Saving for your daughter’s future? A mix of Sukanya Samriddhi and equity funds works best

The Sukanya Samriddhi Yojana (SSY) is a debt product and will always give predictable but debt-like returns. Equity funds, on the other hand, can deliver much better returns in the long term, as they are linked to equity markets. Both products serve very different purposes. Equity funds are more for capital appreciation, while Sukanya Yojana is a fixed-income product.

It is important to pick the right asset for your long-term investments.

It’s easy to compare the Sukanya Yojana with similar debt products such as PPF and conclude that SSY is superior because it gives higher returns than PPF. But even if you beat PPF’s (current) 7.1 percent with SSY account’s 7.6 percent, the fact is that these are still debt-like returns and may not be enough to beat inflation applicable for your daughter’s goals such as her higher education and marriage.

As a parent, I am sure you will be more than willing to do everything to ensure a great future for your daughter. And even if it comes at the (huge and not-so-right) cost of sacrificing your retirement savings.

SSY offers higher interest

Many parents do get attracted to the higher returns of the Sukanya scheme and pick it as the only option to save for their daughter’s future. But that is not right. Why?

That’s because Sukanya is a long-term product with a very long maturity period. Now when you save for goals such as daughter’s education and marriage, these too are long-term goals. Sound investment logic demands that when investing for such long-term goals, it’s better to invest more in equity and less in debt (assuming you are not a very conservative saver).

Given the high inflation in education these days, it’s possible that the savings in Sukanya alone will be unable to match the pace of inflation.

The result will be inadequate savings. And that is something that you don’t want. Isn't it?

My view here is that unless you are an extremely conservative saver, you need to have a lot of equity for your daughter’s future. More so if you are smart enough to begin investing for her when she is very young.

The next question is how much to invest in Sukanya and how much in equity funds?

Dividing investments between equity funds & Sukanya

General suggestions would be as follows:

-If you are an ultra-conservative saver, then keep it simple and limit yourself to 100 percent in Sukanya and PPF.

-If you are open to a little bit of risk-taking, then you can have 75 percent in Sukanya Yojana and/or PPF and the remaining 25 percent in equity funds.

-For balanced investors, it can be an equal 50 percent split between Sukanya (&/or PPF) and equity funds.

-For moderately aggressive to aggressive investors, it can be 75-100 percent in equity funds and the rest (if any) in the Sukanya scheme account.

Please spend some time to figure out the right SIP amount and then invest it in equity funds every month regularly. The same is the case with your Sukanya contributions as well.

If you are not sure what is the right combination for you, then your investment advisor can help plan for your daughter’s goals (and all other goals) using a proper combination of equity and debt options. A properly planned investment strategy goes a long way in generating inflation-beating returns and ensuring that you have sufficient liquidity at the right point of time in the future.

To give you an example of how to divide your investment amount, suppose your daughter is 2-3 years old and you want to have a corpus of Rs 75 lakh by the time she is 17-18 and ready for higher studies.

In such a scenario, how much do you need to invest and where?

You can go for 75:25 Equity:Debt allocation and assuming return of 11-12 percent from equity and 7-8 percent from debt, you need to invest Rs 16,000-18,000 per month. The starting monthly amount can be lowered further if you are willing to increase SIP every year by a small percentage.

You can then divide this Rs 16,000-18,000 into two parts with Rs 12,000-14,000 parked in equity funds and Rs 3,000-4,000 per month in Sukanya Savings Account. If you are comfortable, then you can even start with more equity or even 100 percent in equity! After a few years of accumulation, you would need to rebalance periodically and gradually reduce equity as you get closer to goal day.