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Confused 30-year-old: LIC vs SIP - Which is better for me?

Ramalingam

Ramalingam Kalirajan  |8171 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Aug 13, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Bhaskar Question by Bhaskar on Jul 15, 2024Hindi
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Hello sir Please suggest which one is better LIC or SIP?

Ans: Your question about choosing between LIC and SIP is a common one. Both have their benefits, but they serve different purposes. Let's dive into their differences to help you make an informed decision.

The Purpose of LIC Policies
LIC policies are primarily insurance products. They provide life cover and financial security to your family in case of an unfortunate event. Some LIC policies also offer returns, but these are often modest. The primary goal of LIC is protection, not wealth creation.

Insurance Focus: LIC is designed to give your family a financial safety net.

Modest Returns: While some LIC policies offer returns, they are generally lower compared to other investment options.

Long-Term Commitment: LIC policies usually require long-term commitments, often locking your money for many years.

The Benefits of SIPs
SIP (Systematic Investment Plan) is a method of investing in mutual funds. With SIP, you invest a fixed amount regularly in mutual funds. This approach helps in building wealth over time, as it harnesses the power of compounding and rupee cost averaging.

Wealth Creation: SIPs are primarily focused on wealth creation. They invest in equity, debt, or hybrid funds, which can offer higher returns over time.

Flexibility: SIPs offer flexibility in terms of investment amount and tenure. You can start or stop SIPs as per your financial goals.

Better Returns: Historically, SIPs have delivered better returns than traditional LIC policies. This is especially true for equity-based SIPs.

Assessing Risk and Returns
Risk in LIC: LIC policies are low-risk as they are primarily insurance products. The returns are guaranteed but generally lower.

Risk in SIPs: SIPs, especially in equity funds, come with market risks. However, the longer you stay invested, the more you can potentially reduce this risk.

Higher Potential in SIPs: While SIPs come with higher risks, they also offer the potential for higher returns. Over the long term, SIPs have outperformed LIC in terms of wealth creation.

The Role of a Certified Financial Planner
A Certified Financial Planner can guide you in choosing the right SIPs that align with your financial goals. Investing in regular funds through a CFP can give you the benefit of professional advice, helping you navigate market fluctuations and achieve your financial goals.

Direct funds may seem cheaper, but without professional guidance, you may miss out on optimizing your portfolio. A CFP can help you choose the right funds, balance your risk, and monitor your investments.

Final Insights
Different Goals: LIC is for protection; SIP is for wealth creation.

Better Returns: SIPs typically offer better returns than LIC policies.

Flexibility and Growth: SIPs provide flexibility and have the potential for significant growth over time.

Expert Guidance: Consider working with a Certified Financial Planner to maximize your SIP investments.

In conclusion, if your goal is wealth creation and you are comfortable with some risk, SIPs are a better option compared to LIC policies. However, it is always advisable to keep a balance between insurance and investment. Ensure you have adequate life cover through a pure term insurance plan and invest in SIPs for your wealth creation goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Ramalingam

Ramalingam Kalirajan  |8171 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on May 23, 2024

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Sir which SIP will be best for investment?
Ans: Choosing the best SIP (Systematic Investment Plan) involves evaluating several factors to ensure it aligns with your financial goals and risk tolerance.

Understanding SIP
SIP is a method of investing a fixed amount regularly in mutual funds. It offers the benefit of disciplined investing and rupee cost averaging.

Assessing Your Investment Goals
Before selecting an SIP, it's essential to define your investment goals.

Are you saving for retirement, a child's education, or buying a house?

Evaluating Risk Tolerance
Your risk tolerance determines the type of funds you should invest in.

Are you comfortable with high risk for potentially high returns, or do you prefer stability?

Time Horizon
Your investment horizon influences the type of mutual funds you should choose.

A longer time horizon allows for more aggressive investments.

Benefits of Actively Managed Funds
Actively managed funds are managed by professional fund managers who aim to outperform the market.

Advantages Over Index Funds
Higher Returns: Actively managed funds aim to beat the market index, potentially offering higher returns.

Flexibility: Fund managers can adjust the portfolio based on market conditions.

Diversification: These funds often have a diversified portfolio to mitigate risk.

Disadvantages of Index Funds
Limited Flexibility: Index funds strictly track an index, limiting flexibility.

No Outperformance: They aim to match, not outperform, the index.

Market Cap Bias: These funds are heavily weighted towards large-cap stocks, which might not always offer the best returns.

Types of Funds for SIP
Equity Funds
Equity funds invest primarily in stocks. They offer high growth potential and are suitable for long-term investments.

Large Cap Funds
These funds invest in large, well-established companies. They offer stability and moderate growth.

Mid Cap Funds
These funds invest in mid-sized companies. They have higher growth potential but come with increased risk.

Small Cap Funds
These funds focus on smaller companies. They can offer substantial returns but with higher volatility.

Debt Funds
Debt funds invest in fixed-income securities like bonds. They offer stability and regular income.

Short-Term Debt Funds
Suitable for conservative investors seeking stable returns in the short term.

Long-Term Debt Funds
Offer higher returns but with increased interest rate risk.

Hybrid Funds
Hybrid funds combine equity and debt investments. They offer a balanced approach, providing both growth potential and stability.

Balanced Advantage Funds
These funds dynamically manage the allocation between equity and debt based on market conditions.

Choosing the Right SIP
Factors to Consider
Fund Performance: Look at the fund's historical performance and compare it with benchmarks.

Expense Ratio: Lower expense ratios can improve net returns.

Fund Manager’s Track Record: A skilled and experienced fund manager can significantly impact the fund's performance.

Risk-Return Profile: Ensure the fund’s risk profile matches your risk tolerance.

Suggested Categories for SIP
Large Cap Equity Funds: For stability and moderate returns.

Mid Cap Equity Funds: For higher growth potential with moderate risk.

Small Cap Equity Funds: For aggressive growth with higher risk.

Balanced Advantage Funds: For a balanced approach between equity and debt.

Short-Term Debt Funds: For conservative investors seeking stable returns.

Consulting a Certified Financial Planner
Personalized Advice: A CFP provides tailored investment strategies based on your goals and risk profile.

Holistic Planning: They consider your entire financial situation and future needs.

Expert Guidance: Benefit from their market knowledge and experience in managing investments.

Conclusion
Choosing the best SIP depends on your financial goals, risk tolerance, and investment horizon. Consider a mix of large, mid, and small-cap funds, along with hybrid funds, for a balanced and diversified portfolio.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

..Read more

Ramalingam

Ramalingam Kalirajan  |8171 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Oct 29, 2024

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Im investing 5k Monthly in LiC jeevan anandg for past 7 years. Policy plan matures on 21 year. Return around 22 lkh on maturity. Hearing about sip, same amount invetested in sip maturiy amount looks higher. Should i really stop my lic investment and redirect the funds to sip for 15 r 20 years, pls advice
Ans: LIC Jeevan Anand offers both insurance and savings. However, such plans usually provide modest returns. You mentioned your plan will give Rs. 22 lakh on maturity after 21 years. While it offers life cover, the returns from these traditional plans are generally lower than market-linked investments like mutual funds.

Insurance-cum-investment plans bundle insurance with savings, but each may underperform compared to separate insurance and investment solutions. You may want to assess if holding the policy further aligns with your financial growth goals.

Impact of Redirecting to SIPs
SIP investments in mutual funds have the potential for higher returns over the long term. With regular contributions, equity funds can benefit from market growth and compounding.

By stopping your LIC premiums and redirecting to SIPs, you could explore higher returns, particularly over 15 to 20 years. The flexibility of SIPs allows adjustments based on changing financial conditions, unlike fixed traditional plans.

Taxation Benefits and Drawbacks
LIC maturity proceeds are usually tax-exempt under Section 10(10D) of the Income Tax Act. On the other hand, equity mutual funds have new capital gains taxation rules.

For SIPs, long-term capital gains (LTCG) above Rs. 1.25 lakh are taxed at 12.5%. Short-term gains are taxed at 20%. This taxation needs to be considered, but even with taxes, the growth potential could exceed traditional insurance plans.

Insurance and Investments: A Better Approach
Instead of combining insurance and investment in one product, a Certified Financial Planner would suggest separating them. You can retain life cover with a term insurance policy, which offers higher coverage at a lower cost. This ensures your family’s financial security.

Meanwhile, investments through mutual fund SIPs offer targeted financial growth, like child education or retirement planning. Regularly tracking and rebalancing these investments also ensures they stay aligned with your long-term goals.

Should You Surrender LIC? A Careful Evaluation
Surrendering an insurance policy midway can result in a reduced payout. You need to check the surrender value and compare it with your financial situation. If the surrender value is significantly lower, you may decide to continue.

However, future premiums can be redirected toward SIPs to optimise returns. It is a gradual shift rather than an immediate stop. Also, since you have already completed seven years, evaluate if staying invested till maturity aligns with your expectations.

Why Mutual Funds Are a Strong Option
Higher Returns: Equity mutual funds have historically outperformed traditional insurance plans over the long term.

Liquidity: Mutual funds offer liquidity, allowing withdrawals in case of emergencies without penalties.

Professional Management: Mutual fund managers actively manage your investments, aiming for higher growth. This gives you an advantage compared to passive, fixed insurance returns.

Goal-Based Planning: With SIPs, you can create a corpus for retirement, children’s education, or wealth creation.

Avoiding the Pitfalls of Direct Funds
Many individuals are attracted to direct funds because of lower expenses. However, managing your portfolio alone may become overwhelming. Direct plans require constant monitoring and a deep understanding of markets.

Investing through a Mutual Fund Distributor (MFD) with a Certified Financial Planner can provide expert advice. A professional helps with portfolio rebalancing, tax-saving strategies, and timely switches between funds. This structured support can optimise your wealth-building journey.

Active Funds vs. Index Funds
Index funds passively follow the market, but they may not provide the best results during market volatility. Actively managed funds, on the other hand, aim to outperform the market through the expertise of fund managers.

In volatile times, active funds have the flexibility to adjust holdings. This ensures your investment portfolio remains aligned with market trends. Active management adds value, especially for long-term goals like retirement or wealth accumulation.

Long-Term SIPs and Financial Freedom
Shifting your LIC premium to SIPs for 15 to 20 years can help build substantial wealth. Even with market fluctuations, staying invested ensures you benefit from compounding and market recoveries.

SIPs also offer the flexibility to increase contributions over time as your income grows. This ensures your wealth-building efforts remain in sync with your financial aspirations.

Final Insights
Redirecting your LIC premium to SIPs can enhance your financial growth. However, surrendering the policy needs careful evaluation of costs and benefits. If the surrender value is low, continuing the policy till maturity could be wiser.

Separating insurance and investment ensures better coverage and optimised returns. Mutual funds, through SIPs, offer a versatile approach to building wealth, providing liquidity, flexibility, and professional management.

A balanced approach, where you retain essential life cover and invest systematically, will secure both your financial future and your family's needs.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

..Read more

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BIT Mesra CSE or NIT Raipur CSE what to choose?
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NIT Raipur is improving, but its facilities are still developing.

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I am in relationship with a girl for 6 year but now her parents almost fix her arrange marriage and they dont care about her choice they didnot even consider her opinion about the boy they met ..except her everyone in family like the boy because he is rich and handling his father business and here i am i dont have job i am preparing for government job i asked her family please give me some time i,ll get the job this year but they say we cant agree for the possibility of you getting job or not and her mother say we dont allow intercaste marriage i am sc and she is general and pandit .. i am 26year old what should i do .. i think ab uske parents jada jaldi krre hai shadi k loye because unhone merse baat krli to unko dhr hai ki m kuch esa vsa na krdu jisse unki society me respect vghra ko khtra hoga isliye or vo jada rishtedaro ki sunre hai... mne apni gf ko bola hai ki filhal jb tk job nhi lgti meri tb tk unhe boldo ki mere sath ab kuch nhi h that she blocks me or vo apni side se tb tk rishtey ko mna krti rhe pr uske ghr vale uska opinion about boy consider hi ni krre hai jo unke rishtedaro ne discuss krliya ladka thik h to unhone usko haan boldi ... mujhe kya krna chaiye...her parents do all emotional blackmail to her as today they even touched her feet and said hme pta h tere liye kya shi h hmne tko pala h kuch bhi esa nhi krdio jisse hmari ijat khrab hojaye m pagal hojaunga Esi dhamkiya dere h ... or usko b kse jo rishte are h unko mna kre jisse ye na lge ghr valo ko ki mere karan naa kre jare h or rishtedaro ka b dominance kse km kre bhot sare doubts h kya krna chaiye kuch nhi smjh ara h
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In sab ke beech, aapke girlfriend ka kya kehna hai? Woh aapne bataaya nahin. Kya woh apne parents ko tall sakegi aur kitni der kar paayegi? Kya woh aapke jon lagne tak intezzar karna chahti hai? Aisa lag raha hai ki is rishte ka wazan aap leke ghoom rake ho...thoda apne girlfriend ke saath baithkar plan kijiye taaki woh bhi aapke saath is samasya ka hal dhoond sake.
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DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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