Life insurance vs. Mutual funds: Which Is The Better Investment?

Jul 07, 2018 | 4 months ago | Read Time: 4 minutes | By Manan Vyas

More and more Indians are putting their hard earned savings into financial assets everyday. Experts have said that in 2018, investors will show a penchant for financial assets over physical assets, and if past few years can be testimony, they are likely to be right. This being said, an important question that arises is which instrument of financial investment do Indians prefer? More importantly, which is the better investment for people: life insurance or mutual funds? In order to be able to answer this question, we need to take into account a number of factors, and not just focus on returns, including the long term capabilities of the instrument, effects of government regulation and taxation and stability.

Life Insurance

Understanding the two instruments

Perhaps the first step in decoding which is the better instrument is to understand both the devices and their functionality. Mutual funds are defined as pools of money coming in from both individuals and investors, where every person who invests in the fund receives a proportion of profit or loss based on their share. This means they are essentially instruments of investments that allow you to engage in the growth of the financial market with minimal risk. Investment companies can invest in stocks, bonds, cash, real estate, annuities, metals amongst others.

On the other hand, a life insurance protection plan is a policy that ensures in case of unforeseen circumstances in your life, your beneficiaries are well taken care of. Whenever an individual takes out a life insurance policy, the insurer is liable to pay the full amount insured to your beneficiary in case something happens to you, given that your policy is active.  

Returns, returns and more returns

Financial Assets

Undisputedly, mutual funds offer higher returns on investments as compared to life insurance policies. Mutual fund returns often come in the form of stock, cash or appreciation of capital asset value. However, there are several hidden taxes and fees that decrease your mutual funds’ earnings, including the introduction of service tax that has made mutual funds more expensive, and the recently implemented long term capital gains tax on equity. Additionally, mutual funds are much riskier to invest into as compared to life insurance policies. Life insurance policies on the other hand offer tax-deferred payments on growth dividends, guaranteed cash value and the proceeds of your insurance are also tax-free to all beneficiaries. Thus while focusing on merely comparing “returns” we might incorrectly state that mutual funds prove to be a better investment than life insurance policies. It is important to point out here that all gains in both cases depend on the size of your policy/fund, the years of investment amongst other factors.

Could we leverage benefits from both?

While comparing the benefits of both these financial instruments a question that most certainly must have popped up in your brain is, why aren’t life insurance products designed in a way that they enable investors to take advantage of the market? Well, here’s when unit linked insurance plan (ULIP) comes into play. A ULIP is a life insurance product, however, unlike traditional and pure insurance policies, a ULIP gives investors the capability to insure and invest under a single integrated plan. This means that while you do have the risk cover of a policy, you can also invest in a number of qualified investments such as bonds, mutual funds, stocks amongst others. ULIPs offer individuals the ability to monitor their portfolios closely, however, the policy holder does bear all the risks associated with investing in the market.

Inside a ULIP there are four basic funds which you can choose from before investing. These include equity funds (highest risk factor), income/fixed interest/bonds (medium risk), balance fund (medium risk) and cash funds (low risk). Your investment and protection portfolio and ULIP returns will all depend on your income, willingness and ability to take risks, along with the financial climate and your long term financial goals and budgets. Most important, ULIPs are extremely flexible, much more than traditional mutual funds enabling customers to have the ability to switch investments to take advantage of market conditions or to meet their personal needs.

Individual Wealth in India

Finally, another important factor to note here is that the ease of doing business also affects people’s inclination to invest in certain financial instruments over the other. With the technological infusion of the blockchain, machine learning and automation in the insurance sector, both efficiency and customer service have improved by a manifold, making it easier for customers to manage their investments. These technological innovations have made experts hopeful about the growth, scope and ability of the insurance industry to grow, making it a promising investment. Hence, we see that while comparing mutual funds and life insurance, the latter comes out to be a more sound investment decision due to their ability to offer tax-deferred payments, reduced risk and more stability. However, that said, if you find yourself unable to choose between the two instruments, you can always opt for a ULIP, which offers you the security instrument of a life insurance plan, while also letting you take advantage of the financial market.


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