Mr. Daulat, a software Engineer wanted to invest his money for his future needs but he was totally confused about which is a better option for investment – Mutual Funds Vs Life Insurance.
In this blog post we will discuss Mutual Funds Vs Life Insurance in detail
last updated March 2023.
What is Life insurance ?
In essence, life insurance is a legal contract between the insurer (insurance company) and the insured in which you agree to pay a certain amount of money (the premium) and the company agrees to pay the sum covered in the event of the insured’s death.
Companies also pay a maturity benefit after the specified time frame at the same time. The maturity benefit amount varies for policies and plans.
In short you can say life insurance reduces monetary ( money) crisis if some eventuality happen with the life assured. Although no one can fully compensate for a person’s emotional or personal loss, but a life insurance policy can reduce monetary losses to some extent.
You must have heard advertisement saying Baccho ki padai, char ke kharch … and all that stuff in TV Ads. That is why Life insurance is a must for a family person.
Type of Life Insurance
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
Benefits of Life Insurance
Financial Protection/ Risk Cover
Each and everyone of us exposed to undesirable events of losing a family member. In case, it is a bread earner of the family, the life situation of family become miserble.
Therefore protection cover is needed for a family person who has financial dependents. Life insurance products provide this protection.
To cover against such events Term Life Insurance Plans are the best choice.
Helps in Saving
Life insurance policies helps in saving the money and therefore one can save money in a hassle free manner. So we can say Life insurance is good saving option for risk averse investors.
Explore more safe investment options
Tax benefit
Insurance policies have tax advantages. Section 80C of the Income Tax Act of 1961 provides 100% tax exemption for premium payments up to INR 1.5 lakhs annually.
Stress reliever
Buying Life Insurance policy, especially a term plan makes you stress free. At least you are not worried in case some eventuality happen to you.
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*).
Types of Mutual Funds
On the basis of where a fund invest it’s money ( underlying portfolio) mutual fund are divided in categories
- Equity
- Debt
- Hybrid
- Money market instruments
- Multi Asset
Understand Types of mutual funds Video 1
Benefits of Mutual Funds
- Low Investment amount – One can start mutual fund investment with just Rs. 5000. Thus it is pocket friendly and easy to start with.
- High liquidity– Mutual Fund are highly liquid in nature. This means one can withdraw money any time you require from your investment. There is no additional penalty to withdraw your money other than exit load if you withdraw before specified time. This is specified time is different for different funds. For instance, it is one year for most of the equity funds and three year for debt funds. So it is vital to know before investing.
- Power of compounding-MF investment multiplies your money with the power of compounding. Longer the time higher is the value of money.
- Inflation beating returns– You get high returns as compared to other Investments like FD, post office schemes or any other insurance policy, condition is to stay invested for long term more than 5 years.
- Professional Management– The money is professionally managed. Theses professionals manage a huge corpus and therefore the management fee gets low for an individual investor.
- So, whether you are a aam aadmi ( Common man) aur Amir Aadmi( rich man) you get Professional Management for your money.
- Diversification– You get the benefit of inbuilt diversification as each mutual fund scheme invest in more than 60 to 70 stocks of different sectors.This approach reduces market risk of a particular stock.
- Simple, convenient and easy to monitor– You do not have to take much time from schedule to make your investments. You can invest by filling an auto debit form or online debit instruction to the bank and AMC and your money get deducted each month.
- Achieve your life financial goals– You can fulfill all your life goals whether it is short term or long term with the help of SIP investment and become a crorepati.
- A very simple way to be wealthy with small investment – Yes you can become wealthy by starting a Mutual Fund SIP. With power of compounding,disciplined regular investment you can create great wealth.
- Create wealth with Rs.. 10000 SIP
Difference between Mutual Fund and Life insurance
| Feature | Insurance | Mutual Fund |
| Purpose to Buy | Protection | wealth Creation |
| Life Cover/ Life Cover | Yes | No |
| Tax Benefit | Yes | No ( For tax Benefit you have to invest in ELSS Category Mutual Funds) |
| Tax on Maturity | If premium is more than 5 lac in a FY, maturity will become taxable | Taxable in nature |
| Investment | Differ from policy to policy | Yes |
| Risk | Low risk | Low to High Risk |
| Return | Low Return ( around 5%-6%) | Low to High return (6%-12%) |
| Inflation-Adjusted Return | Negative inflation-adjusted return | Higher inflation-adjusted return |
| Liquidity | Loan Facility is available otherwise surrender at a huge discount | Highly Liquid except close ended fund |
| Transparency of investment | Low transparency | High transparency |
| Issuance Charges | High Charges are involved ( Differ from policy to policy) | No to Low charges |
Mutual Funds Vs Life insurance – Which is better?
Now, again the question of hour which is better insurance or mutual fund.
There is a wide difference between life insurance and Mutual Funds.
While life insurance is best suited for protection cover for family.
If you require wealth creation over long term than mutual funds can do magic for you.
But in real life both protection cover and wealth creation is needed. Therefore ,a suitable combination of both is the best choice.
But now a days insurance product is available as a bundled product wherein one gets life insurance/protection cover along with wealth creation. But in real sense it is not wealth creation, it is high figure show :).
The policies say you will get 1 crore, 5 crore or more after a span of 25 years. But my dear friends, this much money worth will be far lesser than as it looks. Let’s understand it with the help of a video.( given below).
The best way is to invest in Financial Planning way and buy term plan with a combination of mutual funds.
Read more about term Plan & benefits
Here is why term plan and mutual fund is best combination.
Conclusion:
Life insurance and mutual funds both are unique products and have their own merits and demerits. Careful and optimal selection of both the products can make you a wealthy and secure person.
Read more about 5 Top reasons why you should choose mutual fund over insurance
