It is not uncommon to find someone pitching an investment-cum-life insurance product to you. Have you ever wondered if it really offers you the best of both worlds or if it works otherwise?
A life insurance policy is meant to be a financial protection tool to protect an individual or a family in case of the loss of an earning member. However, this protection has only a limited role to play. A larger goal of life should be to earn, save and invest well so that you can fulfil all your life goals in the best possible manner and live long enough to reap the rewards of the hard work.
Many people find life insurance products attractive only when they are offered some return. As a result, they often end up buying a product that neither gives them adequate life insurance protection nor the best investment option.
“Investment-cum-insurance products often have high fees and commissions, limited investment options, and lack transparency. Therefore, it’s generally better for retail investors to separate their investment and insurance needs, and choose mutual funds for their investment needs,” says Sanjeev Govila, the CEO of Hum Fauji Initiatives, a financial planning firm.
Rather than going for investment-cum-life insurance products, retail investors should opt for a pure-term insurance plan to take care of their financial protection needs. “The purpose of insurance is to reduce financial loss in case of any unfortunate event,” says Harshad Chetanwala, founder, My Wealth Growth, a wealth management firm based in Mumbai. “Life insurance replaces the earning capacity of a person in case of death or disability or life-threatening illness. Hence, looking at it as an investment may not work the best for your finances.”
A pure-term plan, when used only as a financial protection tool, gives you the highest life coverage at the lowest cost. “The premium paid for the term plan just has the cost of covering life, and no investment component. Due to this factor, term insurance offers a higher insurance amount at a reasonable premium as the insurance amount is payable in case of death only. Whereas in the case of an investment-cum-insurance plan, the life cover offered by paying a higher premium is less as a part of the premium is also meant for investment,” says Chetanwala.
So, once you are done with your protection needs, you should put your hard-earned money to work as hard as you do. This is where mutual funds as specialised investment products come into play. Here is why mutual funds (MFs) score high for a layperson looking to invest. Helps you invest in equities at a lower risk
Equities are known to be one of the most volatile asset classes. However, it also gives one of the highest returns. Most non-professional investors are not equipped to handle equity investments well. This is where MFs help, as they have investment experts with good experience to handle equity investments. As a fund invests in many stocks, it diversifies the risk for retail investors.
Greater flexibility in managing your investment
You can invest separately for all financial goals and diversify your investment through mutual funds. “Mutual funds are one of the best avenues available to take care of all financial goals,” says Chetanwala.
So, you can pick a separate mutual fund investment for each life goal. “Whether the aim is long-term investment, short-term investment, investment in a bulk amount or in small lots or a combination of the two, or taking a regular income or pension, mutual funds can meet all the needs in a much better and tax-efficient manner,” says Govila, a retired colonel and a Sebi-registered investment advisor (RIA).
It offers high level of diversification
MFs not only help you diversify your investment, it also puts your moneyinto multiple asset classes. “Mutual funds provide diversification, which means that your money is invested across a wide range of stocks, bonds or other securities. This reduces your investment risk and ensures that your portfolio is not overly exposed to any single company or sector,” says Govila.
Lesser cost for management and administration make it affordable
Due to core specialisation just in investment, and the relentless efforts of Sebi, mutual funds in India are now one of the least costly investment products. “Mutual funds are highly cost-effective as there are no charges other than the expense ratio,” says Chetanwala.
Lesser cost and lower denomination of investment makes them highly affordable as well. Govila says this means retail investors with small amounts to invest can also participate in the market. “Many mutual funds have a low minimum investment requirement, which makes them accessible to a wide range of investors,” he says.
Offers higher transparency
In comparison with most insurance-cum-investment products, MFs provide individuals with more details about their investments. “Mutual funds are transparent, which means that investors can easily access information about the fund’s portfolio, performance and fees. This helps investors make informed investment decisions,” says Govila.
You can check the performance of a fund by referring to your fund value at the end of each working day. Chetanwala says you can be aware of how the invested money is doing and where it is invested with the help of daily declared net asset value (NAV) and portfolio factsheet, respectively.”
It offers great liquidity
You can withdraw your money from an MF investment (except some funds with lock-in periods like ELSS) anytime you want. “Mutual funds offer liquidity, which means that you can buy or sell your mutual fund units anytime you want. This makes it easy for investors to exit the investment if they need the money or if they find a better investment opportunity,” says Govila.
What should you do?
Life insurance is a must-have financial protection product, but it should ideally be just to offset the financial losses due to the loss of an earning person in the family. A term life insurance plan gives you the highest life insurance cover at the lowest possible cost. Thus, it helps you take care of the risk of loss of an earning member in a much better way. Investments, on the other hand, should be done to give you the best risk-adjusted return. This makes MFs a much better option to manage your investment.
“Investment-cum-insurance products may have higher charges. In the case of traditional products like endowment or money back, the returns are less as the investments are made in debt products. A combination of term plan for insurance and mutual funds for life goals works the best, and one should avoid clubbing both in one product,” adds Chetanwala.