Should You Secure Your Girl Child’s Future With Sukanya Samriddhi Yojana Or Mutual Funds?

The Sukanya Samriddhi Yojana (SSY) is a government-backed scheme aimed at ensuring the long-term financial security of girl children. But how does it compare to investing in mutual funds for your child’s future? If you are looking to secure your child's financial future at least until they reach adulthood, what option should you choose? While there are no specific schemes for boys, the government offers the SSY specifically for girl children. The primary goal is to provide financial security to girls by the time they complete their education or enter into marriage, which is at least 18 years of age.

Currently, SSY is one of the highest-paying small savings schemes, with an interest rate of 8.2 per cent since January 1, 2024. Notably, the interest earned and the maturity proceeds of this scheme are both tax-free, similar to the Public Provident Fund (PPF).

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However, the long tenure of the scheme raises questions about potential returns. Naturally, mutual funds are often considered a viable alternative for long-term investments.

Preeti Zende, a Sebi-registered investment adviser and founder of Apanadhan Financial Services, states, “Sukanya Samriddhi Yojana (SSY) is a central government scheme. It has sovereign guarantees about principal and interest payments. Interest rates are determined by the Government of India's Ministry of Finance, based on the yields of government securities and are reviewed each quarter”.

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Sukanya Samriddhi Yojana:

The SSY scheme, launched in 2015 as part of the 'Beti Bachao, Beti Padhao' campaign, aims to promote savings for a girl child. This scheme allows parents or guardians to invest on behalf of a girl child until she turns 10 years old. The account matures in 21 years. The scheme offers flexibility, as there is no fixed annual investment amount. Investors can contribute a minimum of Rs 250 and a maximum of Rs 1.5 lakh each year. You have the option to change your investment amount annually, as there is no requirement for a fixed contribution. Although the maximum investment period in SSY is 15 years, the account continues to earn interest for up to 21 years or until it is withdrawn earlier.

Note that the account can be opened for a maximum of two girls. More than two accounts are permitted only in exceptional cases, such as the birth of twins or triplets.

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Taxation Of SSY And Mutual Funds:

Investment in the scheme is tax-exempt up to Rs 1.5 lakh under Section 80C of the Income Tax Act, 1961. The most significant benefit of this scheme is the tax exemption not only on the principal amount but also on the interest and maturity amount so, an Exempt- Exempt-Exempt tax benefit, that no mutual fund scheme can match. Equity mutual funds are taxed based on short- and long-term capital gain basis with a minimum of 10 per cent tax.

Should Tax Benefit Be The Factor To Consider?

When considering the tax benefits of Sukanya Samriddhi Yojana (SSY) and equity mutual funds, it's essential to understand that they are different products and thus serve different purposes.

Zende explains, “SSY and Equity MFS are different products from two different asset classes. SSY is from the debt asset class whereas equity MFs are from the equity assets class. So comparison between both of them is not justified. It is like comparing an orange with an apple”.

She adds, “SSY offers sovereign guarantees about principal and interest payments from the central government. It can also be used for both important goals like a daughter's education and marriage goals. 50 per cent of the accumulated amount is accessible at the time the daughter turns 18 and remaining at the time of maturity or wedding whichever happens earlier. So one should use this as debt part of both the goals as per the asset allocation along with equity MFs”.

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How Are Interest In SSY Determined?

The interest rates for SSY are determined by the Ministry of Finance based on government securities yields, which are reviewed quarterly and compounded annually.

What To Opt For?

When exploring various investment options for a child, one should first assess their goals. If the objective is to secure finances, a guaranteed income instrument like SSY is a good choice, especially with its tax benefits. However, if the goal is not long-term and lacks a specific withdrawal timeline, equity investment may be appropriate. As Zende puts it, “Investors should invest in both these financial products according to goal's asset allocation needs and their risk-taking ability”.