They Are The Same, Aren't They?

During a conversation with a friend Ganga from my college days, as it inevitably happens in my conversations, we touched upon investment matters. He said that he had invested in a few mutual funds but was not sure how they were performing. I happily agreed to look at his portfolio. Once I opened his portfolio sheet, I was shocked. He had five different “investments”. Each one of them was with an insurance company! The beauty was that all those insurance companies had names that were similar to those of some of the prominent mutual fund houses thanks to the same promoters setting up both mutual fund and insurance businesses. For example, XYZ Bank and their foreign partner called ABC would have set up XYZ ABC Life Insurance Co. as well as  XYZ ABC Mutual Fund. Obviously, Ganga was not sufficiently knowledgeable to distinguish between these and fell for the sales pitch of his agent who pushed insurance under the garb of mutual funds.

Let me make one this clear. I have nothing against life insurance. They are very essential for most people. In fact, I would argue that a Term Life policy comes ahead of investments in the order of priority. My issue is only with people mixing up insurance with mutual funds. These are very different products. Insurance is essentially a protection product while mutual funds are pure investments products. If you want your family to be given certain level of financial support or want your loans to be covered in the unfortunate event of your death, nothing to beat a Term Life Policy. However, when it comes to wealth creation or parking short term funds or doing a SIP, it is mutual funds that you want.

After my engagement with Ganga, I had a chance encounter with another person Rafi. When I introduced myself as a mutual fund industry person, he said that he had invested in a mutual fund earlier and had a bad experience. On probing further, he said that he invested Rs. 15 lakhs in a mutual fund and after five years he got back Rs. 12 lakhs. I gently asked which mutual fund it was. He said, ABC XYZ. I then told him that there was no mutual fund by that name but guess what, there was a life insurance company! Rafi had also fallen victim to what seems to a common problem of mistaking insurance for mutual funds.

So when you part with your hard earned money, please make sure what exactly you are getting into. Insurance is not mutual funds.