Should you invest in Sukanya Samriddhi Yojana, NPS Vatsalya or mutual funds for your girl child?
When it comes to investing for your daughter’s future, the options can be many. Should you opt for Sukanya Samriddhi Yojana (SSY), National Pension System Vatsalya (NPS Vatsalya), or mutual funds? Each investment avenue offers unique benefits and considerations. While SSY is a government-backed scheme providing tax benefits and a guaranteed return, NPS Vatsalya offers a mix of equity and debt exposure for long-term growth.
Mutual funds provide flexibility and professional management but come with market risk. The best choice depends on your financial goals, risk tolerance, and your daughter’s age.
Given that Sukanya Samriddhi Yojana (SSY) is the safest option with guaranteed returns, it does offer the added advantage of the EEE tax regime (exempt-exempt-exempt), where the maturity proceeds are fully tax-free. However, the key limitation is that SSY matures in 21 years, after which the proceeds will likely need to be reinvested into other instruments that may not enjoy the same tax benefits. Additionally, the returns are lower compared to other options such as NPS Vatsalya or Mutual Funds, which involve some level of risk.
Samriddhi Yojana (SSY)
Objective: To promote the financial security and empowerment of girl children by encouraging parents to save for their future education and marriage expenses.
Eligibility: Parents or guardians can open an account for a girl child who is 10 years old or younger.
Deposits: The minimum deposit is Rs 250 per year, and the maximum is Rs 1.5 lakh per year.
Interest Rate: The current interest rate is 8.2% per annum.
Maturity: The account matures 21 years from the date of opening, but deposits are only required for the first 15 years.
Both NPS Vatsalya and Mutual Fund carry investment risk, but the level of risk can be managed through the investor’s choice of asset allocation. “Given the long investment horizon, investors can opt for a higher exposure to riskier assets, such as equities, for potentially higher returns. However, NPS mandates a hybrid approach, which may lead to lower returns compared to an aggressive mutual fund portfolio, which can have 100% equity exposure,” said Nehal Mota, Co-Founder & CEO, Finnovate.
NPS Vatsalya
Objective: To promote financial security for children by enabling parents or guardians to save for their children’s retirement from an early age.
Eligibility: Parents or guardians can open an account for their minor children (under 18 years old). This includes Indian citizens, NRIs, and OCIs
Deposits: The minimum annual contribution is Rs 1,000, with no upper limit on the amount that can be deposited.
Transition to NPS Tier I: Once the child turns 18, the NPS Vatsalya account automatically transitions into a regular NPS Tier I account, which the child can then manage independently.
Asset Allocation: The default asset allocation for the NPS Vatsalya Scheme is the Moderate Life Cycle Fund (LC-50), which invests 50% in equities.
Atul Shinghal, Founder and CEO, Scripbox, said, “For many households, planning for children’s education, marriage, and their own retirement takes precedence over setting up a pension for their children. Consequently, the NPS Vatsalya scheme may not be a viable option for a significant portion of the population. We believe it is more prudent to invest in children’s schemes offered by mutual funds, which provide better flexibility.”
Mutual funds offer full liquidity and flexibility, unlike NPS Vatsalya, where after 18 years of the child’s age, only 20% of the corpus can be withdrawn as a lump sum, with the remaining amount transferred to an annuity plan. Upon reaching 60 years of age, 60% of the NPS corpus is available as a tax-free lump sum, while the remaining amount is mandatorily invested in an annuity plan. “NPS Vatsalya can be attractive for those seeking a long-term disciplined approach to financial planning for their child’s future,” said Mota.
MF- Children’s fund
Objective: To provide long-term capital appreciation by investing in a mix of equity and debt instruments.
Default Asset Allocation: Typically, these funds have a balanced approach with around 60-70% in equities and the remaining in debt and money market instruments. This allocation aims to balance growth potential with risk management.
Lock-in Period: Many children’s funds come with a lock-in period until the child reaches a certain age, often 18 years.
Given these factors, experts believe that one should follow a balanced approach. This strategy allows you to benefit from the high potential returns and liquidity of mutual funds while also taking advantage of NPS’s disciplined, long-term wealth-building mechanism with its lock-in feature.