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Mutual Funds Vs Insurance

Mr. C.S. Sudheer | Posted On Monday, October 24,2016, 07:35 PM

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Mutual Funds Vs Insurance



Growing rich is all about being a good investor. Just invest your money and watch it grow. But is it that simple? Investing is risky business. Some investments are considered more risky, than others.This is when you must remember….All investments have risk. Even the highly popular fixed deposit, which households in India, simple love….carries risk. Yes, the returns you get from your fixed deposits, are eaten up by inflation. Inflation….the rise in prices of goods and services with time, eats up your money. Now to the big question….Should you totally avoid investments like equity mutual funds, which are considered risky? The answer is No. If you are comfortable bearing risk in your investments, then….High Risk = High Return.

Time to remember the famous saying by Warren Buffett:

Risk comes from not knowing what you’re doing.” So should you invest your hard earned money in an equity mutual funds, which many investors believe, is quite a dangerous thing to do? Then there is the famous ULIP (Unit Linked Insurance Plan), which is insurance + investment….two for the price of one….Something you and several of our citizens, simply love. Is availing a ULIP, a wise choice? offers genuine, unbiased, free on-call financial advice to ensure that you make wise financial decisions. Just leave a missed call on financial education helpline 02261816111 or just post a request on website. 

SEE ALSO: What is a Term Insurance Plan?

What is a ULIP?

Unit linked insurance plans popularly called ULIP’s, are offered by life insurers in India. A ULIP is a twin benefit plan,

Life insurance + investment

You and several investors, pay a premium and invest in a ULIP. The sum assured of the ULIP, depends on the premium you pay. The life insurer pools this money and deducts the expenses, for giving you life insurance cover. The remaining amount is invested in equity (stocks) or fixed income (debt) or hybrid (mix of equity + debt), after deducting the cost of investing and other expenses, depending on the fund you choose.

A fund manager is appointed by the life insurer to manage your money. His job….get you good returns on your investment. The money you and several other investors invest, is divided into units. You get units based on the amount you invest. If you invest in equity mutual funds, the value of units, rises and falls with the movements of the stock markets. If you/policyholder die before the maturity of the ULIP, your family gets the death benefit. This may be either the sum assured; only the fund value, or sum assured + fund value, depending on the type of ULIP.

SEE ALSO: Why You Need A Term Insurance Plan?

What is a mutual fund?

A mutual fund in India, pools and then invests your and other investor’s money, in stocks or bonds or even a mixture of both, stocks and bonds. The total investment made by the mutual fund, either in stocks/bonds, is then divided into units. You get units, based on the proportion of your investment (cash you invest in a mutual fund). The value of the mutual fund, is measured by its Net Asset Value (NAV). This is the value at which you (investor), buy and sell mutual funds.

Also Know: Equity shares and Mutual Funds in a Simple Way

Cost of investing - Mutual fund vs ULIP

  • You have the expenses of the fund manager, when you invest in a mutual fund. The mutual fund charges you an exit load (charges when you exit the mutual fund). The maximum expense ratio that an equity mutual fund can charge you is 2.5%. (This is 2.5% of the amount you invest). For debt mutual funds it is 2.25%.
  • The ULIP has premium allocation charges (This could be around 7% of the premium). You have mortality charges, used to give you life cover. You also have fund management charges (money paid to the fund manager to manage investments) and also policy administration charges.

Also Know: Hidden Cost in Mutual Funds

The cost of investing in a mutual fund, is much lesser than a ULIP.

SEE ALSO: Best Term Insurance Plans In India

Lock in Period Between Mutual fund vs ULIP

ULIP’s have a lock in of 5 years. You cannot touch your money for 5 years. This could be a problem, if you require money in an emergency. If you invest in an open ended mutual fund, you can invest or withdraw money, each day. You can easily exit from the mutual fund in an emergency. ELSS, a type of mutual fund, has a 3 year lock in. You cannot touch your money for 3 years.

When it comes to lock in, mutual funds win hands down.

Tax Benefits Between Mutual fund vs ULIP

You get a tax deduction under Section 80 C, up to INR 1.5 lakhs a year on your taxable salary, for the premiums you pay for the ULIP. The maturity amount you get when the ULIP matures, or the death benefit your family gets on your death, in tax free under Section 10(10D). If you survive the maturity period of the ULIP, you get the maturity value of your ULIP. Most mutual funds do not have tax benefits. However ELSS a type of mutual fund, enjoys EEE benefits. The money you invest in ELSS, enjoys a tax deduction up to INR 1.5 Lakhs, under Section 80 C of the income tax act. The money which accumulates and is withdrawn at maturity, is tax free.

ULIP’s enjoy tax benefits. Mutual funds do not have tax benefits. However ELSS with EEE benefits, are an excellent tax saving tool.

Never mix insurance with investments. You avail life insurance to make sure your family is well cared for, even in your absence. Avail a term life insurance plan, to do the job. The purpose of investing is to make your money grow. Mutual funds help your money grow, with time. This makes mutual funds an excellent investment. However if you have availed a ULIP, it makes sense to continue with it, till maturity.

Be Wise, Get Rich.

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