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I am a salaried working in Private sector. I am interested in saving for my eight year child. I am confused between ULIP and Traditional Plans of insurance companies. Please guide.

-Rajen Mishra

By Balwant Jain, investment and tax expert

The most important principle of investing, never mix protection and investments needs. You should buy a pure term plan for your life cover and invest in diversified scheme of any good mutual fund house. Though ULIP is sold as an investment product and not as an insurance product, it is important to understand that the ULIP plans have various continuing charges, which reduce your overall return on the investments. Moreover, the ULIP plans have liquidity problem as you cannot get money from your ULIP investments before completion of five years even if you surrender them before five years.

The traditional plans of life insurance companies do not offer you good returns and historically the returns given are around saving bank interest only which do not even beat the prevailing the inflation. So, neither of the plans are advisable. However, as a thumb rule, you must buy life insurance cover equal to 10 to 12 times of your annual income through term plan preferably online if you can . The balance surplus must be invested in ratio 90% in equity mutual fund and 10% in PPF/Gold Fund. It is also advisable to decide in advance the corpus which you would like to have for your child's future at particular age and then accordingly start investing through monthly SIP in equity funds of appropriate amount. You can invest 50% in Axis Blue Chip Fund, 25% in DSP Midcap Fund and the balance 25% SBI Small Cap Fund. Though presently SBI Small Cap does not allow SIP of more than 5,000 but as and when it opens the SIP for higher amount, you can start the SIP then.

(Views as expressed by the expert.)

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