Insurance VS Mutual Funds

Insurance VS Mutual Funds

Insurance and Mutual fund are both different financial instruments. Both have different importances. People are often confused between Insurance and Mutual fund and always try to compare Insurance VS Mutual Funds. Insurance here refered for the term life insurance.

Mutual fund is a financial instrument by which one can invest into the share market. The fund is managed by a person called Fund Manager. The duty of the fund manager is to invest the fund in variety of the stocks in the share market on the behalf of the mutual fund owner. There are thousands of mutual fund are available in market with variety of funds to invest in.

Kind of Mutual Funds: There are various kind of mutual funds  like Stock funds, money market funds,  bond funds, target date funds. Which are furhter divided into many sub categories like blue chip mutual funds, small cap mutual funds, Debt based mutual fund, hybrid mutual fund., index funds, tax saving mutual funds (ELSS),  etc.

Which is the best mutual fund? People often the question which is the best mutual fund, but there can’t be a straight answer for it. Depending upon the people’s requirement different funds can be best for one’s requirement. If someone wants to grow his money then he should invest into stock funds. Funds based on blue chip stocks are stable funds which normally gives 10-14% returns in the long run and funds based on small cap stocks are considered as  risky funds which can give -20% +20% returns. People who want to save taxes and want the returns from the share market should invest into ELSS. There is lockin period of 3 to 5 years in ELSS schemes.

Charges in the mutual funnds : There are various kind of charges in mutual funds. They are called Entry load, exit load and fund management chareges. One should know about the charges before investing in mutual funds.

Advantages of mutual funds : Normally it is believed that the mutual funds gives 8 -10% returns in long run. They have liquidity and in the long run they beat the inflation and provides 6 -10% returns.

Disadvantages of mutual funds : Often TV ads, social media ads lure the layman to invest into the mutual funds. But the ads comes with  disclaimers that “mutual funds are subject to market risk, read the term and conditions of the mutual fund before investing” where nobody focuses. Due to these ads people invest their hard earned money in mutual funds with the hope of getting good returns and  but due to sudden needs they withdraw funds when stock market is down and suffer heavy losses. Therefore investment in mutual fund should be done by consulting with someone who has complete knowledge.

Why people invest in Mutual funds? Stock market gives 12-15% returns in long run. But there are some short time periods when stock market gives returns upto 100% or even 200% and there are time periods when stock market gives -50% to -70% returns. But nobody talks about the the negative returns and often people look 100% to 200% retuns so most of the customers invest in mutual funds to get good returns. And only a few percentage of investor understand that they invest in mutual funds because they actively can’t invest in share market and to get good returns from share market.

Which is the right mutual fund? There are thousand of mutual fund and to guess which is the best mutual fund is always not possible because the returns in mutual funds is totally depends upon the fund manager and the time of investment and time of withdrawl. If the market is down and someone invested at that time and withdraws the funds at the time when share market is at peak position obiviously he will get good returns but in case of reverse situation he may face big losses. Also the expertise of fund manager help the investor to get some additional percentages of returns.

Are mutual fund risky? Yes mutual funds are risky. The money is invested into the stock market and the returns  depend upon at what time you invest and at what time you withdraw. The returns may be handsome or may be in negative too. The disclaimer of mutual funds clearly says that “Mutual funds are subject to market risk, please read the scheme before investing”.

Insurance plans: Here the term insurance plans are referred for life insurance plans like endowment plans, money back plans, pension plans, unit linked insurance plans etc. Life insurance plans are the combination of insurance and investment. Other than ULIPS almost all life insurance plans are safe and provides moderate returns 6-8%. Most of the people in India still invest in LIC plans for saving purpose. Mutual funds are complex to understand for them. The liquidity in mutual funds and wrong time of investing and withdrawal have given losses to many people.

Are mutual funds better than life insurance plans? If one has no idea about the mutual funds and if one is not clear about one’s risk apetite related to his investment then mutual funds are not the right thing for investment. But if one has idea about his risk apetite, time duration of investment & has knowledge about the funds then yes mutual funds can be better than life insurance plans in terms of returns.

Are life insurance plans better than mutual funds? For a laymen who has no idea about any mutual fund then yes life insurance plans are better than mutual funds. Life insurance plans provide them an opportunity to save their money for long time period, to get moderate returns along with life insruance. Even if one has complete idea about mutual funds, all the investment should not be made at one place so for the purpose of diversification and to reduce the risk one should do the investment into life insurance plans.

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