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Are you prioritising financial security or aiming for higher returns? Find out which investment option suits your goals best in our latest analysis.
The Sensex hitting 80,000 points highlights a significant market upswing, boosting investor optimism. Here, in the world of investments, picking the right option is vital.
A common debate revolves around Life Insurance Corporation (LIC) vs mutual funds. An investor can choose the option that best suits his/her financial aspirations by being aware of the distinct advantages of each.
LIC overview
“Yogakshemam Vahamyaham” — translating to “Your welfare is our responsibility” — has been LIC‘s guiding principle since 1956. It offers much more than just policy plans; it creates robust safety measures for financial stability. LIC covers a multitude of needs with its wide range of products, which include term assurance, pension schemes, and more. Term plans deliver extensive coverage at affordable rates, while endowment options combine protection with investment, providing lump sum benefits at maturity or on demise.
A standout feature of LIC is its promise of economic security. Should the policyholder pass away, the beneficiary receives a significant amount to help sustain their lifestyle. Additionally, many plans include maturity benefits, useful for major life expenses like higher education or retirement planning.
- Types of LIC offerings:
- Term insurance schemes
- Retirement plans
- Lifetime coverage
- Endowment options
- Unit-linked insurance
- Money-back schemes
- Micro insurance policies
- Health coverage
LIC encourages disciplined saving habits. Regular premium contributions accumulate into a substantial fund over time. Flexible payment schedules—monthly, quarterly, biannually, or annually—cater to different financial capacities. In case of urgent cash requirements, several LIC policies allow borrowing against the policy’s worth, providing quick liquidity without jeopardising future benefits.
LIC transcends beyond being a mere insurance company. It acts as a comprehensive financial planning partner, integrating protection with wealth-building opportunities, ensuring a secure and flourishing future for its customers.
To know more: Insurance 101: How to protect yourself and your assets!
Mutual funds explained
The investment instrument pools money from many investors to create a substantial investment corpus. Professional fund managers then allocate this amount across a mix of financial instruments such as shares, bonds, & money market securities. The main aim is simple: generate returns for the investors.
By contributing to the fund, the benefactor actually purchases units in a mutual fund, which correspond to a fraction of the fund’s holdings. The value of these units, known as the NAV or the net asset value, varies daily as it is market-linked of the underlying investments.
For individuals lacking the time or knowledge to navigate the market directly, mutual funds are an excellent choice. They offer diversification, spreading risk across different securities, and are managed by experts who make decisions based on extensive research and analysis. The fund manager ensures that investments are aligned with the scheme’s goals, aiming to optimise gains.
Mutual funds are categorised based on many criteria. Based on the underlying asset, these are the general types:
- Equity funds: Primarily focus on stocks, making them suitable for long-term capital appreciation.
- Debt funds: Invest in fixed-income instruments, providing stability with modest returns.
- Hybrid funds: Blend equities and fixed-income securities, offering a balanced approach.
Next based on entry & exit. Open-ended schemes allow investors to join or exit anytime, offering flexibility. Conversely, closed-ended schemes have a set duration and can only be purchased during the initial subscription period. After this period, these schemes are listed on stock exchanges, offering some level of liquidity.
On management basis:
- Actively managed
- Passively managed
Active funds see managers constantly tweaking the portfolio, buying and selling to beat the market. In contrast, passive funds follow a more laid-back approach, tracking an index to match its returns.
Choosing between different schemes depends on one’s strategy and risk preference. Thereby the tool allows access to a diversified portfolio with relatively small capital. And, lastly the SIP option or systematic investment plans enable regular contributions, promoting disciplined savings and wealth accumulation over time.
Also read: SIPs: The game changer for mutual fund investors in 2023 with a 22% spike
LIC vs mutual funds: The ultimate showdown
Here’s a succinct comparison to aid your decision-making:
| Parameter | LIC policies | Mutual Funds |
| Definition | Provides financial security to a family upon the policyholder’s death. | Pools money from multiple investors to invest in market-linked assets. |
| Objective | Primarily aimed at securing dependents’ future in the event of premature death. | Focuses on wealth creation and achieving long-term financial goals. |
| Risk factor | Government-backed, offering minimal risk with assured benefits. | Market-dependent, thus subject to volatility and higher risk. |
| Profitability | Generally offers modest returns, prioritising safety. | Potential for higher returns over extended periods, despite market fluctuations. |
| Tax exemptions | Premiums up to ₹1.5 lakh exempt under Section 80C. | Not all. Funds like ELSS funds qualify for tax benefits under the same section. |
| Access to funds | Allows loans against policy, offering liquidity. | Units can be sold anytime, ensuring easy access to funds. |
| Duration | Policies typically have long-term commitments. | No fixed duration; flexible entry and exit points. |
| Extra benefits | Optional riders like critical illness cover can be added. | Generally, no additional rider benefits. |
| Investment spread | Single policy investment, leading to limited diversification. | Invests across various securities, providing a diverse portfolio. |
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Bottomline
LIC policy vs mutual funds- which one is for you? It depends on your priorities and comfort with market dynamics. LIC policies are best for those wanting assured protection for their family, offering stable returns and tax relief. Conversely, mutual funds appeal to those aiming for higher growth, willing to navigate market ups and downs.
For a balanced strategy, consider combining both: LIC for safety and mutual funds for wealth creation. Align your choices with your long-term aspirations and risk tolerance to achieve a comprehensive and robust financial plan.
FAQs
It depends on your needs. LIC is great for safety and guaranteed returns. It’s like having a financial safety net. Mutual funds can offer higher returns but come with more risk. They are good for long-term growth. Think about your goals. Do you want security or growth? Your choice should match your comfort with risk and your future plans. Both have their own advantages. Choose based on what you value more.
Consider your goals. LIC provides financial security and guaranteed returns, ideal for protecting your family. The returns might be lower compared to other options. For those who prefer stability and peace of mind, LIC is a good fit. If you’re looking for higher returns and can handle some risk, you might want to explore other investments. Assess your needs and decide what aligns best with your future plans.
The returns are usually lower than other investments. It’s not great if you want quick growth. Policies can be expensive over time. There are strict terms and conditions. Sometimes, you have to wait a long time to see any benefits. Limited flexibility is a drawback. If you need to withdraw early, it can be costly. It’s more about security than making a lot of money.
LIC offers life cover plus returns. It’s good for family security. FDs provide fixed interest rates and are low risk. LIC might have different returns compared to FDs but includes insurance benefits. FDs are simpler and more liquid. Think about what you need more: insurance and long-term security, or predictable returns with easier access. Both have their own advantages. Choose based on your goals and what makes you feel secure.
It depends on your priorities. LIC offers assured protection for your family, stable returns, and tax relief. Mutual funds aim for higher growth but come with market ups and downs. If you want security, stick with LIC. If you’re comfortable with risk and seek higher returns, mutual funds might be better. A balanced strategy could be combining both.