So the other day, I had a word with my friend Shaila over the phone, as she needed my help to make a financial decision and since I come from a finance background, she thought I would be the right person to ask. She wanted to know, where she should invest for her child Namrata’s further studies after graduation. She was going to start with a monthly SIP, in a mutual fund scheme, but later heard of the Sukanya Samriddhi Yojana scheme, introduced by PM Narendra Modi, as a ‘Beti Bachao Beti Padhao‘ campaign. So she was confused about what would be the right option to invest in.
I asked her to give me the following information
- What amount is required for her child’s education? She gave me an approximate lump sum amount of Rs. 50 lakhs, since she was going to send her abroad.
- After how many years you need it? Her daughter Namrata is currently 6 years old and she needs it when Namrata turns 21 years.
- Are you willing to take the risk? She said since it’s for her daughter’s education and she doesn’t want to make a compromise on the amount, she would prefer a more secure fund, to invest in, but if the risky fund is performing better and she reaches her goal, she doesn’t mind taking the risk.
- Monthly amount to invest: She said that she has Rs. 12500/- per month available with her to invest.
- Will you make a premature withdrawal? She doesn’t want to withdraw it as it is specifically for her daughter’s education.
So I did some analysis based on the information she provided. I also asked her to do a virtual meeting again after 2 days, to discuss on the same. I made 1 table which shows the returns of her monthly SIP and the returns of the Sukanya Samriddhi Yojana after 15 years. But I also thought that it would be helpful for her to make a decision, if I at least explained to her the basics, she would know the best investment options and accordingly make her choice.
Related Article :-Creating Wealth By Doing SIP – Power Of Compounding
We connected after 2 days, and I started explaining to her that, the Sukanya Samriddhi Yojana was introduced specifically to cater to the needs of a girl child. This scheme was made to collect funds for a girl’s higher education and marriage
- Eligibility: Any girl of age 10 years or less can open an account and she should be an Indian citizen.
- Who can open an account: The account can be opened in the girl’s name by her parents. If the girl is taken care of by a legal guardian, then the account can be opened by them too.
- Maturity: The account can be held for 21 years from the date of opening the account. If the girl gets married before the completion of 21 years, the account automatically closes. If the girl doesn’t get married even after the completion of 21 years of the account, the balance will continue to earn interest as specified in the scheme.
- Rate of Return: The current interest rate is 7.6% and is subject to change every year by the Government of India.
- Premature withdrawal: It is allowed at the age of 18 years for either her marriage or higher education. But only up to 50% of the deposit amount.
- Deposit amount: A minimum of Rs.250/- and a maximum of Rs.150,000/- in a year.
- How many accounts can be opened: Only one account per girl child. The parents or guardians can open maximum 2 accounts for 2 of their daughters, even though they have 3 daughters. If twins are born and both are girls, and if you have a girl child already, then all 3 are eligible to open an account.
- Penalty: If you do not invest the minimum amount in a year, the account will be deactivated. To reactivate it, you need to pay Rs. 250/- along with Rs.50 for each defaulted year.
- Tax implications: The interest earned as well as the maturity amount is tax free. Deposit made under this scheme is also eligible for deduction under section 80C, to a maximum amount of Rs.150,000/-.
I told Shaila this was all she needed to know about the scheme. She was quite impressed with this scheme. But I reminded her that there is still one more option left. So her second option was SIP, I told her that SIP is best effective only when invested in equity, one is because of it’s power of compounding and the second is because of it’s Rupee Cost Averaging.
Power of Compounding:
This is simple, it means earning interest on interest. So I showed her a small table of how the compounding works:
|Month||Opening Balance (Rs.)||SIP amount (Rs.)||Interest @ 12% p.a. (i.e. 1% per month) (Rs.)||Closing balance (Rs.)|
|2||6060||6000||120.6 ((6060 + 6000) * 1%)||12180.6/-|
This table was just to make her understand how interest is calculated on interest. It shows how the interest is calculated on the interest and principal received from the previous month as well as the fresh SIP.
Rupee Cost Averaging:
This is when investors take the advantage from the market downfall. When the market is down, you can buy more units at a discounted value, which will in turn give you more profit, when the market rises.
For example You started an SIP of Rs 12000/- per month in an equity scheme. The Net Asset Value (NAV) at that time was Rs. 10/-, so your no. of units will be 1200 (i.e. 12000/10). Now after few months, the NAV drops to Rs. 8/-, your no. of units now increase to 1500 (i.e. 12000/8). This possible only in the case of equity funds as the equity market fluctuates more. The rate of debt funds fluctuate but not much as in the case of equity.
I also informed Shaila that equity investments are risky as compared to the Sukanya Samriddhi Yojana. Finally, I showed her the table and the comparison of which investment gives a higher return to reach her goal of 50 lakhs in 15 years for Namrata’s education.
|INVESTMENT OPTIONS||MONTHLY INVESTMENT/ SIP (RS.)||RATE OF RETURN||VALUE AT THE END OF 15 YEARS (RS.)|
|SUKANYA SAMRIDDHI YOJANA (SSY)||12500/-||7.6%||42,48,290/-|
|SIP IN EQUITY FUNDS||12500/-||12%||63,07,200/-|
She was shocked when she saw the above table, I also reminded her that, the interest rates in the SSY scheme are subject to change every year. In equity, the rates keep fluctuating as well, the 12% rate I’ve taken here is the minimum earned on an average basis. She was quite clear after this where she wanted to invest, it was obvious that SIP won this battle. She thanked me for my help.
So now your concept is also clear on which is the better option to go for. One good thing about SSY is that it is for a specific purpose and not utilized to fund just any goal. Well there are so many options out there to invest, but nothing can beat the power of compounding of a SIP. So choose wisely and happy investing!