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Investing is no longer considered fancy. It has become a necessity to secure one’s future. At the same time, one cannot ignore insurance and the benefits it offers. In fact, insurance is a preliminary step in the investing journey. There are a lot of financial products at a person’s disposal to fulfill their investment and insurance needs. It can get quite overwhelming to choose from a universe of options, and investors often get confused and end up with investments that don’t suit their needs. In this article, we have covered how to fulfill one’s insurance and investment needs by focusing on LIC vs Mutual Funds.
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The right mutual funds for your long-term goals with inflation-beating growth plus risk management.
Indicative returns of 10-12% annually
Investment horizon of 5+ Years
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Long term goals such as retirement or building your wealth
What is Life Insurance Corporation of India (LIC)?
Life Insurance Corporation of India (LIC) is a government-owned insurance and investment organization. It fulfills individual’s insurance needs by offering plans that suit them. LIC is one of the oldest life insurance companies and is also an industry leader in the insurance space.
Life insurance provides protection to a family against unforeseen events like death. It helps in financially securing a family’s future. The primary purpose of life insurance is to offer ‘death benefit’ to the dependants upon the premature death of the earning member of the family.
There are different types of insurance plans that cater to both insurance and investment needs. The most basic one is term insurance, which is a pure insurance plan. The other types of life insurance plans are Unit Linked Insurance Plans (ULIPs), endowment plans, money back plans, child insurance plans, and retirement plans. All these plans cater to the investment needs of insurers.
Having life insurance is very essential. It comes with a lot of benefits. Following are some benefits of life insurance:
Risk coverage and financial security
Insurance provides protection in the form of monetary compensation against unforeseen events like death. The money from the insurance acts as a cushion and offers financial security to the family to continue their life.
Helps in creating wealth
Some insurance policies also help in creating wealth by investing a part of the premium paid in different asset classes to beat inflation and create a corpus that will aid in fulfilling financial goals.
Tax benefits
Insurance plans come with tax benefits. The premium paid up to INR 1.5 lakhs per annum is completely tax-free under Section 80C of the Income Tax Act, 1961.
Stress-free life
Financially taking care of one’s family is the primary goal of every earning member. Having a life insurance policy that will help the family carry on with their life will help an individual lead a stress-free life. One can live peacefully knowing their family has a safety net in case of unforeseen events.
What are Mutual Funds?
Mutual funds are popular investment options that pool money from investors and invest across securities like stocks, bonds and money market instruments. Securities Exchange and Board of India (SEBI) regulates mutual funds.
Through mutual funds, investors get access to professional fund management. The fund management team makes investments after thorough research and on the basis of the fund’s objective. This expert management helps in outperforming traditional investments like bank saving accounts and fixed deposits.
There are different types of mutual funds – Equity and Debt mutual funds. Equity mutual funds primarily invest in equity and equity-related instruments. Some of the types of equity funds are large-cap, mid-cap, small-cap, multi-cap, sectoral or thematic, tax saving, etc. On the other hand, debt mutual funds invest in government securities, corporate bonds, money market instruments, etc. Some of the types of debt mutual funds are short term and ultra-short-term funds, liquid funds, dynamic bond funds, etc.
Mutual funds offer multiple schemes that suit different investment needs. Therefore, based on the investment objectives and financial goals, one can pick a suitable fund. Apart from this, mutual funds offer various other benefits such as:
Expert Fund Management
Professional managers manage mutual funds. Not everyone has the knowledge of the markets or the time to manage their investments. Mutual funds are a good investment option for such individuals who can invest and forget about managing their money.
Predefined Objective
Each mutual fund has a set and predefined investment objective that helps it to generate significant returns over time. Therefore, one can invest in a fund that best suits their investment goal.
Easy to Invest
Mutual fund investments are as easy as online shopping. One can buy, sell or redeem funds at NAV with just a click.
SIP Option
Mutual funds accept lump sum or monthly investments. In other words, MFs have a Systematic Investment Plan (SIP) option that offers flexibility to invest a small amount regularly. Therefore, one can start their investment journey with as low as INR 500.
LIC vs Mutual Funds – Key Differences Between LIC and Mutual Funds
Following are some of the key differences between LIC vs Mutual Fund:
| Parameter | Life Insurance | Mutual Fund |
| Meaning | Life insurance provides protection to a family against unforeseen events like death. | A mutual fund is an investment option that helps in generating significant returns through investing in market-linked instruments. |
| Purpose | The main purpose of a life insurance policy is to safeguard the financial future of dependents. | The primary motive for mutual fund investments is to generate significant returns for long term financial goals. |
| Risk | Life insurance is less risky in comparison to mutual funds. However, it offers guaranteed death benefits. | Mutual funds are market-linked investments, and hence are highly volatile. |
| Returns | LIC schemes offer low returns. | Mutual funds offer significant returns in the long term. Long durations help in addressing the market volatility. |
| Tax Benefits | Premium payments up to INR 1.5 lakhs qualify for tax exemption under Section 80C of the Income Tax Act, 1961. | Only investment in ELSS mutual funds qualify for tax deduction under Section 80C of the Income Tax Act, 1961. |
You may also like to read about the LIC Vs PPF
What Should You Choose Mutual Funds or LIC?
Having life insurance is essential. It provides financial protection to the family in the event of the premature demise of the insured. Moreover, insurance is one of the first steps towards achieving financial independence and security. Investment always comes second to insurance. However, investing is equally important. It helps build a corpus to lead a financially secure life and fulfil all life goals.
The common mistake that people make is to mix their insurance and investment needs. One must take an insurance policy only to buy protection for their family. The best type of insurance is term insurance. With small premiums, one can get sufficient life cover. The premium paid should be treated only as an expense that will help secure the financial future of the family. It cannot be an investment. Moreover, buying insurance plans which offer investment are costly as they have high management fees. Also, they do not offer proper life cover too. Hence, they aren’t good enough for investment nor insurance.
Financial experts advise that taking term insurance for insurance needs and investing in mutual funds is not only a cheaper option but also helps in wealth creation in the long term. Mutual funds are regulated by SEBI, and it also set an upper limit on expense ratio, hence capping the expenses. Moreover, mutual funds invest in different asset classes and have the potential to offer higher returns than life insurance plans with an investment option. Investors can pick the best fund that suits their requirements from a number of options and invest in it to accumulate wealth.
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