Learn About the Difference Between Mutual Fund and Insurance
Investment is an ideal way of financially securing one’s future. Here, the availability of different types of investment options, such as life insurance and mutual funds, often confuses individuals. This piece will solely focus on the difference between a mutual fund and insurance.
Read along!
What Is the Difference Between Mutual Funds and Life Insurance?
Refer to the table mentioned below to learn about mutual funds vs life insurance.
| Pointers | Mutual Fund | Life Insurance |
| Meaning | Mutual funds are investment vehicles comprising a pool of money collected from investors. These are invested in securities like bonds, shares, money market instruments and other assets. | Life insurance is a contract between an insurance policyholder and an insurance company where the insurer pays a specific sum to the insured persons’ family upon their death in exchange of a premium. |
| Objective | To generate returns on investment and create and ensure growth and capital preservation. | To financially secure the family of the policyholder in case of untimely death. |
| Liquidity | Mutual fund investors can liquidate their funds at any time. However, one has to pay the exit load. | Depending on the life insurance policy, individuals can liquidate through a loan facility. |
| Risk | Mutual funds are subject to market risks. Therefore, the risks associated with mutual funds are high. | Life insurance comes with lesser risk. As long as investors pay all premiums on time and follow policy rules, the nominee of that policyholder will receive a sum assured during settlement. |
| Return | Returns are higher in the long term. The high risk of investing in mutual funds offers high rewards. | Return varies from one policy to another. However, the returns are low. |
| Diversification | A mutual fund allows diversification meaning investors can spread out their investment to restrict exposure to a particular type of asset. | Life insurance does not offer the diversification option if they invest their money in one plan. |
| Tax Benefit | Under Section 80C of the Income Tax Act 1961, only equity linked savings schemes can only qualify for a tax deduction. | Under Section 80C of the Income Tax Act 1961, individuals can avail tax deduction of up to ₹1.5 lakh for premium payments towards a life insurance policy. |
From the above discussion, individuals can understand the difference between a mutual fund and life insurance. Now, let’s see if they churn out benefits from investing in both these investment options.
Can Individuals Benefit from Investing in Both Mutual Fund and Life Insurance?
While investing in life insurance, individuals might wonder why these products are not outlined in a way that allows them to take advantage of the market. Here, the Unit Linked Insurance Plan (ULIP) comes to play a crucial role.
ULIP is a life insurance product where investors can invest under a single integrated plan. Here, investors have to take the risk cover of a policy. On the other hand, they can invest in different investment instruments such as bonds, stocks, and mutual funds. In this type of investment, investors get the chance to monitor their portfolios. However, they have to bear the market risk associated with these funds.
ULIP consists of funds like equity funds, income/fixed interest/bonds, balanced funds and cash funds. The risk factor varies with each fund. Remember, ULIPs are extremely flexible, and the return from this investment instrument will depend on the income objective and risk appetite of the investor.
On an endnote, it can be said that both life insurance and mutual funds come with pros and cons. While life insurance offers financial securities, mutual funds offer decent returns. It is the objective and risk appetite that helps individuals understand the difference between a mutual fund and life insurance and choose the right investment instrument.
If investors cannot choose between the two, yet want to leverage the advantageous features of both these investment options, they can opt for ULIP. Thus, getting security just like a life insurance policy and benefits from the financial market similar to that of a mutual fund can be a lot easier.
Frequently Asked Questions
Does a mutual fund offer rider benefits?
No, a mutual fund does not offer rider benefits. It is available with mutual funds. A rider is an additional coverage and added protection against risks.
What are the different types of mutual funds?
Different types of mutual funds are Index funds, Balanced funds, Equity funds, Money market funds, funds of funds, and Specialty funds.