Kavita believes that investment decisions should be made after proper analysis of available options and their specifications. So, before she starts investing for her 8-year old-daughter, she wants to consider factors such as returns, interest rates, risks involved, time horizon, etc. of investments. Since Sukanya Samriddhi Yojana (SSY) and Public Provident Fund (PPF) are considered the safest investment options for investors seeking financial growth, Kavita wants to evaluate and compare these two. She is aware that both these investments are eligible for tax benefits under Section 80C for up to Rs 1.5 lakh annually. However, the interest rate on SSY is usually at least 0.5% higher than that of PPF. She wonders if SSY is a better option.Sukanya Samriddhi Yojana is a government-sponsored investment initiative for the girl child up to the age of 10. This scheme comes with a tenure of 21 years. Kavita will need to invest the minimum amount every year for up to 15 years from the date of account opening to earn interest until maturity. But, in the case of SSY, her entire corpus will be locked in till her daughter attains 18 years of age. In fact, even after 18 years, Kavita will be able to take out only 50% of the investment and the rest of the amount can be withdrawn only when her daughter turns 21.The interest offered is usually higher in case of SSY, as it encourages parents like Kavita to build funds for their daughter’s future. However, deposits can be made only till the 15th year. No deposits are allowed between the 16th and 21st years, though the account continues to earn interest for all 21 years. Hence, even while the funds are locked-in, investments beyond year 15 are restricted which places serious constraints on the accumulation potential of the corpus. On the other hand, PPF would allow her to earn tax-free interest without any constraints in terms of investments, has a shorter lock-in and allows a longer investment horizon. These PPF features neutralise any benefit in terms of the compounding period of a higher interest rate product like SSY, unless the time horizon is fairly long.Hence, the promise of higher rate of interest alone shouldn’t sway Kavita’s investment decisions. Her relatively shorter investment period (7 years) may not allow the power of compounding to benefit her, adversely impacting her corpus size. SSY would have been an ideal option had Kavita’s daughter been younger. This would have given her the benefit of a longer investment horizon and greater wealth accumulation opportunity as compared to PPF.(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)

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