Less than a decade ago, people favoured tailor-made clothing and off-the-shelf financial solutions, educational programs, and so on. Today, people choose off-the-rack apparel but request customized products and services. The same is true for the assets we pick, the educational avenues we choose, and other lifestyle needs we invest in.
Take education, for instance. In a recent article in the Mint on educational expenses for the girl child, Tarun Birani was asked if the Sukanya Samriddhi Yojana (SSY) (a scheme backed by the Indian government towards the financial security of the girl child) was enough as a financial plan to save for a daughter’s education.
Here is Tarun’s reply:
“Sukanya Samriddhi Yojana is definitely a great strategy for anybody who is looking at a predictable, safe corpus to be created. But, I would say one can have a mix of an equity plus debt strategy for such a long-term goal, where Sukanya Samriddhi Yojana can be used as a debt instrument. Since it is a very safe and government-backed scheme, one can look at a high-risk equity-oriented fund. Or maybe an index-oriented fund, and this will balance out for a long period of time.”
This scheme offers you the opportunity to save Rs. 1.5lakhs a year and offers an interest rate of approximately 7.6%. Over 15 years, an investor could create a corpus of approximately Rs. 43 lakhs.
You’d ask, isn’t that enough?
Here is why we believe it may not be enough:
The SSY fund does offer good returns and is an excellent tax savings opportunity. But, a delay in beginning investing in this fund can be a significant hurdle. An investor must open this account before the girl child attains the age of 10 years. Moreover, investors can invest in this fund for a payment period of 15 years, while the maturity period is 21 years. The annual contributions made determine the maturity amount of the SSY account.
Furthermore, if the girl child reaches the age of 18, you can withdraw 50% of the investment money for education or marriage expenditures. These liquidity limitations may cause obstacles. Investors may not have easy access to the complete corpus required when the child intends to pursue an overseas education before attaining the age of 21.
The prices of goods and services have sky-rocketed over the years. Paying tuition fees in dollars while making investments in rupees is a disadvantage for Indian parents, which is compounded by the crushing effect of education inflation. In India, education inflation stands at 11-12% . If you solely bank on a scheme like SSY for future educational expenses, which offers returns of approximately 7% p.a, then inflation would eat into your corpus rendering it insufficient to aid your financial goal despite its tax advantages. To meet your expenses post inflation, an investor will need first to consider the future estimate of the financial goal (inclusive of the cost of inflation and taxation). An SSY investment will work well as a debt strategy to ensure stable and guaranteed returns. But, to ensure the effect of depreciation due to inflation and taxation are covered, a part of the investment needs to be invested in inflation-beating returns like equity and equity-related instruments.
Value of the Rupee
Over the last two decades the Rupee has depreciated by approximately 4% annually against the dollar. If the rupee declines in value, the amount that one must pay in dollars rises, as does the need to increase the corpus for education overseas. For a child interested in pursuing higher education overseas, the impact of the rupee’s depreciation versus the dollar (depending on the destination country’s currency) will considerably impact the required education corpus. Hence, the value of the rupee depreciation needs to be accounted for while calculating future returns. This again could be hedged by ramping up one’s international investments which gives a cushion against currency depreciation.
In conclusion, SSY proves to be an excellent investment plan, but investors cannot solely rely on it to cover a girl child’s educational expenses. A robust financial plan towards educational expenses as a goal cannot be constant in this ever-changing and dynamic world. The best strategy would not be for a specific asset class or fund but would require personalization as per the child’s aspirations.