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Investing in an insurance plan or mutual fund

You need to be clear whether you need insurance or you are looking to invest and grow your money, says Dhirendra Kumar

I have an option to invest in a guaranteed plan of Tata AIA. Should I invest in mutual funds instead?
- Ramesh

By the name, it looks like this is a kind of endowment insurance policy. It is very important for you to understand why you invest in a mutual fund and why you buy an insurance product. Buying an insurance product is an exercise where you are buying protection for your family. In that case, by all means, go for an insurance plan that will give you enough protection and buy only a term plan for that purpose so that if you are not around, your family will be taken care of.

You pay a premium and your family gets a huge amount if something happens to you. You lose the money if nothing happens. That is what term insurance is. Basically, it is the price of buying protection for your family. My suggestion always is that never consider insurance as an investment. Because when you mix it, you don't get good of either.

Investment by definition is postponing consumption. And you are accumulating money to get a higher return for a future requirement. And where you invest is a function of how long you want to invest money. So first, be clear about your requirement. If you need insurance, buy a term plan. And if you are looking for investment, opt for equity funds if you have a long-term horizon. If you have a short-time horizon, look for other suitable investment options or debt funds, which are suitable for shorter durations.