LIC vs Mutual Funds

LIC is a life insurance provider which offers insurance policies, while mutual funds operate as investment instruments pooling funds from multiple investors to create diversified portfolios comprising stocks, bonds, or other securities.
LIC vs Mutual Funds
3 min
11-June-2024

Mutual funds have potential to generate higher returns compared to LIC. However, life insurance policies offer appealing features such as tax-free insurance benefits and tax-deferred growth dividends, making them attractive to investors. For investors with a long-term outlook, the Indian financial markets offer a wide range of options to choose from. When choosing among these, the dilemma many investors face is the LIC vs mutual fund comparison. Both financial products have a long-term horizon and offer unique benefits. However, to make an informed choice between the two, it is essential to understand the differences between LIC policies and mutual funds.

Mutual funds may be better suited for you if you want to create wealth over the long term. However, LIC policies may be ideal for you if you are prioritising your family’s financial security. Let us take a closer look at the question of ‘LIC or mutual funds: which is better?’

What is LIC?

LIC is an acronym for the Life Insurance Corporation of India — a public sector life insurance provider that has been the industry leader for many decades now. Life insurance policies offered by the LIC are designed to protect the policyholder’s family financially in case of the insured individual’s demise. If the policyholder passes away during the policy term, the insurer pays out the death benefits guaranteed under the plan. In addition to this, the policy may pay maturity benefits depending on the type of life insurance.

What are mutual funds?

Mutual funds are pooled investment vehicles that use the collective capital from investors to put together a basket of assets. These assets may include debt instruments, equity stocks, money market instruments and even gold, depending on the type of mutual funds.

Key Differences between LIC vs mutual funds

Now that you know the meaning of LIC policies and mutual funds as well as the types of options available under each investment category, let us examine the LIC vs mutual funds comparison further. Here are the key differences between LIC policies and mutual funds.

Particulars

LIC policies

Mutual funds

Primary purpose

To offer life insurance coverage and financial security

To offer investment growth through market-linked assets

Risk involved

Generally lower risk as they offer guaranteed death benefits

Higher risk, which varies based on the market conditions and fund type

Returns expected

Fixed returns and bonuses that are typically lower than potential equity returns

Potential for higher returns based on market performance

Investment focus

Stability and security

Capital growth

Tax benefits

All life insurance policies offer tax benefits as per section 80C of the Income Tax Act

Only Equity Linked Savings Schemes (ELSS) offer tax benefits under section 80C of the Income Tax Act

Liquidity

Lower liquidity since life insurance is a long-term product

Generally easier to liquidate (except in the case of ELSS and close-ended funds)

Costs and charges

Premium is the primary charge involved

Costs include management fees, exit loads and other fund-related charges

Suitability

Suitable for investors who want to ensure the financial security of their families

Suitable for investors seeking to create wealth from market-linked investments

 

Which one to Choose between LIC vs mutual funds?

The answer to the question of ‘LIC or SIP: which is better?’ should be clearer now that you know the differences between LIC policies and mutual funds. However, if you are still in a dilemma about the two types of investments, here are some pointers to guide you.

LIC policies may be suitable for you if:

  • You seek life insurance coverage to protect your family in your absence
  • You prefer a low-risk investment with guaranteed returns
  • You want to enjoy tax benefits on your investments
  • You seek a long-term savings option that includes maturity benefits
  • You are comfortable expecting predictable returns instead of dealing with market fluctuations

Mutual funds may be the ideal choice for you if:

  • You are aiming for higher returns through market-linked investments
  • You have a higher risk tolerance and can handle market volatility
  • You prioritise flexibility and liquidity in your investments
  • You want a wide range of options to diversify your investment portfolio
  • You want to benefit from the power of compounding through SIP investments

Difference between the benefits of LIC policies and mutual funds

Both LIC policies and mutual funds offer different kinds of benefits to investors. To understand which investment avenue is better suited to your goals, you need to be aware of these benefits.

LIC policies offer several benefits that are primarily centred around financial security and stability. They provide life insurance coverage and ensure that the policyholder's family is financially protected in the event of the policyholder’s demise. This coverage is in the form of a death benefit, which is a guaranteed payout to the nominee. Additionally, some LIC policies often come with maturity benefits, where the policyholder receives a lump sum if they survive the policy term. These policies also offer tax benefits under section 80C of the Income Tax Act, making them attractive for tax planning.

Mutual funds, however, are favoured for their potential to generate higher returns through diversified market-linked investments. They allow investors to pool their resources to invest in a broad range of assets, including equities, bonds and money market instruments. This diversification reduces risk and can enhance returns. Mutual funds also offer flexibility and liquidity by allowing investors to buy or sell units as needed (except ELSS and close-ended funds). Additionally, professional fund management ensures that investment decisions are made based on thorough market analysis.

Types of LIC plans

LIC offers the following types of life insurance plans:

  • Term insurance plans: These are pure life insurance plans that offer high coverage at affordable premiums. They only offer death benefits and no maturity benefits.
  • Endowment plans: Endowment plans or savings plans come with a built-in savings component, which is offered in the form of maturity benefits if the policyholder survives the policy term.
  • Money-back plans: These LIC policies offer money-back benefits if the policyholder survives the policy term. There is no additional savings component involved.
  • Whole life insurance plans: Whole life insurance plans, as the name indicates, offer life insurance coverage till the policyholder turns 99 or 100 years of age.
  • Unit Linked Insurance Plans (ULIPs): These are life insurance plans that also offer the benefit of market-linked investments in the form of different ULIP funds.
  • Pension plans: Pension plans from LIC are designed to offer the benefit of regular pension income to policyholders in the post-retirement stage of life.
  • Health plans: Health plans from LIC offer coverage for medical expenses and healthcare costs for specified illnesses and diseases.
  • Micro insurance plans: These LIC policies are designed for policyholders from low-income families. They offer basic coverage at low premiums.

Types of mutual funds

The mutual fund market is also as diverse as the insurance market. Broadly, you can choose from the following types of mutual funds:

  • Equity mutual funds: These funds invest primarily in stocks and aim for high returns through capital appreciation. They are suitable for you if you have a higher risk tolerance and a long-term investment horizon. You can choose from different types of equity mutual funds like small-cap, mid-cap and large-cap funds, open-ended and close-ended funds, actively and passively managed funds and even sectoral or thematic funds.
  • Tax-saving equity funds (ELSS): These are equity-oriented funds that offer tax benefits under section 80C of the Income Tax Act. The amount invested is deductible from the total income up to Rs. 1.5 lakhs.
  • Debt mutual funds: These funds invest in fixed-income securities like corporate bonds, government securities and other debt instruments. They are ideal for conservative investors who seek stable returns with lower risk.
  • Hybrid mutual funds: These funds invest in a mix of equity and debt instruments to balance risk and return. They are suitable for investors seeking moderate risk and diversified exposure.
  • Money market funds: These mutual funds invest in short-term debt instruments and offer high liquidity with minimal risk. They may be ideal for you if you are looking for a safe place to park your money temporarily.
  • International funds: These schemes invest in foreign markets and give you the benefit of diversification beyond domestic investments. You can consider investing in them if you wish to diversify your portfolio internationally.
  • Fund of funds: These MF schemes invest in other mutual funds, thus offering diversified exposure across various fund categories. They are preferred by investors who want a one-stop solution to diversify their investments.

Conclusion

This should give you a clear idea of the differences between LIC policies and mutual funds. LIC policies and mutual funds cater to different financial needs. The former category of products focuses on providing life insurance and financial security and offer low-risk fixed returns as well as tax benefits. They are ideal if you want to prioritise family protection and guaranteed returns.

Mutual funds, on the other hand, aim for wealth creation through market-linked investments. They offer potentially higher returns, greater liquidity and a variety of options for portfolio diversification. They suit investors with higher risk tolerance seeking flexibility and capital growth.

You can make an informed choice between the two options based on your financial needs and goals. If you choose mutual funds, you can easily invest in suitable schemes on the Bajaj Finserv Mutual Funds Platform. With more than 1,000 mutual fund schemes to choose from, this platform makes it easy to identify the fund that best aligns with your goals. You can easily compare mutual funds of different types and choose those that meet your risk-return expectations.

Calculate your expected investment returns with the help of our investment calculators

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Frequently asked questions

Which is better: life insurance or mutual funds?
Both financial products have distinct benefits. Life insurance offers financial security and death benefits. Mutual funds, especially market-linked schemes, have the potential to offer high returns.
Is investing in insurance from LIC a good option?
Life insurance policies from LIC offer guaranteed financial benefits as well as tax savings. So, if these are the financial goals you wish to pursue, LIC’s insurance may be suitable.
Are LIC investments 100% safe?
Yes, LIC investments are safe, making them suitable for conservative investors with a low tolerance for risk.
Do mutual funds offer any death benefits?
While mutual funds do not offer any direct death benefits, the investor’s nominee or joint account holders can claim the investments if the investor passes away.
What are the disadvantages of choosing insurance from LIC?
Choosing life insurance is generally a beneficial proposition. However, the returns may be low when compared with successful market-linked investments.
What happens to mutual funds in case of the investor’s demise?
If the investor passes away, the nominee or the joint account holders can claim the investments.
Who is ineligible to be a mutual fund nominee?
Hindu Undivided Families (HUF), trusts (except charitable or religious trusts), societies, partnership firms, companies or corporate bodies cannot be nominees to a mutual fund.
Are LIC policies the same as mutual funds?
No. There is a difference between LIC policies and mutual funds. The former is a life insurance policy that offers death benefits. The latter is a pooled investment vehicle that invests in a basket of assets.
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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.