Should you invest through Sukanya Samriddhi for your daughter?

…kyonki betiyan toh sabki sanjhi hoti hain” tweeted Sushma Swaraj, Minister of External Affairs to a Pakistani girl who praised Indians for their hospitality despite the charged environment. This is one sentiment that the NDA government has echoed repeatedly.

The ‘Beti Bachao, Beti Padhao’ scheme, focused on the protection and empowerment of the girl child has been in the spotlight ever since its launch in October 2014. In January 2015, Prime Minister Narendra Modi launched the Sukanya Samriddhi Account Scheme under the auspices of the Beti Bachao, Beti Padhao. This scheme looks at the basics of the daughter’s well-being by tackling the financial aspect and promoting small savings at the household level.

What is a Sukanya Samriddhi Account?

Sukanya Samriddhi literally means prosperity for the girl child. It is a savings scheme that prompts parents and (legal) guardians of a girl child to put away small sums of money on a regular basis and invest these. The cumulated amount and returns may be used to fund the education, marriage, and entrepreneurial dreams of the daughter, says the government.

Read: Sukanya Samriddhi Yojana Account – Scheme Details, Benefits, Features

Parents of daughters are encouraged to open up a savings account with any post office or any branch of the authorised banks such as SBI, PNB, UCO, Canara Bank, BoB, Andhra Bank, and Allahabad Bank. These may be opened for a newborn infant or for any girl child under the age of 10. The parents/guardian will be required to invest anywhere between INR 10,000 and INR 1,50,000 annually. The deposits may be made till the age of 18. When the girl turns 18, she may withdraw 50 percent of the funds along with interest and on turning 21, the maturity proceeds may be finally withdrawn. If the account holder turns 18 and is married she may close the account before final maturity and withdraw all proceeds.

How is Sukanya Samriddhi Account Different from a regular savings account?

With most banks soliciting minor accounts these days, you may start to wonder how the Sukanya Samriddhi account is different from a regular minor savings account. Here are some key differences –

  • Most banks allow parents or guardians to open minor accounts only if either parent or the guardian has an account in the same bank. For example, HDFC bank Kid’s Advantage account is available only if the parent has an account or opens up one with them. No such restriction has been made on the Sukanya Samriddhi account. In some banks such as SBI, the account has to be jointly held with the parent if the child is below 10 years of age (Pehla Kadam accounts).
  • Many banks have a minimum capital requirement for most minor accounts. This is not true of the Sukanya Samriddhi account, as it targets lower income group families and prompts them to save. The ICICI Bank Young Star and Smart Star accounts, for example, require a minimum monthly average balance of INR 2500 to be maintained, failing which a penalty of INR 100 will be charged each month. In case of the Sukanya Samriddhi Yojana (SSY), the bank or post office will levy a penalty of INR 50 a year if a minimum annual deposit of INR 1000 is not made.
  • The most important distinguishing factor is the rate of interest on these accounts. In most banks such as SBI, the minor account interest rates are the same as any other savings account (4 percent). In some cases, such as in Kotak Mahindra Bank Junior Savings Account, the interest rate is nominally higher (6 percent). The main advantage of the SSY account is the high interest rate offered by the government of India.The initial interest rate offered was 9.1 percent for 2015-16. This was later revised to 9.2 percent. For 2016-17 the interest rate has been pegged at 8.5 percent. This interest is also compounded annually and added to the account, thus increasing the corpus of investment each year. This offers the average Indian a great incentive to save for their daughters through this scheme.
  • Most other minor accounts allow minors to operate them, that is, to make withdrawals, transfers, etc. In SSY accounts withdrawal is only possible when the account holder (girl child) turns 18.

Sukanya Samriddhi Yojna or Public Provident Fund (PPF)?

PPF or Public Provident Fund has been a popular instrument for savings and investment in India. Since parents and guardians may also open PPF accounts for their minors, it has been popular with parents (more so due to the higher interest and tax savings opportunities it offers). Now there are a few differences between investment through PPF and investment through SSY that you must be aware of. While SSY account is available only if your daughter is less than 10 years of age, PPF may be opened for anyone – minor or adult, son or daughter. A PPF account, too, may be opened at select post offices, some public sector branches and some private banks as well. The minimum contribution to be made towards PPF is INR 500 a year.

When the SSY was launched the rate of interest was higher than the PPF (9.2 percent vs 8.7 percent). This year again the SSY offers 8.5 percent while PPF offers 8.1 percent.

If you still are unsure which option is better as an investment option for your child, consider the following –

Is your child a daughter? – SSY is specifically meant as a savings scheme for the daughter. Parents of sons may consider investing in PPF.

What level of liquidity are you looking at? If the target is to withdraw the capital and returns at the age of 18 or 21, SSY is a great option. PPF has a moderate liquidity and withdrawal is allowed after 7 years in specified slabs.

What is the investment term? If the parent is looking for an investment option with a longer term or saving with a hope that the child may take over and continue savings at the age of 21, PPF is a better option than SSY.

A Balanced Investment Portfolio

Both the SSY account and PPF have a better yield than the 10-year government bond. Considering that the investment on SSY is for a period of 10 years and more, it is likely that the rate of interest may dip in the years to come. Investing in an equity-based mutual fund along with SSY is likely to give your daughter a more balanced portfolio and better returns in the long run, say investment experts.

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