs, policy document, and bank details etc. for receiving the compensation arising out of the insurance claim
• Compensation will be payable as per the payment system of the insurance company

Documents Required for Claim Process 

• Claim form
• Policy document
• Statement of the compensation filed by the investors
• Balance Sheet of the AMC
• Bank Details
• Company Identification Number (CIN)
• Any other document asked by the insurance company

Exclusions under Mutual Fund Protection Insurance  

Certain kinds of damages or compensation are not covered under the norms of the policy. These are called exclusions for which you cannot file claims. They are:

• Change in the value of the shares that would rise and fall as per the value of the underlying investments
• Any claims through illegal profit, deliberate fraud or advantage
• Claims against defamation, false arrest, imprisonment, or an assault
• No accidental physical injury or property damage will be covered under this policy

Note: This is not an exhaustive list.

Companies Offering Mutual Fund Protection Insurance in India

Some of the companies providing mutual fund protection insurance in India are:

• HDFC Ergo

Important Aspects 

Following are some of the important points of a mutual fund protection insurance policy:

• Facilitates investor by providing insurance cover to wealth creation opportunity
• The investor needs to pay an advance prior to the security cost is provided for the final issue deposition of a claim
• The custodian firm keeps the mutual fund’s assets in a separate trust and cannot utilize the money even if the bank fails
• The company would pay for the legal expenses arising out of any covered risks and also from third-party liabilities resulting in financial losses
• Some companies also offer life cover as well even if the SIP stops under this policy
• Under this insurance policy, the policyholder can choose their counsel with the company’s prior approval
• For every newly subsidiary acquired, it gets automatically covered under this insurance policy
• No additional documents or medical tests are required to adopt such an insurance policy providing convenience to the policyholders
• Safeguards from online reputation and identity theft are also covered under this insurance

Advantages of Mutual Fund Protection Insurance

The coverage offered by insurance companies under Mutual Fund Protection Insurance keeps varying. Still there are some common advantages of the insurance plan. Here are some of the benefits:

• It’s beneficial for the unit trusts, Investment managers and its directors, officers, and employees
• Some of the insurance companies under Mutual Fund Protection Insurance also provide an additional benefit of life insurance cover to the fund house
• It covers the insured all around the world

FAQs

Q1.  How safe is the mutual fund with AMC?

In case the firm goes bankrupt, the creditors can’t touch the money in the mutual fund, as it is held with separate trust for investors. It is absolutely necessary to insure mutual fund and safeguard from an unfortunate event as such where even at the time of the bank failure the money stays protected.

Q2. Does the policy cover the change in the value of the shares? 

No, this insurance has nothing to do with the change in the value of the shares that would rise and fall as per the value of the underlying investments.

Q3. Is every mutual fund protected with SIPC?

No, some of the leading insurance companies in India provide Securities Investor Protection Corporation (SIPC) cover to mutual fund only if held in the brokerage account.

Q4. How to report the financial loss to claim compensation?

Any financial loss or damage can be reported by calling out on the toll-free number of the company or relationship executive’s handheld device, company’s e-mail id, or by visiting the nearest branch office of the insurance company.