Mohan is a young earner and he is very much convinced about the potential of investing. Mohan wanted to invest his money but was confused between mutual funds vs insurance.
He had contacted many Advisors. Some suggested investing in life insurance policies while others suggested mutual funds for investment purposes.
However, he was not able to choose between life insurance and mutual funds as both have their own merits. But as a serious investor, he wanted to make an informed decision.
At the starting point for Mohan should fully understand what insurance or mutual funds means. Hence let’s talk about it.
Table of Contents
What is Life insurance?
Life Insurance is basically risk cover/protection cover wherein a life insurance company promises to pay a promised amount (risk cover/ sum assured /life cover) to the nominee, in case of any mishappening (death) with the life assured.
This way one can ensure that his/her family’s money requirements can be fulfilled even if he/she is not alive.
Although nobody can fulfill emotional and personal loss but money loss can be fulfilled by the life insurance cover may be fully or partially.
On the basis of investment tenure, features and cash flow, life insurance policies can be further categorized into :
- Term plan
- Money-back plan
- Endowment plans
- Ulip plans
- Child education plans
- Retirement plan.
- Pension Plans
- Guaranteed Income Plans
What are Mutual Funds?
Mutual Fund is an investment scheme where people pool in money (just like other investments) and your money is invested (on your behalf) in stocks , bonds or other securities.
Here, AMC (Asset Management Company) pools in your money to invest in mutual fund schemes.
Consequently MF scheme Manager (act as a fiduciary) invest your money in stocks, bonds or money market instrument (as per scheme objective*).
Which is better Mutual Funds or Insurance?
Reason 1#Returns
If I ask you how much return you would like to get 5%-7% or 10%-12%.
Obviously you will choose a 10-12% return. Exactly, that is the reason you should choose mutual funds for returns or wealth Creation.
Mutual funds give high inflation-adjusted returns, while life insurance policies give meager 5-7% returns only.
Want to check mutual fund returns with real life example – Read the post.
Want to check life insurance return with real life example- Read the post
Reason 2#Inflation
Another reason to buy mutual funds- returns again.
Go to the flashback of your old-time and try to compare the prices of the same goods now and then.
You get it right.
The real culprit is Inflation ( rate at which goods prices increase).
Inflation: The rate at which prices of goods changes over the years.
Lifestyle inflation is rising at a rate of 7-8% each year.
If you get only 5%-7% return, then your money will not be able to beat inflation ultimately making you poor with each passing year.
Reason 3# Loss of Return/Capital in case of non-payment
You will get a return till you pay a regular premium in Insurance Policies. “If by chance you could not pay the premium, your all return and money is gone.”
Yes.
This is the ugliest truth with life insurance policies.
While with mutual funds, this is not the case. Here only Long term and regular review plays a crucial factor for ensuring good return
Reason 4# Liquidity/Flexibility to withdraw
Liquidity: Here liquidity means the ease of withdrawal.
Life insurance policies are highly illiquid investments. There are many terms and conditions attached to a life insurance policy.
Once you signed an insurance agreement with the life insurance company, you can not withdraw your money in between the policy. However, a surrender feature is always available (usually applicable after 2/3 policy year).
One has substantial monetary loss in case in case you opt surrendering your policy. Generally, there is almost a 30% loss of your paid premium.
On the other hand, mutual funds are very liquid in nature ( exception is ELSS Funds and Close-ended funds). You can withdraw money from mutual funds at any time at your convenience.
Read more when you should exit mutual funds.
Read more How to exit mutual fund
Reason 5# What about Life Insurance
A mutual fund does not offer life insurance ( there are few exceptions). While Insurance Policies do not give high/good returns due to their basic nature.
However, you can buy a combination of both to have optimal benefits from both of them.
To understand it fully, please watch the video in full.
More Reasons
Investment Horizon – MF or Insurance
Insurance policies are meant for a long term commitment. You have to invest for a minimum of 5 years at least in life insurance whereas you can invest even for one day in mutual funds. Mutual funds offer a wide range of investment duration.
This duration can range from one day to years altogether. To know the duration in mutual funds please consider watching
Types of Mutual Funds #1
Types of Mutual Funds #2
Types of Mutual Funds #3
Conclusion
There are many factors upon which mutual funds score over insurance for investment purposes. A mutual fund offers better inflation-adjusted returns in long term. Liquidity and ease of investment, transparency adds to its beauty. In addition, there is a wide range of mutual funds available which might suit to various kind of needs of the investor.
