Why Mutual Fund Investments Are Better Than LIC Policies

Mutual Funds

When it comes to long-term financial planning, Indians have traditionally leaned heavily on Life Insurance Corporation (LIC) policies. However, with increasing financial literacy, more and more investors are realizing that mutual funds offer superior returns, flexibility, and transparency compared to traditional LIC policies. In this article, we’ll explore why mutual funds are a better investment option than LIC policies, backed by facts and data.

1. Higher Returns

One of the most compelling reasons to choose mutual funds over LIC policies is the potential for higher returns. LIC policies, being insurance products, focus primarily on providing life cover, with investment returns being secondary. As a result, the returns from LIC policies typically range between 4-6% per annum. In contrast, equity mutual funds, over the long term, have historically delivered average annual returns of 12-15%​ (Monika Halan).

For instance, if you invest ₹1 lakh in a LIC endowment policy for 20 years, you might receive around ₹3-4 lakhs at maturity. However, if the same amount is invested in a well-diversified equity mutual fund, the corpus could potentially grow to ₹10-15 lakhs over the same period, assuming a 12% annual return.

2. Flexibility and Liquidity

Mutual funds offer unmatched flexibility. You can choose from a variety of funds—equity, debt, hybrid, sectoral, etc.—depending on your financial goals, risk appetite, and time horizon. Additionally, mutual funds allow you to start and stop investments as per your convenience. With SIPs (Systematic Investment Plans), you can invest as little as ₹500 per month.

On the other hand, LIC policies require a fixed premium payment every year, and missing a payment can lead to the policy lapsing. Moreover, LIC policies come with a long lock-in period, and early withdrawals are either not allowed or come with heavy penalties.

3. Transparency

Transparency is another area where mutual funds outshine LIC policies. Mutual fund investments are regulated by SEBI (Securities and Exchange Board of India), ensuring that fund managers adhere to strict guidelines. All mutual funds publish their portfolio details, performance data, and expense ratios regularly, allowing investors to make informed decisions.

In contrast, LIC policies often lack this level of transparency. Policyholders are generally not aware of where their money is being invested or how much of their premium goes towards the insurance cover versus the investment component.

4. Tax Efficiency

While both LIC premiums and ELSS (Equity Linked Savings Scheme) mutual funds qualify for tax deductions under Section 80C of the Income Tax Act, mutual funds offer better post-tax returns. The maturity proceeds from LIC policies are tax-free, but the returns are lower. On the other hand, long-term capital gains from equity mutual funds are taxed at 10% only if the gains exceed ₹1 lakh in a financial year, making them more tax-efficient in many cases.

5. Purpose-Driven Investments

It’s essential to understand that LIC policies are primarily insurance products designed to provide life cover, not to generate high returns. If your goal is wealth creation, mutual funds are a more appropriate choice. On the other hand, if life insurance is what you need, a term insurance policy, which offers higher coverage at a lower cost, is a better option than an endowment or money-back policy.

For example, a 30-year-old can get a term insurance cover of ₹1 crore for an annual premium of around ₹10,000. In contrast, an LIC endowment policy with a similar premium would offer a life cover of only ₹5-10 lakhs.

6. Real-Life Example

Consider the case of investing ₹10,000 per month for 20 years. In a typical LIC policy, you might end up with a corpus of around ₹30-40 lakhs. However, the same investment in a mutual fund yielding an average return of 12% per annum would grow to approximately ₹1 crore. This stark difference highlights the power of compounding and the superior returns offered by mutual funds.

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Conclusion

While LIC policies have their place in providing life insurance, they fall short when it comes to wealth creation. Mutual funds, with their higher returns, flexibility, transparency, and tax efficiency, are far better suited for building a substantial financial corpus over the long term. For those serious about growing their wealth, investing in mutual funds while opting for a separate term insurance policy for life cover is the way forward.

By choosing mutual funds, you’re not just investing your money—you’re securing a brighter financial future.