You can't build a dam when flood water is bristling at your doorstep. Likewise, you shouldn't wake up only to find uncertainties knocking at your doorstep. This is why it is advised to plan your finances as soon as you start earning.
Well, planning your finances is a step-by-step process that needs a lot of thought and patience. In this article, we'll understand two investment tools - Term plan and Mutual Funds, the difference between them, and which one is better.
What is a Term Insurance Plan?
Term insurance is an insurance policy that provides a financial shield to the policyholder for a specific time duration. Suppose the insured person dies in between the time duration mentioned in the policy, a death benefit is paid to the nominee. However, if the life assured survives till the end of the policy tenure, there won’t be any payouts as term plan is a pure risk cover.
Term insurance provides a financial shield to your family in your absence. God forbid, but in case of your untimely or premature death, term life cover would ensure that your family continues living the same lifestyle as you have been providing.
It is the most simple and affordable insurance policy.
The benefit of a term insurance plan is that it provides a huge amount of life cover without being too heavy on your pocket.
For instance, a 30 years old non-smoker male can opt for a INR 50 lakhs life cover (sum assured) with a policy tenure of 40 years, i.e up to his age of 70 years in just INR 4,500 to 7,500 annually. The premium varies from insurer to insurer.
Now, in case the life assured dies by the age of 50 years, the life insurance company would pay INR 50 lakhs to the nominee. The nominee can be his wife, children, parents, or all three. In the case where all three are the nominees, the cover for each must be mentioned by the assured at the time of purchase.
|Life Assured Details||Policy Tenure|
(Sum Assured) (INR)
|Annual Premium (INR)|
Age: 30 years
|40 years||INR 50 Lakhs||INR 4,500-7,500/ year|
This sum assured of INR 50 lakhs can be utilised by the family to pay off any debts or loans, to carry out monthly expenses, for children’s education or marriage, and so on.
With the assured term plan cover, your family wouldn’t have to face financial crunch or challenges due to unpaid loans or to meet monthly expenses. They can live a financially stable and worry-free life in your absence if you opt for a term insurance with an adequate life cover.
What is a Mutual Fund?
A mutual fund is a financial investment instrument made up of the pool of money collected from different investors investing in stocks, bonds, and other money making instruments. They are professionally managed by fund managers who allocate fund's assets and try to produce capital gains for the investors. The value of a mutual fund depends on the securities it buys and the market performance of those securities.
The average of mutual funds has hundreds of securities, which means investors get to invest in diversified securities at a low price. When you buy a unit of a mutual fund, you're purchasing a part of the portfolio managed by the mutual fund company. The unit is made up of different funds instead of one holding of a particular company’s stock.
For instance, you purchase stocks of a company A. Now, in a particular quarter, the company didn't perform well, which would directly affect the stocks you'd invested in. On the other hand, if you invest in mutual funds, you lose significantly less amount as that company A might be only a small part of the portfolio.
However, it is a risk-related investment option that helps you to grow your money, and you should keep that in mind before investing and analyse before investing, as you might have heard this line on radio and television – "Mutual funds are subject to market risks. Read scheme related documents carefully before investing."
Why are Term Insurance and Mutual Funds important?
Let's understand this part with the help of an example.
Assume there are three people, namely, Amit, Rajiv, and Chitersh.
They earn the same amount of salary and have two kids; each of them has taken a car loan of INR 8 lakhs and a home loan of INR 42 lakhs.
At the age of 35 years, all three of them decide to make a regular investment of INR 10 thousand per month.
Amit invests monthly in SIPs, stocks, and other investment vehicles.
Rajiv invests monthly INR 500 in a term insurance policy of amount INR 50 lakh. He invests the remaining amount like Amit.
Chitersh invests INR 1500 in term insurance policy of INR 1.5 crore. He then invests the remaining amount like Amit.
Investment by Amit, Rajiv, and Chitersh: INR 10, 000 monthly investment budget.
Car loan: INR 8 Lakh, Home loan: INR 42 Lakh
|Name||Monthly Term Insurance Investment||Monthly Mutual Fund Investment||Life Cover|
|Rajiv||INR 500||INR 9,500||INR 50 Lakh|
|Chitersh||INR 1,500||INR 8,500||INR 1.5 Crore|
In case they survive till beyond the retirement age:
Three of them get an annual return of 10%.
As Rajiv and Chitersh were investing some amount of money in a term insurance plan, they will not get an annual return on that amount.
By investing in the same manner for 25 year, they retire at the age of 60.
At the time of retirement, Amit has INR 1.32 crore as savings, Rajiv has INR 1.25, and Chitersh has INR 1.13 crore as savings. This will help them in leading a satisfactory retirement life.
|Name||Monthly Term Insurance Investment||Monthly Mutual Fund Investment||Returns by the Age of Retirement|
|Amit||Nil||INR 10,000||INR 1.32 Crore|
|Rajiv||INR 500||INR 9,500||INR 1.25 Crore|
|Chitersh||INR 1,500||INR 8,500||INR 1.13 Crore|
But not everybody gets to live a retired life.
What if three of them had died in car accidents at the age of 45 years?
In case of Death before the retirement age.
At that time, the family of the Amit will have INR 20.5 lakh as savings. That amount would not be sufficient even for paying a house loan. What about education, daily expenses, and marriage of children?
Family of Rajiv will have INR 19.5 lakhs as savings, and they will get INR 50 lakhs from term insurance. Will that be sufficient for the education of children and for maintaining a quality lifestyle of the family?
Chitersh's family will have INR 17.68 lakhs as savings and INR 1.5 crore from the term insurance policy. After paying the house loan, they can invest the remaining amount in safe investment instruments like FDs and Gold. The money coming from the term insurance will help his family maintain their lifestyle, provide quality education to children, and get them married when the time comes.
|Name||Monthly Term Insurance Investment||Monthly Mutual Fund Investment||Returns from Mutual Fund at the time of Death||Term Insurance Death Benefit||Car and Home Loan|
|Amit||Nil||INR 10,000||INR 20.5 Lakh||Nil||Family can’t pay off.|
|Rajiv||INR 500||INR 9,500||INR 19.5 Lakh||INR 50 Lakh||Family Can easily pay, but will find it difficult to carry out monthly expenses and other life events without another source of income|
|Chitersh||INR 1,500||INR 8,500||INR 17.68 Lakh||INR 1.5 Crore||Can pay all the debts, plus can carry out child’s education and marriage without any worries|
Now, the decision is up to you.
Mutual funds help you save money and take advantage of it while you are alive. They are tools that allow you to invest in the growth of the market with risk. If your savings aren't meeting your future financial goals, investing a part in mutual funds can help you fulfill them while staying in your risk-taking capacity and budget.
But God forbid, if any untoward incident happens, what do you want to leave behind for your family? How can you make sure they live a financially stable life and the same lifestyle that you have been providing for so long? Will the money you leave behind be sufficient for your family to secure their future?
That’s the reason, it is highly advised to opt for a term insurance plan
Let’s see how each differs from each other.
Comparison of Term Plan Vs. Mutual Funds
|Term Plans||Mutual Fund|
|Definition - Protection scheme which helps you in securing the financial future of your family, if you die a premature death.||Definition - Tool of investment which helps you increase your wealth through market-linked investments with the advice of professional money managers.|
|Beneficiary - Secures the financial future of your dependents, your parents, or children in your absence.||Beneficiary - Helps you secure the future of your's and your dependents with minimal risks.|
|Risk - Involves a lesser amount of risk as compared to mutual funds and provides a guaranteed death benefit.||Risk - Doesn't ensure returns and doesn't provide any death benefit.|
|Returns - High Returns if the insured person dies.||Returns - Provides low returns as compared to the term plan.|
Which is the Better Option — Term Plan or Mutual Fund?
There is no one-size-fits-for-all answer to this question. The answer totally depends upon your financial goals and needs. You need to analyze which financial instrument suits you and your family. And for that, you must understand that these two instruments serve two different purposes.
While mutual funds are profit-making schemes, a term insurance plan is a cover to protect your family's future.
So before purchasing any of these two financial plans, it is necessary to discuss it with family or give a detailed thought by keeping your family's financial needs in mind.
However, all the financial advisors recommend to first invest term insurance and secure your family’s future against eventuality. After all, family first. And then once you have a life cover, and if you want to invest in mutual funds, chalk out your goals, vet your risk-taking appetite, analyze the returns given by your preferred mutual fund, and then invest in it.
A sound portfolio must have term insurance plans and mutual funds. While the latter boosts your financial wealth and helps you achieve your financial goals, the former protects your family from uncertainties.
Remember: family first. Life is quite unpredictable, before making any decision, ask how will they manage life in your absence?