Sukanya Samriddhi Yojana is a good investment for your daughter, but it's not enough

Saving for their children’s future is one of the major goals for most investors. At times, parents walk the extra mile, even if it comes at the cost of their retirement savings.

There are tons of instruments available to save for your children’s future. But daughters have the upper hand over sons in India, as they have one extra instrument at their disposal – the Sukanya Samriddhi Yojana (SSY).

Many parents are often confused between two of the safest savings options: the SSY and PPF (Public Provident Fund).

Saving for twin goals

In India, when it comes to daughters, one of the major worries for parents is to save for their education and marriage. At times, many parents give more importance to saving for the marriage. Right or wrong, that is a fact here. So SSY does strike a  chord with parents when it comes across as a unique product that can help them save for their daughter’s marriage and education.

Now Sukanya accounts are expected to continue giving slightly higher returns (around 50 basis points) than PPF due to the social angle of the SSY scheme. Currently, SSY offers 7.6 percent while PPF offers 7.1 percent.

So when it comes to interest, SSY is better. But that should not be the only reason to pick SSY over PPF.

Remember that an SSY account can be opened for a girl up to the age of 10 and has a tenure of 21 years (or it will be closed after the marriage of the girl). But deposits can only be made till the 15th year. SSY corpus will still generate returns from 16th to the 21st year. But you cannot make any additional contribution after the 15th year and up to the 21st year. So this rule restricts investments beyond the 15th year in the SSY. And the problem here is that if you decide to invest elsewhere after the 15th year, you cannot do it so easily. For example, if you begin investing in equity funds, then there isn’t much time left after age 15 (only six years left up to 21). So, in a way, the person is already past the time when equity investing could have worked wonders due to the long runway available.

Another issue is that the entire SSY corpus is locked-in till the girl attains the age of 18. And even then, only up to 50 percent of the investment amount can be withdrawn for educational needs. So liquidity is an issue. What if the daughter’s higher education requires more money than what is provided by 50 percent of the SSY account balance? You have more money sitting there, but still it’s not available at the time of need. Think about it.

How SSY fares against PPF

Since both PPF and Sukanya qualify for 80C deductions, there isn’t anything to compare on the tax-saving front.

Sukanya account can be opened for daughters as there is some merit in it and gives better tax-free returns. But if liquidity is also a concern after the 15th year, then investing in PPF, too, is advisable. PPF provides greater flexibility and can also be used as an investment tool even after the daughter’s marriage or closure of her Sukanya account. This brings me to another important point.

Remember that you are saving for the long term – your young daughter’s education and marriage. Also, educational inflation in India is much higher than regular inflation or the returns provided by safe debt instruments. So, for this reason too, you need to also invest a portion of your savings in equity mutual funds that are known to beat inflation in the long term.

It is for these reasons that I think that using SSY as the sole investment option for your girl child isn’t the right approach. You should also invest a small portion in her PPF account. And unless you are an ultra-conservative saver, you also need to have equity funds for inflation-beating returns that you will need to save up for the ever-growing cost of higher education in India.

So that is about picking between Sukanya Samriddhi Yojana and PPF when investing for your daughter. Do not make the mistake of picking one of them just because of the higher interest rate.