LIC or mutual funds, which is better?

People no longer see investing as a luxury; they now consider it essential for securing their future. But it can be difficult to select the right ones to meet your goals. Which option is better, LIC or mutual funds?

These choices lead investors to confusion. So let us have a look :

Purpose and nature

LIC offers financial security and protection for you. Furthermore, it serves as a safeguard for you as a policyholder. It protects you and your beneficiaries. It also assures you of a safety net that you can use at times of unexpected events.

But the primary goal of mutual funds is wealth creation. It aims for capital appreciation over time. Consequently, this strategy benefits you as an investor.

Risk vs. safety 

Policies provided by LIC offer you safety and security. They guarantee a certain sum to you as the policyholder or your beneficiaries. This guarantee comes into play in two key situations. The first is in the unfortunate event of your death. The second situation is upon policy maturity.

Mutual funds operate differently. They come with varying levels of risk. The level of risk is dependent on the type of funds you choose. For example, equity mutual funds are often perceived as riskier options. However, they have a potential for higher returns. 

Returns

LIC policies offer more predictable returns. These returns are often guaranteed. However, the guaranteed returns do not always keep pace with inflation. Inflation reduces the purchasing power of your money. But LIC policies can’t ensure the growth of your wealth.

In contrast, mutual funds can give you high returns over the long term. There is always a chance for capital appreciation. Furthermore, you can plan your portfolio based on your financial goals.

Liquidity 

There is a lock-in period in LIC. During this duration, you can’t access your funds or surrender the policy without penalties. Once you commit to an LIC policy, your money is tied up. You have limited flexibility to access the funds. This will be good if you have a long-term financial outlook. 

Mutual funds offer liquidity. You can redeem your investments at any time. This means that if you invest in a mutual fund, you have the freedom to withdraw your money whenever necessary. 

Cost structure

LIC policies have charges, such as premium allocation, and administrative charges. These charges are deducted from the premium you pay. So they can impact the total amount of money that gets invested. For example, upfront, they deduct premium allocation charges, reducing your initial investment amount.

The fee charged by mutual funds is the expense ratio. It is the annual cost of managing the fund. The expense ratio covers various operational expenses such as management fees, administrative costs, and marketing expenses. So lower the expense ratio, the higher your returns.

Diversification

LIC policies focus on providing insurance coverage and financial security, but they do not provide diversification. LIC typically invests the premiums you pay in debt instruments or fixed-income securities. Consequently, you will get stable but lower returns.

Mutual funds pool money from multiple investors like you and invest in a mix of assets. This is diversification. This reduces the risk associated with investing in a single asset class, like stocks or bonds. So you can use a balanced investment plan to achieve your goals. 

Conclusion

The choice between LIC and mutual funds depends on your financial goals and risk tolerance. However, to achieve a balanced approach to financial planning, you should consult with a financial advisor. They can assess your financial situation and goals, providing valuable suggestions.