Life Insurance vs Mutual Funds: Which is better investment option? Find out
An investor invests in life insurance for availing a lump sum either on maturity or upon death. Meanwhile, mutual funds is a market-linked investment, which is managed by a qualified experts and is carried with the intention to make quick money.
A new trend is being witnessed nowadays, and looks like individuals find insurance much more appealing than compared to mutual fund schemes. It is being known that, private life insurers individual NBP surged by 17% YoY to Rs 46 billion in Jan-19 (FY19TD growth 15%). On other hand, Mutual fund equity (excluding arbitrage and ETF) net inflows on the other hand declined to a 31-month low of Rs 52 billion in the same month, which is 51% below FY19TD monthly average of Rs 106 billion.
An investor invests in life insurance for availing a lump sum either on maturity or upon death. It is an agreement signed between insurer and policy holder, where the former is promised to receive a fixed amount in exchange of premium paid to the latter. This one is the most secured scheme in India, and almost everyone seeks to avail insurance policy.
Meanwhile, mutual funds is a market-linked investment, which is managed by a qualified experts and is carried with the intention to make quick money. One can invest their money in mutual fund schemes like debt funds, equity-linked, liquid assets and many more. It can be done by either buying stocks or bonds or a mixture of both. However, because mutual funds are also stock-linked there is risk and burden is borne by investors in days of market volatility.
According to Madhukar Ladha and Keshav Binani analysts at HDFC Securities, this is how both the industry are seen to move ahead.
Insurance: After two strong years of Indiv APE growth of ~25% p.a. we expect FY19E APE growth to moderate to 8-10% i.e. FY19E total Indiv APE range of Rs 385–392 billion.
AMC: While we expect near-term lump-sum equity inflows to remain weak due to tepid market conditions, flows to SIPs are expected to support overall equity inflows. We expect equity net inflows of ~Rs 1.2-1.25 trillion (-53% YoY) in FY19E.
Where should you invest?
The duo at HDFC Securities said, “We believe this is an interesting time to track net inflows to these savings options, as SEBI has banned upfront commission payouts for MF sales by AMCs, while life insurers continue to pay out heavily.”
They added, "While we cannot attribute the outperformance of insurance solely to the above reason (as this is also a seasonally strong time for insurance), we do believe that incongruous commission structures do change distributor behavior. "
“We believe this tilts the scale in favour of the insurers, as we expect distributors to push insurance (ULIPs) given the higher commissions and upfronting of payouts,” added the analysts.
In terms of stock investment, analysts here believe SBI Life is well placed in insurance sector, with a target price of Rs 750 which is higher by 32.3% from current levels.
Subsequently, in mutual fund, the analysts have picked Reliance Nippon with a target price of Rs 200 set to rise by 30.1% from current levels.