LIC vs Mutual Funds
Investing your hard-earned money is an essential part of securing your financial future, and plenty of options are available to help you achieve your goals. Among the most popular choices are LIC (Life Insurance Corporation of India) policies and mutual funds. Both serve different purposes and cater ...read more
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Qualified Policybazaar expert will assist you What is LIC (Life Insurance Corporation)?
LIC is a government-owned insurance and investment company in India that has been around since 1956. It offers various insurance products to help secure your family’s future in case of untimely death.
LIC policies include —
- Term insurance
- Endowment plans
- Unit Linked Insurance Plans (ULIPs)
- Money-back plans
The primary purpose of LIC is to provide financial security to the insured's family and loved ones in the event of your death.
Additionally, it offers tax benefits under Section 80C of the Income Tax Act, making it an attractive option for those looking to reduce their tax liabilities in India.
Benefits of LIC
- Risk Coverage: Provides financial protection in case of your untimely demise
- Wealth Creation: Certain LIC policies, like ULIPs and endowment plans, help create wealth over time
- Long-Term Investment: Some LIC policies offer guaranteed returns, making them suitable for long-term wealth building
What are Mutual Funds?
Mutual funds are a pooled investment vehicle — many investors contribute money to collectively invest in a diversified portfolio of stocks, bonds, or other securities. Managed by professional fund managers, these funds aim to generate market-linked returns and usually offer higher growth potential compared to traditional investments.
These funds can be categorised into equity funds, debt funds, hybrid funds, and more. The primary objective of mutual funds is to create wealth over time by investing in the market, allowing investors to benefit from compounding and diversification.
Benefits of Mutual Funds
- Diversification: Your money is invested across a variety of asset classes, which helps spread risk
- Professional Management: Fund managers handle the investment decisions, saving you time and effort
- Flexibility: Mutual funds offer various options like SIPs (Systematic Investment Plans), lump sum investments, and redemption flexibility
- Liquidity: Unlike LIC policies, mutual funds offer relatively higher liquidity — you can redeem your investment whenever needed (subject to exit loads)
Key Differences Between LIC and Mutual Funds
Curious whether LIC is better or mutual funds? Let’s take a look at the points below —
| Criteria | LIC (Life Insurance Corporation) | Mutual Funds |
|---|---|---|
| Purpose | Provide life insurance and financial security to your family Some policies also offer savings and investment benefits | Wealth creation by generating market-linked returns through investments in a diversified portfolio |
| Risk | Low risk, especially with guaranteed return policies like term insurance Some policies offer moderate returns (endowment plans), but returns are not market-dependent | Higher risk as returns are linked to market performance — the value of mutual funds fluctuates based on market conditions |
| Returns | Offers fixed or guaranteed returns (e.g., endowment plans) and death benefits Returns are generally predictable | Market-linked returns, not guaranteed May offer higher returns over time, especially with equity funds, but also comes with the risk of downturns |
| Lock-In Period | Most policies, especially ULIPs, have a lock-in period of minimum 5 years | ELSS funds have a 3-year lock-in period, but other funds like debt or hybrid funds have more liquidity options |
| Liquidity | Limited — early withdrawal often involves penalties and surrender charges apply after the lock-in period | Higher liquidity — investments can usually be redeemed at any time, though exit loads may apply if redeemed within a short time frame |
| Taxation | Mostly premiums paid up to Rs. 1.5 lakhs per annum are eligible for tax exemption under Section 80C Death benefits are tax-free under Section 10(10D) | As per the type and holding period Long-term capital gains (LTCG) on equity funds (held for over 1 year) are taxed at up to 12.5% Short-term capital gains (STCG) can go up to 20% |
| Regulation | Regulated by the Insurance Regulatory and Development Authority (IRDAI) | Regulated by the Securities and Exchange Board of India (SEBI) |
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Mutual Funds vs LIC: Which One Should You Choose?
The decision in terms of LIC vs mutual funds depends on your financial goals, risk tolerance, and time horizon.
Choose LIC if You
- Prefer low-risk investments with guaranteed returns and death benefits
- Seek a long-term savings option with tax benefits and protection
- Want a combination of insurance and investment in a single plan
Choose Mutual Funds if You
- Aim to generate higher returns over the long term and are comfortable with market fluctuations
- Have a higher risk tolerance and can handle market volatility
- Want to benefit from compounding with systematic investments (SIP) and are focused on building wealth
Read More: 10 Best Mutual Funds in UAE to Invest
Is LIC Better Than Mutual Funds?
As with all investment choices, the answer depends on many factors — the most important one is whether you prioritise insurance and security or are looking to create wealth with market-linked returns.
For many, a balanced approach of having life insurance (like LIC) for security and investing in mutual funds for growth works best. Ultimately, both options have their place in a well-rounded financial plan. Assess your individual goals, risk tolerance, and time horizon before making a decision. Consider consulting a financial advisor to tailor an investment strategy that best suits your needs.
Frequently Asked Questions
It depends on your financial goals. If you want protection and security for your family, life insurance (like LIC) is better. If you're looking for higher returns and wealth creation, mutual funds are a more suitable option.
No, LIC is a life insurance company that offers insurance and investment products like ULIPs. Mutual funds, on the other hand, are strictly investment vehicles that pool money from investors to invest in market-linked assets.
If your goal is only long-term wealth creation with higher returns, SIPs in mutual funds are a better choice. However, if you need life insurance coverage alongside savings, LIC is more suitable for securing your family's financial future.
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