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For most parents, saving for their child’s future is a major financial goal. And the government gives a helping hand to parents in saving for their daughters through its Sukanya Samriddhi Yojana (SSY).

From October 2018, the rate of interest for SSY was hiked to 8.5%, compounded yearly, making it one of the most lucrative small saving schemes. Only the Senior Citizen’s Saving Scheme offers a higher interest rate at present, at 8.7%. SSY, launched in January 2015 as part of the government’s larger ‘Beti Bachao, Beti Padhao’ campaign, is aimed at encouraging and incentivizing Indian parents to educate and nurture their daughters. But does it make sense for all parents who have daughters to invest in SSY?

Abhishek Kumar, a 33-year-old software engineer based in Bengaluru, opened an SSY account for his daughter Ira when she was two years old, primarily to save for her higher education. “I do invest in mutual funds too, but I wanted to keep a portion of my investment safe for my daughter. This account gives the highest rate of interest and the lock-in is long, so it serves my purpose since I will not be able to withdraw the money for smaller needs," he said.

Under SSY, the parent or guardian of a girl child between age zero and 10 years can open an account in the child’s name. Deposits can be made on a monthly or yearly basis for the next 15 years from the date of opening the account. Investments can’t be made after the 15-year period, but the account keeps gaining interest for the next seven years and matures after 21 years. You can withdraw only after the child turns 18 years, subject to certain conditions.

According to the Sukanya Samriddhi Account (Amendment) Rules, 2018, the minimum amount to open an SSY account has been reduced from 1,000 to 250. The maximum you can invest in a year is 1.5 lakh.

For Kumar, the scheme is a back-up to bolster his savings if his daughter decides to go abroad to pursue a degree or chooses an expensive higher education course like a medical degree. “I understand that the money saved through the Sukanya Samriddhi account may not be sufficient when my daughter is ready for higher studies. But I still think it will be able to cover 50-60% of the expense," he said.

What also works for Kumar is that the returns declared every quarter for SSY are guaranteed for the quarter. Like Kumar, many parents want to ensure the money they put away for their child is safeguarded from any market volatility.

“Any government scheme in India has close to zero credit risk. Anyone who wants to create a long investment, and is not after getting the best IRR (internal rate of return) can invest in such schemes. SSY is one such scheme with which a person can build a sizeable portfolio, with 100% assurance of receiving both capital and return, with small investments," said Ashish Shah, founder and managing director of investment advisory firm Wealth First.

Deposits made in SSY qualify for tax deduction for up to 1.5 lakh under Section 80C of Income Tax Act. The amount of interest earned through the account, as well as the maturity amount is also tax-free.

SSY is ideal for parents saving for their daughters’ education, since the investment horizon aligns with the child graduating and pursuing higher education.

But if you buy it when your daughter is above 4-5 years, SSY may serve a different purpose. Now it will mature when your daughter is in her mid-20s by which time the need to fund her higher education may have passed, but the maturity amount can be used for financial goals like her wedding or for buying property for her.

Apoorv Durga, a 44-year-old who runs an IT advisory firm based in Noida, decided to open SSY for his 12-year-old daughter Divija, when she was nine. But over time he realised that the product was not a good fit for his family’s needs. “Many people are under the impression that the money is locked in till your daughter is 21 years of age. This is not true. The lock-in period is actually till 21 years after the account is opened. This means if you open the account when your daughter is nine, you can fully withdraw the amount only after she is 30," said Durga.

SSY allows partial withdrawal for marriage or higher education once the holder turns 18, but the withdrawal is limited to 50% of the amount in the account at the end of the preceding financial year.

The long lock-in period was a major drawback for Durga, but this might not be a disadvantage for everyone. “Maybe it can’t be used for the child’s higher education, but it can always be used for her future. Don’t plan it as a goal-based investment for marriage or higher education. The only goal is securing your daughter’s future," said Shah.

The key to making the most of SSY is to plan carefully and invest early.

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