How Mutual Fund is Better than Insurance

In today’s day and age, we have numerous choices when it comes to investment.  Every investment serves a different purpose for an individual. The features, advantages, and disadvantages of every investment differ from each other. An investment which is best suited to one person may be a disadvantage to another. It all depends on the financial and life goal of the person who is planning to make the investment. Many a times, people don’t understand the basics of the financial products and get confused. These result in people giving individual advice on a specific financial product like,”Mutual fund is better than Insurance” or “Insurance is better than mutual fund”.  It is vital to understand both these products fulfil different financial needs. This article will help you understand the difference between the two products so you can judge yourself which product is better for your individual case.

	Life Insurance		Mutual Fund
Meaning	Life insurance protects and secures that financial future of your family in your absence	Meaning	Mutual fund helps to increase your wealth through market linked investment opportunities.
Goal: Dependent family	A life insurance policy is a must in a person’s financial portfolio, as it protects the financial future of your spouse and children, and dependent parents	Goal: Wealth	Mutual funds help to realise your long term financial goal like buying a house, children education, marriage etc.
Risk factor : Very Safe	A life insurance policy is a very safe investment as compared to mutual funds. It provides guaranteed death benefit.	Risk factor: Medium to high	Dependent on equity market mutual funds are riskier than life insurance. Risk factor depends on the funds or portfolio you choose. It also does not provide any life insurance.
Low Returns	Life insurance if used for investment might not be able to give returns equal to that of the mutual fund.	High Returns	Mutual fund offers option of diversified funds which can help you get high returns. In the last couple of decades, mutual funds have given the highest rate of return in comparison to any other investment tool.

Which one should you choose?

Every financial instrument in which you invest in holds distinctive characteristics and benefits. It is essential to understand each product and what it has to offer in absolute detail. Making a decision on any investment the first thing that needs to be taken into consideration is that how it becomes an asset to you in the time period you are going to hold the investment. After all, it is your hard earned money which you are going to invest in a particular financial scheme.

To compare between life insurance and Mutual funds, we can take a life insurance product such as ULIP, which will draw a fair comparison between the two investments. In ULIP, you can get benefits of both life insurance and mutual funds. ULIP is designed in such a way that it offers life insurance as well as an investment opportunity in market-linked securities in the same plan. Part of the premium of ULIP goes towards the life cover component of the plan and the rest is invested in the market to generate wealth for the investor. ULIPs are a great choice for investors who want the dual benefit of life insurance with high returns from the equity market. The funds of ULIP invested in the equity market are managed by experienced fund managers just like mutual funds which not only helps your money grow but also carry lower risks. Similar to mutual funds, in unit linked insurance plan the policyholders have the option to choose the funds as per their risk appetite and returns they are expecting. For high returns, they will need to be aggressive and invest most of their investment in equity funds. For medium returns, they will need to invest a maximum of their corpus in debt related funds. You can also have the flexibility to adjust your risk by investing in both equity and debt market funds to maximise your returns and at the same time be careful of the volatile market conditions.

More detail comparison

	ULIP	MUTUAL FUND
What are you getting in your investment?	Life Insurance + Investment.	Only Investment (no life coverage).
Is it saving any tax for you?	Premium will tax free under section 80C of the IT Act, 1961. The death benefit will also be tax exempt under section 10(10D) of the IT Act,1961	Mutual funds falling in category of ELSS only offer tax benefits under section 80C.
Life Insurance	Yes	NO
Riders	Option to enhance your life protection through additional riders.	Not Applicable
Return on investment	Gives moderate to high returns as per the investment portfolio and performance of market	Chances of getting high returns through equity fund portfolio which is all high risk.
Exit period	ULIP have a lock in period of 5 years	Mutual funds don’t have a lock in period except ELSS which has a lock in period of 3 years
Investment strategy	When you want financial protection and good market returns on your investment.	If your investment objective is only high returns and you’re not looking for life protection
Ideal Investment period	unit linked insurance plan  is normally for long term investment goals	Mutual fund investment period can be short, medium or long. For any fruitful returns, long term investment is recommended.
Best Time to buy	There is never a best time to buy life protection. It is a must in one’s investment portfolio. With ULIP you can get the best of both worlds.	When one has disposable income. Mutual funds also give SIP option which can be as low as INR 500 a month
Fund Management fees	Fund management charges is up to 1.35%	Fund management fees in mutual fund is up to 2.5%

The above would have helped you clear lot of confusion between Life Insurance and Mutual fund. If you already have ample life insurance policies and want to invest in the market-related investments then mutual funds are the best way forward. You can take help of mutual fund calculator that will help you explore top 10 mutual funds options.

If you don’t want the hassle of maintaining two different investments, then ULIP is a good choice. ULIP will be a smart investment product for individuals who don’t have much knowledge on equity market or different fund option available with mutual fund but want to benefit from long-term capital appreciation through investment opportunity in equities. List down your financial goals and requirements and accordingly put your money in the appropriate investment product.

Which is better: ELSS or ULIP

Both ELSS and ULIP are investment options you can consider in order to avail tax deduction under section 80C of the Income Tax Act, 1961. Both of these investments offer different return opportunities and have different risk categorization, but a mutual benefit of tax saving.

But even after this, there is a dilemma in the mind of an investor - ELSS vs ULIP. To make things easier, we have highlighted the features of both. Read more to find out.

What is ELSS?

An Equity Linked Savings Scheme is a type of tax saving mutual fund which invests primarily in shares of the stock market - equities. ELSS funds invest in capital markets and in companies with a large market capitalization. An ELSS has a minimum lock-in period of 3 years which is the shortest span for any tax-saving investment u/s 80C. What makes ELSS a tax saving mutual fund is that an investor can claim a tax deduction of up to INR. 1,50,000 against investments made in ELSS. As per the recent amendment, ELSS attract an LTCG tax of 10% post the lock-in period.

Salient Features of ELSS

●     You can start investing in an ELSS with a minimum amount of INR. 500 or a lump sum amount of any size. But a tax exemption of only up to INR. 1,50,000 can be claimed as per sec 80C of the Income Tax Act, 1961.

●     It is one of the best tax saving mutual funds which offers tax benefits with potentially higher returns and short lock-in periods.

●     The returns on Equity Linked Savings Schemes attract an LTCG tax of 10% whether it is dividend income or capital appreciation.

●     You have an option to reinvest the proceeds in any tax other saving mutual fund post the lock-in period.

●     ELSS funds come with a higher risk, but they also have a potential for generating high returns.

What is ULIP?

A Unit Linked Insurance Plan is an investment cum insurance plan offered by insurance companies. Under a ULIP plans, the premium is usually divided between  life cover and the remainder is invested in market linked investment funds. These funds can include equity, debt, hybrid, or money market funds through ULIPs. Investment in a ULIP can entitle you to a tax deduction of INR. 1,50,000 under Section 80C of the Income Tax Act, 1961. These plans have a lock-in period of 5 years and as an investor you can choose to switch from equity to debt or hybrid, as per your investment objective during the lifecycle of the investment. A ULIP is an excellent option for a long-term investment.

Salient Features of ULIP

●     ULIPs are different from traditional insurance plans as they invest in market linked securities and provide insurance cover at the same time.

●     When you invest in a ULIP, a part of your premium is utilised towards meeting your insurance. Once these expenses are met, the premium is divided between providing you a life cover and buying fund units for investment. The premium allocation charge is deducted upfront from the premium that you pay while other expenses are met through deduction of units or adjustment of the NAV.

●     The expenses involved in ULIP investment include premium allocation charges, administration charges, mortality charges, and fund management charges.

ELSS vs ULIPS

Distinction	Unit Linked Insurance Plan	Equity Linked Savings Scheme
Definition	An insurance cum investment plan	A pure investment scheme
Purpose	The fund’s purpose is to provide investment benefits along with tax relief and life coverage.	The fund’s purpose is to provide benefits from diversified equity investments along with tax relief.
Time Period	Minimum lock-in of 3 years.	Minimum lock-in of 5 years.
Return Rate	Returns depend on the combination of funds invested - equity, debt or hybrid.	Returns are market-linked, they are depended on the scheme invested with an average return rate of 15%-20%.
Tax Saving	The gains are tax-free. The invested amount offers tax deduction u/s 80c.	The invested amount offers tax deduction u/s 80c and the returns attract an LTCG tax of 10%.
Fund Charges	The expenses include charges like policy administration charges, premium allocation charges, mortality charges, etc.	There is an exit load and fund management charges.
Liquidity	You can liquidate your invest post the lock-in period subject to further policy conditions.	You can liquidate the entire investment amount post the lock-in period.
Regulator	IRDAI	SEBI
Switching	Switching between funds such as Equity, Debt, Hybrid, Balanced, or money market funds are allowed subject to certain charges from the fund house.	You cannot switch the fund under an ELSS as the entire amount is invested in equity related securities.
Risk	The risk associated with the investment part of the fund is high while life coverage is guaranteed.	ELSS is market-linked. It carries a higher risk but also a higher rate of return.
Transparency	ULIPs offers transparency as you are aware of where the money is being invested.	ELSS offers compete fund transparency as you can get all the details of your investment via a consolidated fund report.

Now that we have highlighted the basic difference between ULIP and ELSS funds, it is time to come to a conclusion. As an investor, if you are looking for a short-term equity investment with sizeable returns, then an ELSS is the perfect investment option for you. An ELSS is a best type of tax saving mutual funds and investing in one for a long time period is a good source of wealth creation.

On the other hand, if you have a specific family goal in mind, a ULIP is a better option as it provides insurance cover for you and your family. Additionally, you always have an option of switching the investment fund in order to add value to your investments without taxation.

Thus, the only thing you should keep in mind while facing a ULIP vs ELSS dilemma is your financial goal, investment objective and the life stage. Then accordingly, you can choose the one suitable for you.

What is systematic investment plan and how it work?

Ever wondered why some people achieve their long-term goals successfully with Systematic Investment Plans? Because a SIP or a Systematic Investment Plan is considered as an ideal way to invest in Mutual Funds. Investment is not only essential to achieving your long-term goals but also to cultivate the habit of savings and making you a disciplined saver. With the help of SIP, you can invest on a weekly, monthly and quarterly basis where a fixed amount is auto-debited from your bank account and invested in Mutual Funds. Besides, Mutual Funds are flexible, therefore you can choose to discontinue or increase the amount as per your wish. And more importantly, investing through SIP’s is considered as the simplest and smartest way to get maximum returns out of your investments. Read on to know more about ‘Systematic Investment Plans’.

But, how does one get started?

Most of the industry experts who have been in this industry for decades are all die-hard followers of ‘invest and hold’ strategy. By applying this strategy an investor can hold and buy stock for a longer period of time in spite of the fluctuations in the market. On the other hand, it is believed that portfolio rebalancing across assets such as debt and equity is a must. But, it is still advisable for one to look for systematic investment plans. In the longer run, it not only helps you to smartly plan your finances but also, build wealth step by step over a period of time.

Importance of investing in Mutual Funds through Sip’s

In case you are a uncoordinated and an indolent investor, then investing through Sip’s can inculcate the habit of discipline and help you invest regularly without struggling with the market fluctuations, index level etc. For instance, you are keen on investing a fixed amount in the mutual fund scheme every month but all you need is to find time to do that and above all market conditions may bog you down. However, investing through SIP’s can put all your worries at rest since the money here is automatically invested in a scheme regularly without you putting efforts.

Advantages of using Systematic Investment Plans

1)    Inculcates the habit of discipline

The reason why SIP is strongly recommended by industry experts is that it brings discipline amongst the mutual funds investors. It is flexible and can be stopped at any point of time as investors may want to increase or decrease the amount being invested.

2)    Investment convenience

As the name suggests, a systematic investment plan is systematic in nature and allows the investor, an advantage of investing a small amount of money every month in a hassle-free manner. All he/she has to do is to instruct their bank to allow auto debit of the fixed

investment amount each month.. By doing this you can invest money systematically without missing out on any monthly installment.

3)    Rupee Cost Averaging

Rupee Cost Averaging (RCA) is another good reason why investors should consider investing in SIP. The investors here invest a fixed amount of money each month towards any investment vehicle which lets them purchase more stocks of a unit when the price of an investment is low. This eventually reduces the average cost of purchasing of the financial asset over the time. The SIP transactions are carried out in the following manner. It is done by using ECS or the Electronic Clearing System where the money gets debited from the bank in a hassle-free manner.

4)    Power of Saving

You can save a good amount of money only if you invest it at an early age. It will be difficult to meet your desired goals if you take long to invest. Also, saving at an early age will have a great impact on your wealth accumulation process. The following example will help you understand it better.

At end of Year	5%	10%	15%	20%
1	Rs.1,050	Rs.1,110	Rs.1,115	Rs.1,120
5	Rs.1,276	Rs.1,611	Rs.2,011	Rs.2,488
10	Rs.1,623	Rs.2,594	Rs.4,046	Rs.6,192
15	Rs.2,079	Rs.4,177	Rs.8,137	Rs.15,407
25	Rs.3,386	Rs.10,835	Rs.32,919	Rs.95,396

5)    Online Convenience

It is simple to invest in a paperless Systematic Investment Plan by following the three simple steps:

-    Register for a Systematic Investment Plan online

-    Post which you can fill in all the required details

-    Make sure you have all the required funds available

Conclusion:

Systematic Investment Plans not only offer transparency but also tax benefit with higher returns and so they have gained popularity in a short period of time. Therefore, SIP’s are important to make a robust financial planning and enhance your portfolio with regular investments.