Before choosing an investment plan, parents must take into consideration the effect of inflation, which may increase the current cost many-folds, resulting in a higher fund requirement in the future.
With the rising cost of living as well that of education, marriage etc, making proper investments is a matter of concern for most of the parents to make funds available to meet the financial goals for their daughter(s) as and when required.
Before choosing an investment plan, therefore, parents must take into consideration the effect of inflation, which may increase the current cost many-folds, resulting in a higher fund requirement in the future.
Assuming that the requirement of Rs 1 crore has been calculated keeping in mind the effect of inflation and also the time when the girl turns 21-year old, let’s evaluate the three investment options and the amount to be invested periodically to achieve the target on time.
Sukanya Samriddhi Yojana (SSY)
Among the several investment avenues to reach the goal, SSY has become a very popular choice due to attractive interest rate, complete tax benefits and sovereign guarantee. However, there is a limit on investments per financial year, which is currently Rs 1,50,000. If the current interest rate of 8.5 per cent and investments as per the limit continue and the parent of a daughter starts investing from the year of the birth of the girl, the maximum Rs 74,96,802 would be accumulated in the SSY account at the end of 21 years, if Rs 1,50,000 is invested at the beginning of every year for 15 years.
So, SSY alone won’t be sufficient to accumulate Rs 1 core in 21 years. Moreover, as the age of the girl increases, lesser will be the return till the age of 10, as an SSY account may be opened for a girl child till she turns 10 years old.
Unit-linked Insurance Plan (ULIP)
Along with insurance, ULIPs also provide an investment option through the equity route. While the insurance part ensures additional security, equity investments bear the market risks, but generate higher return over the long term. ULIP investments are also completely tax-free.
Assuming that ULIPs take the conservative route generating about 9 per cent long-term compound annual growth rate (CAGR), about Rs 15,541 need to be invested at the beginning of every month (i.e. about Rs 1,86,493 every year) for 20 years starting from the year of birth of the girl.
Mutual Fund (MF)
Investments in MFs are subject to market risk depending on the category of a fund, but generate higher returns than other investment options over the long term. Investments in equity-linked saving schemes (i.e. ELSS category of MFs) enjoy tax deductions u/s 80C, while other categories don’t enjoy such benefit. Moreover, from this year, 10 per cent long-term capital gain (LTCG) tax has been imposed on equity MFs over the LTCG of Rs 1 lakh on redemptions made in a financial year. The gains from MFs are considered long term, if redemption is made after one year from the date of investment.
Assuming long-term CAGR of 12 per cent, a person has to start a monthly SIP of about Rs 10,871 (i.e. about Rs 1,30,455 per year) for 20 years to accumulate a corpus of Rs 1 crore (without considering the LTCG tax of approximately Rs 7.29 lakh).