The most crucial financial endeavor on the path to a healthy financial future is investing for your child’s future. The government-sponsored Sukanya Samriddhi Account (SSA) is one that continues to garner attention when it comes to investing for girl child. SSA is providing an interest rate of 8.0 percent annually for Q1FY24, and the deposits qualify for tax deductions under section 80C of the Income Tax Act.
The guardian may start an SSA account in a girl’s name who is younger than 10 years old, and deposits may be made for a maximum of 15 years from the account opening date. The SSA account matures 21 years after the account’s opening date or when a girl child gets married after 18 years of age. SSY offers an interest rate of 8% which is much higher than the returns of bank fixed deposits and along with tax benefits, SSY can be a good bet for your girl child, but should you invest in it ?. By consulting some of the financial advisors, here are the reasons why you should not invest in a Sukanya Samriddhi Account (SSA) for your girl child.
Amar Ranu, Sr. VP and Head – Investment Products and Insights, Anand Rathi Shares and Stock Brokers
SSY is exclusive for parents with daughters. Though it provides certainty of returns, at present, 8%, it misses the upside potential of returns which one can expect from being in equity market. Since we suggest equity for a longer period, putting money in SSY limits the upside potential.
Also, since the return is capped, it may not beat the inflation including education inflation which is generally higher.
This is also less friendly as the money can only be used for education and marriage expenses of daughters. Additionally, it comes with fixed lock-in – the funds are locked in until the girl reaches the age of 18 and only 50% can be utilized for higher education.
Aashika Jain, financial expert and editor at Forbes Advisor
The Sukanya Samriddhi Yojana is among the most progressive savings schemes ideas specifically rolled out by the government of India. This scheme designed to empower the girl child, however, has two key drawbacks:
The lock-in period of 21 years, while well-intended, is far too long for any account holder. With an 8% fixed annual return, it would be impossible for the scheme to beat inflation in the long run. Other saving schemes such as the public provident fund and market-linked equity mutual funds, both of which provide tax benefits akin to the SSY, have much smaller lock-in periods ensuring the principal and interest are readily available and they offer a much greater opportunity to build financial corpus.
Since the investment by parents or legal guardians for their daughter up till the age of 10 years can be used for the purposes of marriage or education only, an investment made for a child at the age of 9 would imply the scheme can be open for full withdrawal only when the girl turns 30. If she intends to use the SSY-earned corpus for her marriage or education, she’ll have to opt for a partial withdrawal which is permissible but wouldn’t enable using the SSY scheme to their advantage.
Aniruddha Bose, Chief Business Officer, FinEdge
Even though returns from the SSY are tax free and fetch a higher return than other traditional instruments (presently 8%), we do not consider it to be an optimal savings tool. The lock in period for the SSY is 21 years (with a contribution period of 14 years), and we believe that settling for a fixed-income rate of return for such a long-term investment would not be a wise move. Over two decades, the difference between 8% and 12% that on can earn from equities can be very large, so a measured degree of risk taking is advisable for such long-term goals, instead of being risk averse.
Amit Gupta, MD, SAG Infotech
The Sukanya Samriddhi account is a popular savings instrument in India for parents with daughters, offering government-guaranteed, tax-free returns. However, simply opening a Sukanya Samriddhi Yojana (SSY) account may not be sufficient for securing your daughter’s future due to several reasons. This article highlights the top six reasons why investing solely in Sukanya Samriddhi Yojana may not be the best option.
Firstly, the interest rate offered by the Sukanya Samriddhi Yojana is currently 7.6 percent, but it is subject to change on a quarterly basis. This interest rate may not be enough to combat the high inflation associated with long-term goals like education and marriage expenses. In comparison to mutual funds, the SSY fails to provide a return that beats inflation.
Secondly, the SSY has a long tenure of 21 years. For generating inflation-beating returns in the long term, it is advisable to consider equity investments. Allocating more funds to equity funds rather than relying solely on debt investments is preferable for goals that are more than 10 years away, unless you are a highly conservative saver.
Thirdly, the SSY has certain restrictions that make it less investor-friendly. The funds saved in the account can only be used for education and marriage expenses, and the entire corpus remains locked in until maturity. This lack of flexibility limits the usage of the funds for other financial needs that may arise in the future.
The fourth reason is the long lock-in period of the Sukanya Samriddhi Yojana. The funds remain locked in until the girl reaches the age of 18, with only 50 percent available for higher education. This reduces the liquidity of the investment, making it less suitable for unforeseen financial requirements.
Another peculiar rule is that deposits can only be made for the first 15 years, despite the account’s 21-year tenure. This limitation restricts the period during which additional contributions can be made, potentially affecting the overall growth of the investment.
Lastly, the withdrawal and maturity rules of the SSY state that after a girl reaches 18 years of age, guardians can withdraw money up to 50 percent of the balance in a financial year. Withdrawals can be made in a single transaction or in installments, with a maximum of one withdrawal per year within a limit of 5 years. These restrictions may hinder the flexibility of accessing funds when required.
To address these limitations, it is recommended to have a mix of equity and Sukanya investments. Different allocation strategies based on risk appetite. Aggressive investors may allocate 70-80 percent to equity and 20-30 percent to Sukanya, balanced investors may allocate 50-60 percent to equity and 40-50 percent to Sukanya, while conservative investors may allocate around 30 percent to equity and 70 percent to Sukanya.
In conclusion, while the Sukanya Samriddhi Yojana is a popular savings scheme for girls in India, it may not be the ideal option for securing their future due to various reasons. To achieve higher returns and address the limitations of the SSY, it is advisable to consider a combination of equity investments and Sukanya investments. This will provide a more flexible and potentially higher-growth approach to meet the financial goals of the girl child.
We do not recommend investment decisions and only provide information by consulting industry analysts. Neither the author, nor Greynium Information Technologies, nor the brokerage firm should be held responsible for losses based on the above article. Please consult a professional advisor before investing.
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