Difference Between Life Insurance and Mutual Funds Investments

Manish Kothari
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Manish Kothari

Life Insurance vs Mutual Funds Investment

With the increase in financial knowledge and awareness, everybody today is becoming more concerned about financial planning to achieve their goals. And to do this, investors have a number of options available to choose from and they often get confused while opting for the same. What holds the most significance is the end goal. You can be a person having dependents to look after, or a single person, or someone who invests to meet specific financial targets. 

Two of the most popular options which come to investors mind while doing financial planning are Life Insurance and Mutual Funds. But most of us often fail to understand that both of them serve a different purpose. While a mutual fund is an investment alternative, life insurance is not and is simply a way to secure life and health. As the goals differ from person to person, the choice of the option also differs. In this article, we will discuss these two in detail and talk about various aspects.  

What is Life Insurance ?

Life Insurance is a protection offering plan that makes sure the beneficiaries well being in case of unfortunate events in the policyholder’s life. When you opt for life insurance, the issuing entity or insurer is bound and liable to pay the sum assured to your nominee/beneficiary in case of any unfortunate event, provided that the policy is not expired or matured. Life insurance has many types which include Whole Life insurance, Term Insurance, Money Back, Endowment, Retirement plans among others. 

What are Mutual Funds

Mutual funds are investment alternatives that pool funds from many individuals, put them together, and purchase a collection of bonds, stocks, or other securities as per the investment objective of the scheme. This is usually termed a portfolio. The NAV(Net Asset Value) or price per unit of the mutual fund scheme is ascertained by the total value of the securities in the portfolio divided by the fund’s outstanding stocks. Based on the value of securities at the end of each trading day, the NAV of the scheme fluctuates. It is very important to take note that investors do not own the securities in which the fund invests, they are owners of the units in the fund itself. 
When we talk about actively managed mutual funds, the decision and authority to buy & sell the underlying securities are made by professional fund managers which are supported through research. The primary goal of these managers is to seek out investment opportunities that can help the fund to surpass the returns of its benchmark which generally is the index, such as Sensex or Nifty. A simple way to tell the fund’s performance is to compare it with a set benchmark.

Key Aspects to Consider

Before opting for any of these options, the following things should be considered:

Goals and Vision:

Without a goal or vision, you can not decide on what to opt for as there doesn’t exist any blueprint. The goal will help you to make a blueprint and invest according to the needs and best fit. Life insurance plans are also an important part for an investor as it covers the financial security of dependent members of the family. Whereas, mutual funds are a disciplined commitment to meet your goals, short or long term, whether it is for buying a home, starting a venture, or for higher studies.


Risk plays a very important role in financial planning as the options and subcategories to be selected are totally relied on the risk appetite of the investor. Investors having less risk appetite might go forward with term insurance while the high ones can look upto market-linked insurance plans like whole life, etc. However, in most cases term insurance plans are good to go. Also, they are the most affordable option among all life policies. 

Similarly, in MFs investors can opt between debt funds, equity-based funds, or hybrid funds according to their risk profile & investment requirements. Nevertheless, the returns are better in relation to risk when we talk about mutual funds. 


Liquidity is termed as the ease with which security or asset can be converted to cash or cash equivalents. In the case of MFs (other than ELSS), you can withdraw funds within a year with some percent of exit load being levied if units are withdrawn before a specific period.

In the case of market-linked life insurance plans like ULIPs, you will get a liquidity constraint due to a minimum lock period of 5 years in insurance. Talking about general term insurance, individuals just need to make premium payments to avail risk coverage. As it is not a market-linked or profit participating product, the liquidity doesn’t come to picture here.


In general, Life insurance plans are not meant for investment purposes. But with the changing times, the insurers have started to offer combo plans offering insurance and investment in a single plan. Nevertheless, most often it is seen that such market-linked plans do not promise identical returns to the mutual funds. So, it automatically makes the mutual funds a better choice as premiums for such plans have proven to be too expensive.   

The best way is to opt for separate investment & insurance plans to earn efficient returns along with lower costs. 

Merits, Demerits, and Risks Associated With Mutual Funds

Mutual funds are investment alternatives that aim to generate income or returns over the short or long term as per the investment objective of the fund. The returns on these investments come in the form of dividends, stock, coupon payments or capital appreciation and are reflected in the NAV of the fund. Investors can conveniently diversify their portfolios with the help of mutual funds so as to maximize the returns on investments and reduce the overall portfolio risks. However, investing in MFs involves risks.

Merits, Demerits, and Risks Associated With Life Insurance

As discussed, Life insurance most often offers returns that are lower than that of mutual funds. But at the same time, the risk is less. Life insurance policies have certain features and add ons which makes them a good choice for investors. These include tax-free insurance proceeds, tax-deferred payments in growth dividends among others. Borrowing money against the insurance policy is possible but it will reduce the death benefits and cash surrender value. One of the major demerit and concern with life insurance plans is, as an investment option, these have high fees and expenses making it difficult to compete with the returns of mutual funds. 


Meaning Life Insurance is a protection offering plan that makes sure the beneficiaries’ well-being in case of unfortunate events in an individual's life. Mutual funds are investment alternatives that pool funds from many individuals, put them together, and purchase a collection of bonds, stocks, or other securities as per the investment objective of the scheme.
Goal The goal is to offer financial protection to the policyholder’s dependents.The goal is to provide income or capital appreciation to investors.
TypesHave different types namely Whole Life, Term, Endowment, Money back, Retirement, and Investment and Saving plans. Namely 3 broad categories: Equity funds, Debt funds, and Hybrid funds. 
RiskThere can be risks in market-linked life insurance plans like ULIPs.Risks vary across funds based on their investment objective and asset allocation
Liquidity Have liquidity constraints due to the lock-in period in the case of ULIPs. Investments in mutual funds offer good liquidity and allow withdrawals at any time except for tax-saver funds.
Returns Lower returns in market-linked plans as compared to mutual funds due to high costsReturns vary across schemes & MF categories. However, returns higher than ULIPs with similar allocations. 


A well-done financial planning is one that incorporates mutual funds as well as life insurance. This is because mutual funds will generate the required returns and gains which will help investors to reach their financial goals and the life insurance policy will cover the life of the investor so that in case of his/her unfortunate demise, the dependent family should not suffer. Including both the options is called ideal by many financial experts and professionals. Nevertheless, which mutual fund and which life insurance to opt for are subjective questions and differ from investor to investor due to many factors involved. 

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