General, Investment, Mutual Funds

INSURANCE vs. MUTUAL FUNDS

insurance-vs-mutual-funds

Insurance:

Insurance is an agreement between two parties under which one party agrees to pay certain sum of money to another for return of a consideration to make good for a loss, damage, injury to something which has a value. The person who agrees to pay the sum is called “insured” or the person who agrees to pay consideration for any accidental loss of the insured is called “insurer”. The writing between them is called as “insurance policy”. The amount paid by the insured is called as “premium”. It can be paid on monthly basis or quarterly or half yearly or annually. The amount payable by the insurance company to the insured after happening of an event or after maturity is called as “claim”.

In order to regulate insurance business the government has set up Insurance Regulatory and Development Authority. Insurance is of two types i.e. life insurance and general insurance. Life insurance pays the sum of money either on the death of the insured or after a set period. Here, depending on the contract critical illness can also trigger payment. The policyholder can pay the premium either in lump sum or in regular intervals. But, some exclusion are written in the agreement cases like suicide, fraud etc.General insurance can defined as the insurance that is not life insurance. This can be categorized as motor insurance, health insurance, travel insurance etc.

Mutual Funds:

Mutual fund is an investment module that the shareholder trades in diversified holdings and it is managed professionally. Mutual funds are regulated by the Securities Exchange Board of India (SEBI). The risk spread over the different holdings and it makes to invest in stocks and bonds easily. Mutual fund pools money from different interested investors and manage professionally for the purchase and sale of the securities may be retail or institutional in nature.

If look at the benefits of investing in mutual funds the following are the points of benefits:

  • Mutual funds are professionally managed by the managers who supervise the funds or investments.
  • Larger investors can have the facility to engage and participate in investments.
  • The greatest advantage of mutual funds can be that it is regulated and supervised under governmental body.
  • These provide a transparent and flexible way for comparison by the investors.

Definition of Mutual Funds:

According to the SEBI,” a fund established in form of a trust to raise money through the sale of units to public or a section of public under one or more schemes for investing in securities including money market instruments”.

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Here, are the differences between insurance and mutual funds:

BASIS OF DIFFERENCE INSURANCE MUTUAL FUNDS
MEANING Insurance means the contract between insured and insurer to pay certain sum of money on the happening of an uncertainty Mutual fund is an investment module that the shareholder trades in diversified holdings and it is managed professionally.
PURPOSE The only purpose of insurance is to make good for loss or uncertainty. The only purpose is to invest and get returns in short or medium period.
TYPES Insurance majorly is of two types’ life insurance and general insurance. Mutual funds are of many types based on structure and based on the investment.
REGULATORY BODY Insurance is regulated by Insurance Regulatory and Development Authority of India (IRDAI). Mutual funds are regulated by Securities Exchange Board of India (SEBI).
OBJECTIVE The objective is to give protection for the happening of an uncertainty. The objective is to yield profitable returns in short period.
LOCK IN PERIOD Lock in period is of 3years. There is no lock in period for Mutual funds
TAX BENEFIT Tax benefit will claimed for Life insurance policies. It can claim this facility only under ELSS.
RETURNS The returns are low when compared with mutual funds. The returns are comparatively high.
RISK The factor of risk is also low in insurance case. The risk factor is more in mutual funds as the returns are depending on the market conditions.
LIQUIDITY It has low liquidity. It has high liquidity.
CONVENIENCE Insurance gives moderate convenience. High convenience.
FORM OF MANAGEMENT It refers to risk management. As the risk can be compensated by the return on policy. It refers to asset management. The current asset cash is invested in many good return yielding investments.
SURRENDERING In insurance, if the policyholder is not in a position to pay the rest of premiums there is facility of surrendering the insurance policy and get the surrender value. When continuously SIP transactions are failed then it is considered as you are not willing to invest further and SIP would be liable for cancellation. It also provides a better way to pause i.e. the facility of Pause SIP (minimum of 1 installment and maximum of 6 installments).

*SIP — Systematic Investment Plan.

KEY WORDS:

Insured: The person who gets the insurance policy.

Insurer: Who agrees to pay the certain sum after maturity or happening of an event.

Claim: Any amount payable by the insurance company to the insured.

Premium: It is the amount paid by the insured for getting policy. It can be paid in lump sum or on regular interval basis.

Surrender value: If the insured is not in a position to pay the remaining premiums he can surrender the policy and get the surrender value that is calculated on the number of premiums paid by the insured.

 

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CA Rachit Jain

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