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LIC vs Mutual Funds: Types, Benefits & Comparison

Choosing the right investment option is key to securing your financial future.

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 Among the most popular options in India, LIC (Life Insurance Corporation of India) and mutual funds stand out. While both serve the purpose of building wealth, they do so in fundamentally different ways. 
This article compares LIC vs mutual funds based on their features, risks, returns, and overall suitability for different types of investors. Read on to learn more!

What is LIC?

life insurance Corporation of India (LIC) is a government-owned life insurance company. It offers a wide range of life insurance products designed to provide financial security to policyholders and their families in the event of unforeseen circumstances.

LIC combines insurance coverage with an investment component, ensuring a death benefit for your family, along with a potential maturity benefit after a set term.

Types of LIC Policies

  • term insurance: Pure life coverage with no return on premiums paid.
  • Endowment Plans: Offers both insurance cover and savings.
  • Unit-Linked Insurance Plans (ULIPs): Offers insurance cover and investment opportunities in market-linked instruments like stocks and bonds.
  • Money-Back Plans: Provides periodic payouts along with insurance cover.
  • Child Plans: Focused on securing a child’s future education or marriage.

Key Benefits of LIC

  • Risk Coverage: Provides a safety net in case of death or disability
  • Tax Benefits: Premiums paid are tax-deductible under Section 80C of the Income Tax Act
  • Guaranteed Returns: Many policies offer guaranteed returns, which make them safer
  • Loan Facility: Loans can be availed against your LIC policy

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What are Mutual Funds?

A mutual fund is an investment vehicle that combines the capital of multiple participants to purchase a variety of assets, such as stocks, bonds, and money market instruments. These funds are managed by professional fund managers who conduct thorough research and select securities based on the fund's objective.

Types of Mutual Funds

  • Equity Funds: Invest in stocks and equity-related instruments. These funds offer higher returns but come with higher risks.
  • Debt Funds: Invest in bonds, government securities, and corporate debt. These are relatively safer but offer lower returns.
  • Hybrid Funds: A mix of equity and debt funds.
  • ELSS (Equity-Linked Savings Scheme): A mutual fund that saves taxes and is eligible for Section 80C deductions.

Key Benefits of Mutual Funds

  • Professional Management: Funds are managed by experts who understand the market
  • Liquidity: You can buy and sell mutual fund units anytime, providing more flexibility
  • SIP (Systematic investment plan): Allows you to invest a fixed amount regularly, making it easy to start with as low as INR 500 per month
  • Diversification: Your money is spread across different assets, minimising risk
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Difference Between LIC and Mutual Fund

Here’s a detailed comparison for you to see if LIC is better or mutual fund —

Criteria LIC (Life Insurance) Mutual Funds
Primary Purpose Provides life insurance to protect against unforeseen events Generates returns through market-linked investments
Type of Investment Insurance-based investment products Market-linked investment products
Returns Guaranteed or fixed returns depending on the policy Not guaranteed; returns depend on market performance
Risk Low risk due to fixed returns and government backing High risk; returns vary based on market conditions
Tax Benefits Tax benefits on premiums paid under Section 80C and maturity proceeds under Section 10(10D) Tax benefits on ELSS mutual funds under Section 80C
Lock-in Period Typically 5-10 years, depending on the plan No mandatory lock-in, though some funds have exit loads
Liquidity Limited liquidity due to lock-in and surrender charges High liquidity; you can redeem at any time (subject to market conditions)
Investment Objective Financial protection for the policyholder's family Wealth creation through capital appreciation
Flexibility Low flexibility; you must follow the terms of the policy High flexibility; choose from a wide variety of funds

LIC vs Mutual Funds: Which is Better?

The answer to "Mutual Fund vs LIC?" largely depends on your financial goals and risk tolerance. Here's a quick guide —

1. Risk Appetite:

  • If you're risk-averse and want guaranteed returns, LIC is a better choice

  • If you can tolerate market fluctuations for potentially higher returns, mutual funds are ideal

2. Investment Horizon:

  • LIC policies are designed for long-term security and savings, often locking in funds for 5-10 years

  • Mutual funds, especially through SIPs, offer more flexibility in terms of investment amounts and duration

3. Financial Goals:

  • Choose LIC if your primary goal is life coverage along with a savings component

  • Opt for mutual funds if your goal is wealth accumulation and you are focused on long-term capital appreciation

 

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Frequently Asked Questions (FAQs)

Is LIC better than mutual funds?

It depends on your financial goals. LIC is better if you want insurance with guaranteed returns, while mutual funds are suitable for those looking for higher returns through market-linked investments.

Can I surrender my LIC and invest in mutual funds?

Yes, but carefully evaluate your LIC policy’s maturity value and surrender charges before making a decision. Mutual funds offer higher returns but come with market risk.

Is LIC policy a mutual fund?

No, LIC is an insurance company, not a mutual fund. However, LIC offers ULIPs that combine insurance with market-linked investments similar to mutual funds.

Which is better for long-term growth: LIC or mutual funds?

Mutual funds typically offer better growth prospects for long-term wealth creation, but they come with higher risks. LIC offers stability but limited growth potential.

Guide to Investment in UAE
Top SIP Investment Plans in UAE How to Invest in Indian Mutual Funds from UAE
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Endowment Plans in UAE SIP Investment Calculator

 

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