Sukanya Samridhhi versus MFs: A No-holds-barred Face-off

By | May 19, 2015

child insurance 2

Suhasini, a mother of a 5-year-old girl, is in a dilemma. Ever since the government has announced the launch of a scheme for girl child—Sukanya Samriddhi, her relatives are after her life to get an account opened.

The buzz around the scheme has already created a lot of excitement, and Suhasini is being virtually ‘poked’ everyday to get a Sukanya Samriddhi Account opened.

Why the euphoria?

The scheme has everything that gets people excited. It offers 9.2% guaranteed return (increased from 9.1% earlier), more than the Public Provident Fund which offers 8.7%.  The amount deposited in the account is eligible for tax deduction, and to top it all, the interest earned and the withdrawal are both tax-free.

The account can be transferred from any bank/post office to another, and it has a low minimum investment amount of Rs 1,000 every year. The money in the account can be withdrawn only after the girl reaches the age of 21 years, but up to 50% of the amount can be withdrawn when the girl is 18.

The decision Suhasini took

Suhasini, though, is not ready to give in to the pressure and euphoria. When it comes to investing, she is very calculative—a quality that she inherited from her traditional business family.

So, she sits down with her husband one day to weigh the different options they have. They want at least Rs 50 lakh after 15 years for their daughter’s education, and for that they have to start investing Rs 10,000 every month if their investments grow at 12%.

They were quick to realise that Sukanya Samriddhi (with 9.2% annual interest) alone cannot get them to that target. Even the 9.2% interest is not fixed forever and would change with the change in government bond yields. Therefore, they need an investment option that can give 12-15% return in the long-run.

They consulted a financial planner, who asked them to start monthly investments in a couple of diversified equity mutual funds. Given that their investment horizon is 15 years, they can always take a bet on equities through mutual funds.

Mutual funds vs Sukanya Samriddhi Scheme

Of course, not all mutual fund investments are eligible for income tax deduction (only tax-saving funds are eligible), but given that Suhasini and her husband easily exhaust the limit of Rs 1,50,000 deduction, they probably do not need another tax-saving option.

Besides, long-term capital gains (made after one year of investment) from equity mutual funds attract no tax, much like the Sukanya Samriddhi’s tax-free nature.

Unlike the Sukanya scheme, equity mutual funds (except for tax-saving and close-ended funds) do not have lock-in periods, which means you can withdraw the investments any time. That can be a double-edged sword as the investor may get tempted to pull out the money if there’s some need. However, a disciplined approach is more effective in creating a big corpus than a mandatory lock-in.

As in the Sukanya scheme, even mutual funds allow one to start monthly SIPs at as low as Rs 1,000. There is no limit on the maximum investment in equity mutual funds, but in Sukanya Samriddhi Scheme one can invest a maximum of Rs 1,50,000 a year. You can have as many mutual fund accounts as you want, unlike in the Sukanya scheme where only two accounts can be opened in the name of two girl children.

Suhasini also realised that when it comes to convenience, investing is MFs is much easier than investing in the Sukanya scheme. There are online distributors, who allow you to invest in mutual funds without bothering to go out of your office or home. Your monthly SIP is automatically deducted from your account at a pre-defined date.

On the other hand, imagine going to a designated post office branch or a bank branch every month to deposit into the Sukanya Samriddhi account, and having to deal with the attached red tape.

Asset allocation

Though, Suhasini is ready to give the benefit of doubt to the Sukanya scheme and deposit Rs 2,000-3,000 (of the Rs 10,000 for her daughter’s education) every month in it, so that at least 20-30% of the money is in a ‘safe’ investment avenue.

However, their financial planner asks them to look at another mutual fund option—the balanced funds. These funds invest 20-30% of their portfolio in debt instruments (probably the same instruments where the Sukanya money would ultimately be invested), and the rest in equities.

Since at any time, they maintain over 65% of the portfolio in equities, the long-term capital gains from balanced funds are tax-free like that of equity funds. Balanced funds over the past 10 years have given around 14-15% average return.

Taking the final call

Even the tough nuts crack, when faced with family and peer pressure. Suhasini gave in to the continuous pestering, and decided to invest Rs 3,000 every month in Sukanya Samriddhi scheme, and the rest Rs 7,000 in equity mutual funds.

This way she keeps her words given to her parents and friends, and also ensures that her daughter’s future is well-taken care of. A balancing act only a woman with good heart and brain can pull off.

Features Sukanya Samriddhi Scheme Equity Mutual Funds
Expected long-term return 8-9% 10-15%
Taxation Deposits eligible for income tax deduction; interest and withdrawal tax-free Not all the equity funds are eligible for income tax deductions (Only tax-savings funds are eligible); Dividend and long-term capital gains are tax-free
Lock-in Till the girl reaches 21 years of age; partial withdrawal allowed at 18 years of age No lock-in in period for non-tax-saving, open-ended funds
Minimum and maximum annual investment Minimum annual investment of Rs 1,000 and maximum investment of Rs 1,50,000 No limits
Number of accounts Only two in the name of two girl children No limit


YOU MAY ALSO WANT TO: Check your monthly SIP as well – SIP Calculator


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