Thursday, December 26, 2019

Is the Sukanya Samriddhi Yojana suitable for your daughter’s goals?

As a parent, saving for your children's future is a big responsibility. And many times, and understandably, people are willing to sacrifice retirement savings for their children's future.

If you have a young daughter, then you would have come across the Sukanya Samriddhi Yojana (SSY) many times.

But is it a good option? And does it make sense for everyone who has a daughter to invest in the SSY? 

Being part of government's small savings schemes, the SSY often gets compared with products such as the PPF (public provident fund). The SSY does give higher returns, of 8.4 per cent, than PPF (7.9 per cent).

But 'higher returns' alone shouldn't sway your investment decision.

The SSY has certain in-built restrictions that make it a very illiquid product and should be chosen only if it suits the investor's actual objective of accumulating savings for the girl child's future.

As per the rules of the SSY:

- A Sukanya Samriddhi Account or SSA can be opened only up to 10 years age of the girl child.

- It matures on completion of 21 years from the date of account opening (note that it's not related to the girl's age).

- But deposits can be made only till the 15th year. No deposits are allowed between the 16th and 21st years, though the account continues to earn interest for all 21 years.

For example: If an SSA opened on Dec 15, 2019, then deposits can be made only up to Dec 14, 2034 (15 years) and the account would mature on Dec 14, 2040 (after 21 years).

-There is an option for premature closure (before 21 years since account opening) for the girl's marriage (only available if she is above 18).

But what if you need the money for the girl's education before that?

The SSY rules allow partial withdrawal for higher education. You can withdraw up to 50 per cent of the SSA balance at the end of previous financial year. So if you want to withdraw money for your daughter's education in August 2029, you can withdraw 50 per cent of the balance at the end of the previous FY, March 2028.

Now let's take two scenarios, which will highlight why SSA may not work in every parent-daughter situation:

A parent opens SSA for her daughter aged two. She keeps making investments for the first 15 years (girl's age 2-17). No investment is to be made from years 16 to 21 (girl's age 18-23). Now SSA allows withdrawal only after the age of 18, that too only 50 per cent of the corpus as of the previous FY. In this case, it would be fine, assuming that 50 per cent of the SSA balance in the previous year would be enough for the daughter's higher education needs.

Another parent opens an SSA for her daughter aged 8. She invests for the first 15 years (girl's age 8-23). No investment is to be made from years 16 to 21 (girl's age 24-31). So, in this case, amounts can be withdrawn fully only after the daughter is almost 30-31. And even though 50 per cent of the corpus can be withdrawn when the daughter turns 18, it must be noted that by then, the account would have only completed 9-10 years of existence and hence, may not have enough savings for education itself.

Need to open the account early:

So, it can be said that if you don't open an account for your daughter when she is very young, the SSY may not be enough to fund her higher education needs. In that case, the SSY becomes more of a tool to save for marriage as the account matures when the girl is in her mid-to-late 20s (for accounts opened when girl is aged 5-10).

Many parents who had opened an SSA realize this late due to the misunderstanding that the account matures when their daughters turns 21. In reality, account matures 21 years after being opened and not when the girl turns 21.

Another factor to understand is that Sukanya Samriddhi Account is a long-term product. But when saving for goals such as education and marriage, it's possible that the SSY – being a pure debt product – may be not be able to match inflation's pace and result in inadequate savings. And if interest rates fall, then SSA savings may not grow enough to meet your requirements.

For those who have very young daughters, it makes sense to take some exposure to equity as well as it's the only way to beat inflation in the long run. Equity mutual funds give you the best shot at inflation-beating returns in the long run.

So, if you need some amount for your daughter's education after 12-15 years and for marriage after 20-plus years, then consider investing in equity funds via regular SIP (systematic investment plan) as well.

Even though SSY has a favorable tax status, it may not help you fulfill your daughter's education and marriage goals. You need to beat inflation too.

                                - Dev Ashish