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SIP or ULIP? Which is better?
Uma Shashikant
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August 17, 2005

Got a question about your money? What you should or should not do with it?

Our expert Uma Shashikant has the answers.

ImageI  am currently 28 and single.

Monthly salary = Rs 18,000 per month
Rent = Rs 3,600
Car EMI = Rs 6,500
Premium on LIC [Get Quote] pension plan = Rs 10,000

I should be getting married in 2007. My wedding expenditure will amount to Rs 4,00,000. I want to pick up this bill and not burden my parents.

My only saving is Rs 12,000 in my Sahara India Account.

What must I do?

- Santona Senapati

I am assuming that the insurance premium you mention is for a year. That means your monthly expenses come to around Rs 10,000.

The only hassle in your financial goal of Rs 4,00,000 is that you do not have time on your side. Even if you save all the remaining Rs 8,000 every month for the next two years, you will need a magical 70% return on your investments to achieve your goal.

At 10% per annum, you would make little over Rs 2,00,000.

Begin to save regularly and start immediately. Save as much as you can.

Invest some money, say 20% to 25% of your total savings, in equity every month. Though I must caution you that a two-year time frame is too short and too risky. Do not go for speculative deals. 

For the rest of the money, you may have to turn to conservative investments like short-term mutual funds and bank deposits. Do not invest in unsecured fixed deposits of companies.

Secured deposits imply that if the company shuts down, the assets (building, land, machinery etc) will be sold and your money will be returned. Unsecured deposits have no such assurance. If the company fails, you lose your money. They can be risky though they offer a higher interest rate.

Don't look at the wedding as the final destination. Please expect your expenses to increase after your wedding.

I am 25, earning a salary of Rs 28,000. Since my monthly expenses are just Rs 10,000, I can save quite a bit.

Should I invest the balance in an SIP or ULIP?

- Shashanka Dontula

A Systematic Investment Plan is a method of investing in a mutual fund.

An SIP allows you to regularly invest in a mutual fund. This ensures discipline and regularity in savings. When the Net Asset Value is high, you will get few units. When it is low, you get more units. Over time it evens out.

To understand SIPs in greater detail, read How to invest in a mutual fund.  

An ULIP - Unit Linked Insurance Plan - is a financial product that offers you life insurance as well as an investment like a mutual fund. Part of the premium you pay goes towards the sum assured (amount you get in a life insurance policy) and the balance will be invested in whichever investments you desire - equity, fixed-return or a mixture of both.

Investments in ULIP attract the benefit under Section 80C.

However, don't mix the two - insurance and mutual funds - just to save some taxes.

If you are looking for a tax-efficient and lower cost investment option, an SIP in an Equity Linked Saving Scheme will do better. These are diversified equity funds that offer a tax benefit under Section 80C. 

To understand how an ELSS works, read Which ELSS Fund should you invest in?

To get a list of all the investments falling under Section 80C, read All about Section 80C.

If it is insurance that you seek, a term policy will come very cheap at your age. Read Insurance for your 20s

Is a car overdraft a good option to meet my personal loan requirements? What are the risks involved? What does hypothecate a car mean?

- Santhosh, H.

To hypothecate your car is to take a loan, using the value of the car as the security for the loan. If you did not repay the loan, the bank would be able to take possession of your car. 

The rate, at which this overdraft will be available, depends on the value of your car, and whether it was funded by a loan to begin with. If there is an outstanding loan already on the car, you are likely to pay a higher rate on the overdraft.

If you are using the money to meet some expenses tread very carefully. You could end up in too much debt. 

It makes sense to balance income and expense. Keep such loans and overdrafts for situations of absolute emergency, like a medical problem.

Read Calamity-stricken and need money? to check out other options.

Illustration: Dominic Xavier

Got a question for Uma Shashikant? Please write to us.

Note: Questions may be edited for brevity. Due to the tremendous response, all queries will not be answered.

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