There were two sisters named Neha and Sasha. They were both financially astute and constantly on the lookout for methods to safeguard their future. The issue of investing came up one bright day as they sat in their cosy living room sipping tea.
The eldest sister, Neha, was a strong supporter of Systematic Investment Plans (SIPs) in mutual funds, whereas Sasha believed in the stability provided by term plan insurance. They agreed to hold a friendly debate to compare the returns on SIPs and the advantages of term plan insurance.
Investment approach
Neha is a believer in systematic investing, which she attains via SIPs (systematic investment plans). She emphasises that SIPs endow a disciplined way to save as well as invest by permitting investors to contribute small sums at periodic intervals. This approach fosters a savings habit while removing the burden of making huge lumpsum commitments. Neha believes in slowly accumulating money over time, making use of the benefits of compounding, and accomplishing financial objectives via constant contributions.
On the other hand, Sasha prefered term plan insurance owing to the lumpsum payoff. She contends that insurance plans endow critical monetary stability to the family of the insured in the scenario of the untimely demise of the insured. This single sum payment may act as a lifeline for family, permitting them to finance urgent requirements, settle debts as well as maintain their living standard. Sasha enjoys the mental peace that comes with knowing her family is secure financially during her absence.
Risk vs. security
Neha admits that SIPs are not immune to market changes and incur the risk of fluctuating returns. However, she is confident in the market’s long-term potential and is ready to accept these market risks in exchange for the chance of generating bigger rewards over time. Neha’s investment strategy is based on her belief that equities investments through SIPs may outperform other asset types in the long term.
Sasha’s first objective in these uncertain times is financial stability. She appreciates the security of term plans, which guarantee a predetermined payment regardless of market conditions. This predetermined financial cushion guarantees that her family’s financial requirements are satisfied, providing a safety net unaffected by market volatility. This financial security gives Sasha comfort.
Wealth accumulation
SIPs, according to Neha, are a powerful instrument for amassing wealth over time, owing to the force of compounding. She emphasises that by investing little sums on a regular basis, SIP participants may benefit from the compounding effect, which can result in significant wealth building over time. Neha feels that SIPs have the ability to help people reach their financial objectives and establish a comfortable nest egg.
Sasha believes that term plans are not intended for wealth building. Their major goal is to provide risk protection and financial security for the family. Term plans, rather than striving for wealth creation, prioritise a lump sum payout to meet immediate expenditures and replace the insured’s income, assuring the family’s financial security.
Liquidity
Neha appreciates the liquidity that SIPs offer. Investors of SIP can make partial withdrawals during exigencies on witnessing unanticipated financial needs. This liquidity permits investors to get hold of their invested funds when required, endowing financial flexibility.
Sasha notes that term plan payouts are typically triggered only upon the death of the policyholder. While this makes term plans less liquid compared to SIPs, it ensures that the payout is preserved for its intended purpose – providing financial security and support to the family during a difficult time.
Tax benefits
Neha highlights the tax benefits associated with SIPs. Investors of SIPs can benefit from deductions as well as tax-free returns as per Section 80 C and Section 10 (10D), making SIPs a perfect tax-efficient investment option. These benefits can assist investors in lowering their thorough tax obligations.
Sasha figures out that term plan premiums are even tax deductible as per Section 80C, which includes the appeal of tax-efficient investing. Individuals might save more funds on taxes while still protecting the financial future of their family.
Premium amount
SIPs offer considerable flexibility when it comes to the amount of investment. Investors can start with as low as Rs. 500, making SIPs accessible to a wide range of individuals with varying financial capacities. This flexibility allows investors to begin their wealth-building journey gradually.
Term plan premiums are typically fixed and determined based on factors such as the sum assured and policy term. While they may not offer the same low entry point as SIPs, they provide a predetermined level of coverage that ensures adequate financial protection for the family.
Tenure
SIPs do not require investors to commit to a certain time frame. Investors may tailor the duration of their SIP investments to their financial objectives, whether they are short-term, intermediate-term, or long-term. This adaptability corresponds to the necessity for customised investing strategies.
Term plans have set insurance lengths that might range from 10 to 30 years. This fixed tenure corresponds to the requirement for long-term financial stability and protection, guaranteeing that the family is covered over a lengthy period of time.
Returns expectation
SIP returns might vary depending on market performance, but Neha feels that equity investments through SIPs have the potential to grow wealth. While profits may fluctuate, investors with a long-term view might possibly benefit from the compounding impact and earn bigger gains.
Sasha understands that term plans are intended to provide set death payouts rather than produce investment profits. The primary focus of term plans is to provide financial security to the family, offering a guaranteed payout regardless of investment market performance. This predictability provides peace of mind.
As Neha and Sasha wrapped up their discussion, they realised that both SIPs and term plan insurance had their advantages and purposes. They came to the conclusion that a balanced strategy was the key to a stable financial future. Neha chose to maintain her SIP investing in order to accumulate wealth for her long-term aspirations, but Sasha chose a term plan to assure her family’s financial security. Prior to this, Neha utilised an online lumpsum SIP calculator to determine how much she needs to invest to accomplish her goal.
Finally, the two sisters discovered that there was no one-size-fits-all answer to financial planning. Individual goals, risk tolerance, and financial needs determined the optimal method. They hugged, thankful for their informative chat, and promised to support one other’s financial pursuits.
