Equity and endowment plans are two extreme ends of the investment plank. While equities are a go-to choice for you if you want aggressive growth, endowment plans offer a surety over the long term like no other. So which one will be your choice?
What is Equity Stock?
The terms, Equity and Stock, are used interchangeably although there is a fine line of distinction between the two. Both represent ownership in a company and are available for purchase/sale on the stock exchanges. Equity, in particular, means ownership after debts are cleared off whereas stocks refer purely to those equities purchased/sold in the stock market.
Investments in equity stocks are done either directly or through equity mutual funds and ULIP plans. The advantage of mutual funds is that you do not require specialized knowledge to monitor progress because the expert portfolio managers would do so and give you the most optimal returns. You can also trade directly if you understand and closely monitor stock market movements.
Equity investments are largely done to generate wealth either in the form of capital gains or in value. When equities give capital gains, you get money in the form of dividends whereas a price increase allows you to sell shares at a higher price and profit by keeping the difference.
Equities are an important part of a balanced investment portfolio. The exact percentage allocation to equity depends on your age, risk appetite and investment objectives.
What are Endowment Plans?
Endowment plans are designed to serve multiple objectives:
One, it is a safe investment strategy to build a corpus.
Two, it is an insurance policy that gives your family a financial cushion in case of your untimely demise.
Endowment plans have a long legacy and are thus trusted by millions of people to save money, protect life and also save on taxes both on investment and during withdrawals.
Endowment plans can be used as a robust, reliable, comprehensive “piggy bank” to save for life goals such as a child’s education or marriage. At the time of maturity, endowment plans give back the guaranteed amount + bonuses + guaranteed annual additions, if any. Moreover, most endowment policies give extended life cover even after the maturity value is paid out.
Endowment plans are popular because they offer guaranteed returns, which most risk-averse investors like. The safety net of life insurance means that your family will be financially comfortable if life does not go as planned.
For example, the guaranteed income plans, offered by Canara HSBC Life Insurance, give guaranteed annual income after paying premiums for a fixed term. What’s more, you will get the “Guaranteed Sum Assured” at the end of the policy term. Being an insurance plan, there is a life protection built-in to financially safeguard your family in case of demise. The fixed lump sum is immediately paid out to the nominee whereas the fund value is paid towards the end of the term.
Difference Between Equity and Endowment Life Insurance
Both equity and endowment life insurance are part of most investment portfolios. It is therefore important to understand the finer nuances to decide what suits you best and the exact allocation for each.
|Safety/Risk on Investment||1. Direct Trading: Returns depend on the market performance of that stock2. Mutual Funds: Return depend on the performance of various stocks that form part of the fund. Less risky as compared to direct trading as an investment is spread across stocks.3. ULIPs: Triple Advantage-Keep shuffling allocation between Equity and Debt. Life Insurance cover is also built-in. Generate wealth. Least risky of the three.||1. Guaranteed Returns + Applicable Bonuses + Annual Additions2. Insurance + Savings3. Safest investment plan4. In case of demise, the nominee gets Sum Assured +Bonus|
|Investment Tenure||1. Direct Trading of Stocks: No lock-in or tenure2. Mutual Funds: Generally, no tenure. Equity Linked Saving Scheme (ELSS) has a lock-in of 3 years3. ULIPs: Minimum 5-year lock-in period||Depends on the plan and premium paying term|
|Instruments of Investment||1. Direct Trading2. Mutual Funds3. Unit Linked Insurance Plans (ULIPs)||1. Unit Linked Endowment2. Guaranteed Endowment3. With/Without Profit Endowment4. Low-Cost Endowment|
|Emergency Support||1. In case of medical and other personal exigencies, you can opt for partial withdrawals without surrendering the policy. This is possible only in ULIPs2. Life Insurance cover is available only in ULIPs||1. In case of permanent disability, the company pays the future premiums until the end of the term.2. It is dual protection against critical illnesses and death.|
|Purpose of Investment||1. Wealth creation through capital gains and dividends2. Profit through fluctuation in market value For example: Invest 4G, a Canara HSBC Life Insurance policy, is designed to give superior returns and help create wealth. The money is initially invested in high growth equity funds and gradually moved to safer debt instruments.||1. Stable method to create a corpus2. Guaranteed returns3. Profit-sharing in the form of bonuses|
Every person needs a safe investment to fall back on, so that they know this money will be there under all circumstances. Endowment plans provide that safety net by giving guaranteed returns in the long run. This guaranteed corpus forms the base of your investment portfolio to give you and your family financial security.
The subsequent goals should be to generate wealth where ULIPs are conservative yet aggressive because you can change your portfolio allocation depending on your life stages and market movements. Both ULIPs and endowments provide a life cover which makes both solid financial investment options. Direct trading in equities neither gives the flexibility that ULIPs provide nor the guarantee that endowment plans come with.