Is relying solely on Sukanya Samriddhi enough, or should you invest in equity funds too?

Recently, I was talking to a relative who has a 3-year-old daughter. Being an investment advisor, many of the general conversations with extended families tend to steer towards investments.

This relative of mine told me that he is investing ₹1.5 lakh yearly in the Sukanya Samriddhi Yojana account for his daughter’s future. I asked him if he was doing anything else to save more for his daughter and he told me that he wasn’t.

So, I told him that if he continues to save just ₹1.5 lakh yearly for 15 years (since account opening) in Sukanya, he is expected to have a corpus of ₹45 lakh after 15 years. If the money remains untouched for 6 more years till the 21-year account maturity, then the corpus (without any fresh contributions between 15-21 years) will grow further to ₹69-70 lakh assuming the current 8.2% rate of interest (which is subject to change quarterly).

He said he was happy with this large amount that he will get in future and it would be enough for her education and marriage goals. But he seemed to have missed the impact of inflation on all of this.

A decent professional 4-year course in India (like engineering, etc.) easily costs about ₹25 lakh today. And if you consider inflation over the next 15 years, this becomes ₹80 lakh to ₹1.05 crore for 8-10% inflation. So Sukanya alone may not be enough to meet even the higher education goal let alone her marriage goal.

There is another issue here. As per the current rules, one can only withdraw up to 50% of the Sukanya Yojana corpus for a daughter’s higher education! Fair or not that is the rule as of now. So even if you need a lot of money when your daughter enters graduation, you will be unable to fully use Sukanya corpus.

Please don’t get me wrong.

Sukanya Samriddhi Yojana is a very good debt instrument that allows parents to save for their daughters’ future under the Exempt-Exempt-Exempt taxation and gives a solid 8+ per cent return.

But given its upper cap of ₹1.5 lakh savings per year, only allowing contributions for 15 years and restrictions at the time of withdrawal are a few issues that prove that just saving in Sukanya Samriddhi Yojana may not be enough for your daughter.

So, what are your options?

You need to invest elsewhere as well.

I am not saying you don’t invest in Sukanya Samriddhi Yojana. All I am saying is that you need to invest more in different assets/instruments which help avoid the limitations of Sukanya.

It is not an apples-to-apples comparison, but for most people who are at least moderately aggressive investors, there is a case to invest in equity funds in addition to Sukanya Samriddhi Yojana for their daughter’s future.

As we saw, Sukanya Samriddhi account, when contributed with ₹1.5 lakh yearly, will grow to about ₹45 lakh in 15 years. Now compare this with equity funds. Assume that you instead did a ₹12,500 monthly SIP (or a similar ₹1.5 lakh annual investment) in equity funds for 15 years, then assuming 12% average returns the corpus would be close to ₹63 lakh.

I am not saying that you skip Sukanya altogether. But if your daughter is still young and you still have 12-15 years before her higher education begins, then you should ideally invest some money in equities (via equity funds) as well.

The educational inflation in India is a lot more than your regular day-to-day household inflation (6%) that the government tells us about. In my view, one should always have some allocation to equities (via SIPs) as they have proven to give inflation-beating 10-12% average returns in the long term.

Assuming your daughter is young (say under 5-6 years of age) and her higher education expenses will start only after 10+ years, then here is how to decide how much to invest in equities and how much to put in debt (or Sukanya Samriddhi Yojana) for her future savings.

If you are an aggressive investor, then you should put up to 75% in equity funds and the remaining 25% in Sukanya Yojana. For balanced investors, it is suggested to split 50% equally between the two instruments. And for conservative savers, you will naturally seek risk-free returns and hence, a major chunk (up to the annual limit of ₹1.5 lakh in Sukanya Yojana) should be in Sukanya. If you wish to save more for her, then you should still consider allocating a smaller component of the portfolio towards equity funds.

So that is how you can invest in both Sukanya Samriddhi Yojana and equity funds to save adequately for your daughter.

So ideally, it’s not a decision to pick between the two. Both can have a role in your portfolio. And while Sukanya Samriddhi Yojana is a great tax-free debt option, you shouldn’t rely solely on this scheme for your daughter’s future. You should complement your contributions in Sukanya with doing SIPs in equity funds to ensure that you don’t end up with inadequate savings when your daughter needs money to start her career.

Dev Ashish is a Sebi-registered investment adviser and the founder of Stable Investor