Many of us believe that investment and insurance plans offer comparable financial benefits, while others fall prey to unscrupulous marketers offering insurance products with unrealistically high return expectations.

While the primary objective of insurance is to cover the financial risk (via monetary reimbursement) in the event of the untimely death of a wage-earner, the primary objective of an investment is to generate a return in excess of the risk-free rate and to outpace inflation in order to achieve a person’s future goals.

To attract investors, investment products are frequently packaged with insurance products. Nevertheless, it is prudent to keep investments separate from insurance products. Always purchase term plans for life insurance and Mediclaim for health insurance.

The distinguishing factor:

The amount we pay for insurance consists primarily of three components: expense cost (which is very high compared to investment products such as mutual funds), mortality premium; and the remainder is invested according to your chosen investment strategy, which could be equity, debt, or hybrid. However, core investment products such as mutual funds have a much lower expense ratio than insurance products. So, after costs, the initial capital invested is more than insurance plans and may do better than insurance plans in the long run.

Most Indians always choose fixed deposits as a way to save money because they are popular and easy to operate. Although they are not as tax-efficient as debt mutuals, fixed deposits can be easily replaced with Gilt Funds if there is no need for steady income flow and the investment horizon is greater than three years.

The FD interest is a yearly addition to the taxpayer’s income that is taxed at the investor’s individual income tax rate. Debt funds outperform FDs tax-wise, particularly for investors in higher tax brackets.

Investments held for less than 36 months that are short-term capital gains in debt funds are taxed like savings deposits (Basis the income tax slab of the investor). After taking into account the benefits of indexation, long-term capital gains in debt funds (investments held for longer than 36 months) are only subject to a 20% tax. When comparing fixed deposit and debt fund taxation, long term capital gain taxation is therefore a significant benefit of debt funds.

Mutual funds known as “Gilt Funds” only invest in government securities. They are favoured by conservative and risk-averse investors who wish to invest in the shadow of government bonds.

Investors are protected from credit risk because gilt funds only invest in government bonds. The instruments in which these funds invest are backed by the government. Therefore, there is no default risk attached to these instruments.

These funds’ maturity profiles can vary. While others are medium or long term, some may be short term. These funds also carry interest rate risk, just like all other bond funds.