Sukanya Samriddhi vs Child Mutual Fund – which one is better?

Becoming a parent affects every aspect of your life and your money is no exception. You not only have to plan for your own life goals, but for those of your children as well, such as education. For the purpose of building a corpus for young daughters, the Sukanya Samriddhi Account Scheme is an attractive option to evaluate. 

However, when evaluating the Sukanya Samriddhi option, a common question is how it compares with child mutual funds, which fall under the ‘Solution Oriented’ mutual fund category. What are the pros and cons of each and which one should you go for?

In this article, therefore, we’ll take up the popular Sukanya Samriddhi vs child mutual fund question, and give you the answers.

About the Sukanya Samriddhi account scheme

The Sukanya Samriddhi Yojana Scheme was launched in 2015 as a part of the ‘Beti Bachao Beti Padhao Scheme’ and is meant to incentivize putting away for the future of a girl child.  Like other small savings schemes (POMIS, Senior Citizen Saving Scheme, NSC, Kisan Vikas Patra, PPF etc.), this scheme comes under the purview of the National Savings Institute. Here are its key features. 

Eligibility

The account can be opened in the name of a girl child below the age of 10 by a parent / legal guardian. You can only have one account per girl child. Only 2 Sukanya Samriddhi accounts are allowed per family. The only exception is if there is a case of twins or triplets.

Even here, it will be capped. If you have twins/triplets in the second order of birth, you can open accounts for all provided the first order has not already resulted in 2 surviving girl children. To put it simply, you can have 2 accounts per family or 1^st triplets, 1^st twins, 1^st one girl and 2^nd twins, 1^st one girl and 2^nd triplets. Sukanya Samriddhi accounts can be opened in Post offices, public sector banks and some private sector banks (HDFC Bank, Axis and ICICI).

Contributions & maturity

The account matures on the completion of 21 years from date of opening. However, it can be prematurely closed in the case of marriage after age 18. Withdrawals are also allowed for the purpose of higher education. This withdrawal is limited to 50% of the balance, and can be done when the girl completes her tenth standard or turns 18. Premature closure (but not before 5 years) will be allowed under compassionate grounds and exceptional circumstances. 

You can deposit a minimum of Rs. 250 and a maximum of Rs. 1,50,000 in this account per annum. You will have to meet at least the minimum deposits for 15 years from the time of opening to keep it alive. The account will be operated by the parent or guardian until the girl child turns 18 and thereafter by the girl herself. 

Returns & taxation

The Sukanya Samriddhi earns interest. Interest is calculated at the rates notified by the Government on the lowest balance in the account from the 5^th of the month till the end of the month. The Government announces the interest rates every quarter and these are usually much better than prevailing market rates and even most other small savings schemes. Below is a look at the historical rates for this scheme. 

Therefore, while there is high safety from the fixed nature of return, do note that the actual rate of interest will vary each year – you do not ‘lock’ into any interest rate, unlike in an FD. Interest is credited to the account every financial year and is compounded annually. 

The amount deposited in this account qualifies for deduction under Section 80C of the IT Act (if you’ve opted for the old tax regime). The big sweetener here is that the interest earned is not taxable as per Section 10 of the Income Tax Act. On maturity, the Payout from this account too is free from tax. That is, the Sukanya Samriddhi currently enjoys the coveted E-E-E status (exemption on investment, exemption on returns & exemption on maturity). 

About Child Mutual Funds

Child mutual funds are normal mutual funds. These funds fall under the category ‘Children’s Funds’ under SEBI’s ‘Categorisation and Rationalisation of Mutual Fund Schemes’, under the broader solution oriented schemes category. These are open ended schemes, investing in equity and debt securities.

Eligibility

These are generic child mutual funds and are not restricted to only girls. There is no restriction on the age either; an investment can be started any time before a child turns 18. Just like in the Sukanya Samriddhi account, once the child becomes a major and completes documentation requirements, they gain access to the funds.

These funds have a lock-in of at least 5 years or until the child attains majority, whichever is earlier. Investments can be made through SIPs or lumpsums, with no cap. You can also invest in any number of funds you wish to – but generally speaking, holding too many funds is not a good idea 😊There is also no exit load on these funds provided the lock-in has been completed. 

Where they invest

Child funds invest in a mix of debt / equity, making them hybrid funds by nature. However, most are equity-heavy. The table below shows the equity exposure of these funds for June 2023. As you can see, apart from ‘Savings’ plan versions, most hold at least 70% in equity. This makes them open to equity market fluctuations, and as there are no restrictions on market cap allocations, they can invest across segments. 

Returns & taxation

Like any other mutual fund, a child fund’s returns will be based on the performance of the underlying portfolio. Returns are not guaranteed or fixed; it will depend both on equity and debt markets and the fund’s ability to manage the different market cycles. Returns come through capital gains – i.e., appreciation of the fund NAV, as is the case with any mutual fund. The level of risk in each fund depends on the extent of equity exposure as well as the fund strategy and investment style.

If the child fund qualifies for it, investment made will be eligible for deduction u/s 80C if you opt for the old tax regime. Otherwise, child funds are taxed just like other mutual funds, depending on how much their allocation to equity is and the holding period. You can read more about how mutual funds are taxed in our earlier article, ‘Understanding Mutual Fund Taxation’.

The table below summarizes the features of Sukanya Samriddhi vs child mutual funds.

Sukanya Samriddhi vs child mutual funds

#1 Flexibility – mutual funds score higher

In the Sukanya Samriddhi vs child mutual fund debate, on the aspect of flexibility, child mutual funds score with the ability to invest regardless of the child’s age, and at any time, with a lock in of only 5 years. This compares well against the 21-year maturity for a Sukanya Samriddhi account. In addition, the Sukanya Samriddhi also has requirements such as annual minimum contribution to keep the account live, a cap on total contributions and number of accounts you can hold – all of which don’t apply to children’s funds. 

#2 Taxation – Sukanya Samriddhi account has an edge

The Sukanya Samriddhi account scheme is the clear winner as interest earned is not taxable and neither are the withdrawals. Further, contributions are also tax-deductible if you opt for the old tax regime. On the other hand, a child fund is taxed like any other mutual fund with no exemptions. For funds where equity averages less than 35%, the tax impact can be especially heavy as capital gains will be taxed at your normal slab rate for investments made post April 1^st, 2023.

#3 Safety – Sukanya Samriddhi leads with Government backing

On the aspect of safety as well, the Sukanya Samriddhi account leads. The Sukanya Samriddhi account is a Government-backed scheme and therefore, comes with assured capital protection. Returns are also low-risk, since it earns a fixed return each year; the only risk here is that the interest rate is subject to change. 

This is the complete opposite in the case of child mutual fund schemes which are heavily tilted toward equity. Investments in these funds could bring with them volatility and risk of capital erosion depending on market conditions and where they invest.

For example, among the more equity-oriented, funds generated 1-year losses about 13% of the time over the past 3 year period. Therefore, you will have to pick your fund wisely and be ready to see returns fluctuate especially in short-term periods.

#4 Returns – mutual funds have greater return potential thanks to equity exposure

In terms of returns, it wouldn’t be fair to compare the returns of the Sukanya Samriddhi vs child mutual funds. The former is a government-backed, low-risk debt product that offers capital protection. While interest rates are generally better than many bank FD rates, child funds can obviously earn far superior returns from their equity exposure.

To put this in perspective, let’s say one had invested Rs. 1 lakh per annum in the Sukanya Samriddhi account from 2016. The amount would have grown to Rs. 9,72,000. This is similar to what you may earn in longer-maturity debt funds such as corporate bond funds, which averaged about Rs 947,000. On the other hand, if you had invested Rs 1 lakh per annum in a child mutual fund, depending on which fund you picked, the investment would today be worth Rs. 10 lakh - Rs. 13 lakh. 

But it’s not that simple! 

Child mutual funds are, at their core, hybrid mutual funds or even pure equity funds where equity allocation is very high. They come with no additional benefits other than a possible Section 80C deduction. The choice, for you, is to either use these child funds or invest in normal equity, hybrid or debt funds to build your daughter’s education portfolio. Child funds’ performance, therefore, needs to be compared with other aggressive hybrid funds or flexicap funds. This is what we do in Prime Ratings and in the MF Review Tool.

On that count, child funds falter. Their returns have, by and large, lagged top aggressive hybrid funds in both short-term and long-term periods. More, their consistency in beating the Nifty Hybrid 65:35 index, across timeframes, is also lower than the hybrid aggressive category. For example, the average 3-year returns over the past six-year period for child funds works out to 12.97% (excluding debt-heavy funds). The average for aggressive hybrid funds is above that at about 14.1%. The same trend holds in more equity-heavy funds when compared to flexi-cap or large-cap funds. Barring a couple, therefore, child mutual funds do not offer a clear return advantage over other funds.

So if its Sukanya Samriddhi vs Child Mutual Fund, which one should it be?

If you are putting away investments for your daughter’s education or just looking to build a corpus for her, here’s what we think on the Sukanya Samriddhi vs child mutual funds:

• Sukanya Samriddhi can be an effective debt component in your daughter’s education portfolio. Its low risk, favourable interest rates and tax treatment all make it a good option. A key positive also is that, given the manner in which rates are set and because of the nature of the product, its interest rates are slow to react to changes in the overall rate cycle; the extent of change can also be lesser. Therefore, in periods of falling or a low interest scenario, the Sukanya Samriddhi can retain comparatively higher rates - as it has in recent times (see the interest history table above) – which can allow superior returns compared to debt mutual funds. However, do take into consideration that the amount here will not be available for rebalancing in your portfolio and it has a very long lock in. Investments are also capped. So you may want to decide allocations accordingly.
• Be careful with child mutual funds. These funds can bring in higher returns compared to Sukanya Samriddhi. But performance is not uniform across funds, and as explained above, these funds are not the only or best-returning options you have. Remember that the lock-in will also prevent you from making quick switches should funds underperform. Therefore, be careful in when choosing funds for investments and your allocation to these funds. Use the MF Review Tool to know if a fund is a Buy. 
• Use other funds in addition for better returns: Since you have a wide variety of funds to choose from, and which offer diversification, do not limit your portfolio only to child funds. Pair these funds with pure equity funds and debt funds, or even with other aggressive hybrid funds to build a more balanced portfolio that will also generate better returns. Try out our ‘Build Your Own Portfolio’ tool if you need help putting together a portfolio for your daughter.

With data inputs from Bipin Ramachandran.