Take a car loan and get the first year's insurance free. Splurge on an LED TV, and get an audio system free. Such offers are easy to come by during the festive season and in a market with reducing or reluctant customers. This strategy is now being adopted by mutual fund houses in the hope of pulling in investors.

So, two mutual funds are offering free life insurance covers to SIP investors who continue for the long term. At first glance, the SIP Insure plan from the Reliance Mutual Fund and the Century SIP plan from Birla Sun Life Mutual Fund appear unbelievable.

If you start an SIP in any of the specified equity or balanced funds of the Reliance Mutual Fund, your SIPs are insured by the fund house. If something untoward happens to you, the fund house will pay the remaining SIPs on your behalf and give your nominee the corpus on completion of the investment.

It is similar to the premium waiver feature in the case of a child Ulip. Only, this comes without the exorbitant charges levied by a Ulip or a child plan. The Century SIP from Birla Sun Life Mutual Fund is slightly different. You are covered for 10 times the SIP amount in the first year, 50 times in the second year, and 100 times from the third year onwards.

The NRIs and PIOs living in 45 countries are also eligible to invest in the Century SIP scheme. There is a good reason mutual funds are resorting to such gimmicks. According to the latest data released by the Association of Mutual Funds in India (Amfi), 5.4 lakh equity folios belonging to small investors closed down between 1 April and 30 September this year.

This is not the only factor that is giving the fund managers sleepless nights. Despite efforts by the industry and the market regulator to coax them to remain invested for the long term, small investors are redeeming their equity funds far too soon. More than 22% quit within a year and over 38% don't stay invested for over two years. This is an improvement over the September 2009 figures, when almost 50% quit before two years, but the percentage of long-term investors has steadily declined in the past three quarters.

It seems all the advice from financial planners and the sermons on long-term investing from experts have fallen on deaf ears. This is a worrying trend for fund houses because small investors (defined by Amfi as individuals investing up to Rs 5 lakh) account for over 67% of the investments in equity funds. So, fund houses are trying everything to retain investors, and if free life insurance can get them to do so, then so be it.

Too many conditions A closer examination reveals the warts in the free insurance offers. The Reliance SIP Insure plan must be continued for the entire term if you want the insurance cover. If you redeem (even partially), switch or stop investing, the insurance cover ends. Also, you won't get any cover if you miss two consecutive SIPs or four during the entire tenure.

Careless investors, whose cheques tend to bounce due to insufficient funds, should keep this in mind. Birla Sun Life is comparatively more lenient with withdrawals, switches and termination of SIPs. If you stop investing within three years of starting, the cover ends.

If, however, you have invested for three years and don't withdraw the sum, you will get a cover equal to the fund value at the beginning of every year. The insurance cover will continue till you withdraw the investment or till you are 55 years old, whichever is earlier. False sense of security Don't let this lull you into a false sense of security. The cover is not very large.