However, investing into the right tax saving fund is a common objective of all working individuals, yet a majority of the Indian working populace is forever confused. So, let's start from scratch by attempting to comprehend the difference between the two before determining which tax saving fund is ideal to invest in.
What are Mutual Funds?
Mutual Funds are professionally managed investments - a managed portfolio of stocks and bonds. Simply put, mutual funds are like baskets containing a diversified blend of stocks and bonds from various companies across different industries. When you purchase a mutual fund, you are basically buying one of these baskets that contains dozens (or even hundreds) of stocks from numerous companies. This is quite different from how stock market invesments work.
However, you don't get to buy a basket and lock it away for a certain period. As these are professionally managed investments, the fund managers decide what proportions of stocks your basket should store after carefully researching and predicting the market growth. They constantly shuffle the goodies in your basket to make sure that you profit from the market fluctuations. On an average, you can expect a steady annual return of at least 8% on these investments.
So, even if you are a risk-averse person, your money isn't at stake, and you can peacefully invest in these products for a long term. Tax saving mutual funds are all the more safe baits.
What are Insurances?
The Oxford English Dictionary defines insurance as "An arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium." Drawing on this definition, we can define life insurance as a similar arrangement in which the insurer compensates your survivors if you die; all you need to do is pay a specific amount for a specific period.
This is the pure and unadulterated definition of life insurance, which is commonly marketed as Term Insurance. However, there are several other types of insurances that are quite complicated
What's the Problem?
The world of insurances is indeed mysterious. Investing your hard-earned money into them without adequate knowledge of what is to become of that amount is the biggest problem. Let us try to understand the complicated world of insurance in extremely simple words.
The Simple Ones
Term life insurances are pure protection products - they are available at a low cost and do not pay dividends. To put it in the simplest of words, if you purchase a term life insurance policy, you keep paying a certain premium towards the policy for a specific period - you won't get back a single penny from this policy. Your family gets a substantial fortune when you depart for your heavenly abode. A purist might not consider this a financial investment.
However, you and I can treat it as an investment in financial security as it pays a cash benefit to your family when you're not around to support them anymore. It just compensates the loss of income arising out of your death. On an average, a 30-year-old non-smoker can easily get a cover of Rs.1 crore by paying just Rs.12,000 a year. The premium amount of such policies is exempted from income tax. That's life insurance - simplified for you.
The Beguiling Ones
Insurance companies, however, have diversified their offerings and introduced several types of life insurance products which claim that they will return the premium after a specific period. Endowment Plans, ULIPs, Money Back Plans, Whole Life Plans, Annuity Plans and the likes belong to this category. These schemes have been cleverly designed by mixing insurance with investment.
The insurance companies position these products in such a way that they appear as lucrative investment options. Millions of Indians are tempted by the plethora of benefits, bonuses, coverage and a lump sum maturity amount that these policies offer. They rampantly purchase these products, not realizing that the apparently lucrative maturity value will be worth very little if inflation is accounted for.
No comments:
Post a Comment