Here is an illustration of Sukanya Samriddhi Yojana vs. PPF when used for a girl child's education goal. It also serves to understand why liquidity is more important than higher interest rates.
Update: Current Sukanya Samriddhi Yojana rate is 8.3% and current PPF rate is 7.8% (the same 0.5% difference as assumed in the article). This does not change the conclusions of the article. One can now withdraw 50% after the child has pased 10th standard, however documentary proof of admission in another institution is necessary. I am farily certain you would like your child to finish school and not stop at 10th. So this rule is of no use to you.
Consider a couple with a girl child which would enter college at age 18. Some children enter college or get admitted to college before they turn 18. Using Sukanya Samriddhi Yojana for such children is a terrible idea unless you have some other source of income for college admission and first-year fees!
The couple can invest Rs. 8000* a month towards their child's for a start. They believe that they can increase this amount by 10% each year. They are going to use the following asset allocation:
60% of monthly investment amount toward equity SIPs.
40% of monthly investment amount towards
- Sukanya Samriddhi Yojana --> SSY
- Public Provident Fund --> PPF
- Can you guess why I chose 8000? 🙂 Illustration will not change if you choose more or less.
Assumptions
- Asset allocation does not change until the child turns 18. This is impractical and simplistic, but does not harm the illustration in any way.
- No rebalancing is done (cannot be done without adding another instrument)
- PPF rate is fixed at 8.7%. SSY rate is fixed at 9.2%. These will vary each quarter from now on, but will not change the illustration if we assume SSY will always be higher than PPF by 0.5%. After all, it is a Beti Bachao yojana!
- Investment limit of Rs.1.5L a year will not change.
- Equity investment return is 12%.
Illustration: Child is 3 years old.
We will consider a case when the child is 3 years old when investments begin. Or the child turns 4 after 1 year of investing. The PPF will mature when the child turns 18 (and before she enters college)
This comparison cannot be made for an older child since the PPF will mature later and SSY is not liquid. The results will not change by much for a child which is younger.
Read more: The case for not investing in the Sukanya Samriddhi Account
PPF:
Tenure 15 years.
Investments can be made for 15Y.
Return 8.7% (fixed only for illustration)
Maturity amount = 21,90,687 (21.90 Lakhs)
SSY
Investments can be made for 14 years only (15th-year full investment in equity only)
50% of closing balance after the child turns 18 can be withdrawn each year.
Return 9.2% (fixed only for illustration)
Amount available at age 18: 10,55,753 (10.55 Lakhs). After this 50% of the closing balance can be withdrawn up to age 24 when the account will be closed.
Equity investment
Investments can be made for 15Y.
Return 12% (fixed only for illustration)
Equity Corpus when child is 18: 43,44,725 (43.44 Lakhs)in case of SSY route (higher investment in 15th year)
In case of PPF route, equity corpus is: 41,81,402 (41.8 Lakhs)
When the child is about to enter college, SSY+ Equity corpus will only be about 84-85% of the PPF+Equity Corpus.
I don't know about you, but to me, this is a serious constraint. For me, liquidity is priceless. I need to get my hands on much as money as possible to be deployed the way I want when my child enters college. There is no basis for me to claim that I can make do with a 15% lower corpus several years before the actual expense!
The PPF corpus upon maturity will only be Rs. 79,812 lower than the SSY closing balance (before withdrawal when child is 18).
This is a pretty small amount - just 22% of the annual investment the couple would make that year! This fact that PPF is 100% liquid after 15 years compensates for this (imo, of course)
Sure some amount is available from SSY when the child turns 19, 20,... but this is still only 50% of the closing balance (which is already 50% lower). It is no guarantee that this amount will be enough for fees in the 2nd, 3rd year etc.
The Sukanya Samriddhi Yojana is meant for those folk who will not educate their daughters but marry them off at or before 18. Which is why there is a 50% withdrawal limit at 18. The govt wants to Bachao such Betis. If you are reading this, your Beti probably needs rescuing from this ill-liquid policy!
If you have already opened this account, suggest you tag it to your retirement goal, invest regularly and let it mature after 21 years from date of opening. For retirement, it is a very good fixed income instrument. Not for your child's education!!
Very nice eye opening illustration. Thanks pattu sir..
Thank you.
You sum it up so nicely
Thank you.
What is age limit to invest in Sukanya Samriddhi Yojana. My daughter age is 10 years . Can you Suggest some good saving plan for her education and marriage. Thank you
I believe it is 10. I do not provide investment advice.
Dear Pattu,
Thanks for sharing your insight on SSY. I agree that it may not be feasible to rely only on SSY for education purpose.
I am going with a mix of equity (through MF ) and SSY, wherein equity will take care of the fees and SSY will take care of other incidental expenses like hostel fees, books, food, etc....
Thank you. Okay.
once again great job
Thank you.
Good information but it appears you have missed out on some crucial information here with respect to withdrawals.
The account will automatically terminate at 21 years from the date of opening or if the beneficiary gets married before that 21 years period. So, if you are looking at investing in this scheme for the sake of girl child's marriage, this completely makes sense.
It may not be so useful when thinking about her education as you have rightly highlighted.
The chart makes it clear enough that the account will terminate after 21 years. Girl marrying before 21 is not of much relevance to my audience.
If the intention of the investor is to generate the corpus for girl child's wedding, won't it make sense? I am sure there are such people in your audience.
This is my first visit to your website though. Ignore my lack of knowledge about your audience.
I just thought this is an important clause which investor should be aware about.
It certainly would, but perhaps not before age 21. I usually focus on specific aspects of a product and not cut and paste features. It is up to the buyer to read everything about it. That aside, welcome to freefincal.
Great Insight...appreciate