SSY or Mutual Funds? Know the basics before you invest for children’s goals

Investing in children’s goals is always a top concern for most parents. There are several investment options for the parents but deciding between them is often a tricky affair. Some of them such as Sukanya Samriddhi Yojana carry a fixed return guaranteed by the government but others like mutual funds do not provide any such guaranteed return. Before choosing to invest through Sukanya Samriddhi Yojana (SSY) or mutual funds (MF), it is better to understand how they work, their features, benefits and risk factors.

Sukanya Samriddhi Yojana scheme is aimed at the financial needs of a girl child. The age of the child has to be below 10 years, while the scheme matures when the child attains 21 years. The SSY deposits made by the parent has to be only for the initial 15 years. The SSY rules allow the scheme to be closed after the child becomes 18 years of age provided it is only for the purpose of marriage. Currently, the interest rate is 7.6 per cent per annum, compounded annually and paid on maturity. The interest earned is tax-free.

Within mutual funds there are schemes or category of schemes aimed at child goals. Such funds invest in a mix of equity and debt investments. “Children Mutual Funds is a category of mutual funds that are designed to help people build a corpus to meet the future financial requirements of their children. Since most investors opting for these funds are goal-based investors, they are disciplined since the investment is earmarked for their children,” says Harsh Jain, Co-founder and COO, Groww.

One may even invest in regular equity mutual fund schemes to save for children goals. “One may consider large-cap or blue-chip equity funds and index funds to meet these requirements. The long-term investment horizon gives these funds sufficient time to help parents raise enough money for their children’s needs,” says Archit Gupta, Founder and CEO, ClearTax

Are equity funds better than investing in SSY? “Even though equity funds are suitable for long-term financial requirements, they still provide much-needed flexibility in terms of liquidity. Most equity funds are open-ended, and you can redeem your units at any time. Coming to the return potential, equity funds are capable of beating inflation and benchmark in the long run. On the other hand, the rate of interest offered by SSY is restricted and often fails to beat inflation. SSY rates are also revised every year and in the current scenario, rates are reducing,” says Gupta.

“SSY are debt instruments, while equity MFs are equity-linked instruments. The decision to invest depends solely on the duration of time, risk appetite and the goal for which a parent is investing in them,” says Tarun Birani Founder and CEO,TBNG Capital Advisors

It is better to diversify and invest both in SSY and equity mutual funds rather than opting for any one of them. “In my opinion, if parents have the means they should invest in a healthy mix of both investments. SSY gives them the benefit of tax relief and guaranteed returns at a far decent rate of interest as compared to current FD investments; while well-diversified equity mutual funds (index, large-cap or mid-cap funds) have the potential to offer higher returns considering a long term duration of the investment,” says Birani.