Why you need to think beyond Sukanya Samriddhi Yojana

CHENNAI: Sukanya Samriddhi Yojana (SSY) is a government-backed small saving scheme that is quite popular amount people with young daughters. The current SSY interest rate is a solid 8% and the scheme is completely exempted from taxes. That is, exempt from tax at the time of investment, interest accrued is tax exempt and so is the maturity payout.

But why am I saying that just investing in Sukanya account for your daughter may not be enough? Let me explain.

Currently, the maximum annual investment allowed under this scheme is Rs 1.5 lakh. And the maturity tenure of the account is 21 years from the date of account opening but you can invest only for the first 15 years. Many parents get confused that the account matures when the girl child turns 21.

That is not the case. Account matures after completion of 21 years of account opening. So, let’s say if an account is opened on 15 August 2019, then the then deposits can be made only for 15 years, i.e., up to 14 August 2034. And then the account will remain active for 6 more years (but without further contributions) and mature after the completion of 21 years, i.e., on 14 August 2040.

Coming back, suppose you open an account when your daughter is 3 and then you start investing the maximum allowed Rs 1.5 lakh each year for the next 15 years, then assuming the SSY earns 8% per year*, the total corpus you will accumulate by the end of 15th year will be close to Rs 44 lakh.

Now at the age of 18, you will need funds for your daughter’s graduation. But you cannot use the full Rs 44 lakh that you accumulated! Yes. You are allowed to withdraw only up to 50% of this corpus for her higher education. So, the amount available to cover higher education expenses is only half of the corpus, i.e., about Rs 22 lakh.

Let’s now compare this amount with the cost of higher education. A decent professional graduation course in India (like engineering, management, medical, etc.) will easily cost about Rs 20-30 lakh today. And if you consider the impact of inflation on this over the next 15 years, it will easily cross Rs 90 lakh to Rs 1 crore!

And as you saw a little earlier, if you invested only in Sukanya Yojana, you will not have enough funds to fully fund your daughter’s higher education. And that is not what you would want 15 years down the line. Isn’t it?

This clearly proves that just investing in Sukanya Yojana may not be enough unless you don’t expect your child’s higher education to cost you a lot of money. If you do, then you will have to make investments in addition to your Sukanya Samriddhi Account contributions.

So, what can you do? Or rather, what should you do if you have been only considering the Sukanya Samriddhi account till now for your daughter’s future?

If your daughter is young, then you have 10-15 years before you will need money for her education. And if you have such a long investment horizon, then you should always have at least a substantial allocation to equity, which has historically proven to give 10-11% average returns in the long term.

How much should be invested in equity then? Depending on your (parent’s) risk profile, you can choose your path from below –

Aggressive – Put 70-80% in equity funds and the remaining 20-30% in Sukanya

Balanced – Put 50% each in equity funds and Sukanya

Conservative – Put about 25-30% in equity funds and the rest 70-75% in Sukanya account

Before I end, let me clarify something. Don’t get me wrong. I am not saying Sukanya Samriddhi Yojana is not a good option. It is. Given the taxfree nature and reasonably good returns, it is surely a decent product. But, given the impact of inflation on career choices, it may not be enough to just rely on the Sukanya account for your daughter’s future. You need to complement it with equity funds to save enough for her future requirements.

(Dev Ashish is a SEBI-registered investment advisor and founder of Stableinvestor.com, who provides fee-only investment advisory services)