I have been investing in mutual funds for the last three years. I would like to understand the benefits of mutual funds over traditional insurance plans. I have been getting messages like 'Get ₹5 lakh by investing ₹2,500 per month for seven years'. It looks like almost 20 per cent returns in seven years. Is this a reliable claim? Is it a better choice to diversify some investments in plans like these?
- Venkat Thavva
Investing ₹2,500 per month for seven years and making ₹5 lakh is indeed lucrative. It means a return of 22.43 per cent per annum. Anyone would like to invest in such a plan, but unfortunately these figures are only used to catch the investors' attention, and they appear only in messages and illustrations; they are not guaranteed returns. A simple trick will reveal the truth. Next time when someone is promising you such fantastic returns, ask the person to give you assurance of such returns in writing. Also, check the official documents to verify whether those figures are really mentioned in them. If they are not, don't buy such schemes.
By the way, a glance at the SIP-returns section on our website reveals that several large-cap funds have offered more than 20 per cent return in the last three years. A single fund managed to offer over 20 per cent returns even in the five-year period. Four funds managed to offer over 15 per cent returns in the ten-year period. This clearly shows that mutual funds have the potential to offer you impressive returns over a long period. But the performance doesn't come with any guarantee. Equity generally proves to be the best-performing asset for the long term and equity funds can simplify your participation in the stock market.
However, things could get complicated if you buy an insurance product for your investment needs. This is because these products have a mandatory insurance cover, which takes away money (minimum 10 per cent) from your total investment. Then there may be other charges as well. That is why we ask our readers to keep their investments simple and invest in an equity mutual-fund scheme regularly to create wealth over a long period.
This article was originally published on October 13, 2015.
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