Exploring Public Provident Fund (PPF), Mutual Funds, Sukanya Samriddhi Yojana, and Private Equity

Rohan, an IT professional in Bangalore, recently had a financial wake-up call. Although he enjoyed a comfortable lifestyle—living in a spacious apartment, going on family vacations, and having some savings—he was taken aback to learn that the annual fees for a top kindergarten now match what he paid for his undergraduate degree just ten years ago. With a one-year-old daughter, Rohan realized he needed to start financial planning for his daughter’s future education.

This is a common concern for many parents. As education costs rise faster than inflation and salary increases, it’s important to start financial planning to ensure that your child’s education doesn’t become a burden.

In this blog, we’ll discuss practical strategies to help you plan and save for your child’s education so you can provide them with the best opportunities while maintaining your financial stability.

Impact of Inflation on Education 

While general inflation typically hovers around 5-5.5%, the cost of education is climbing at a much faster rate, currently around 11-12%. This trend is expected to continue over the next decade or more. According to CNBC, education expenses could potentially double every 6-7 years, placing a substantial financial burden on families.

If, like Rohan, you’re planning to save for your preschooler’s future education, the first step is to understand your financial goals. Starting with deposit schemes is a good beginning, but investing in options with better returns is often more effective. A well-planned investment strategy can help you build a fund that will grow to meet your child's future education costs.

If your daughter is currently one year old and you’re planning for her college education, selecting the right investment options is crucial. For instance, the average cost of a four-year Bachelor of Technology course at a private Indian university is around Rs. 10 lakh. Meanwhile, a Bachelor of Medicine and Surgery (MBBS) course could cost approximately Rs. 50 lakh. If she decides to pursue graduate studies abroad, the expenses could exceed Rs. 1 crore. Hence, planning ahead with the right investments can help you manage these future costs effectively.

When it comes to investing for your child’s future, you have a few key options: Public Provident Fund (PPF), Sukanya Samriddhi Yojana, and Mutual Funds. Each has its own characteristics, such as lock-in periods, returns, and tax benefits. Depending on what you’re looking for, your risk tolerance, and your financial goals, you can pick the one that fits best with your needs.

Investment Options You Can Explore

• Public Provident Fund
  Launched by the Government of India in 1968, the Public Provident Fund (PPF) is a long-term savings option available at post offices and banks. It offers a guaranteed interest rate and tax benefits under Section 80C of the Income Tax Act, 1961. Currently, for the second quarter of FY 2024-25, the interest rate stands at 7.1%. It’s worth noting that this rate has been consistent since the first quarter of 2020-21.
  

• Sukanya Samriddhi Yojana
  In 2015, The Government of India launched Sukanya Samriddhi Yojana as a part of the ‘Beti Bachao Beti Padhao’ initiative, to support families in saving for their daughter's future. The scheme is available for girls aged 10 or younger and offers a higher interest rate than PPF—currently 8.2% per annum, which is reviewed quarterly and compounded annually. You can invest between Rs. 250 and Rs. 1.50 lakh per year for a duration of 15 years. If you don’t maintain the minimum annual investment, a penalty will be applied. After the initial 15-year investment period, the account continues to earn interest for an additional six years, with maturity occurring 21 years from the account’s opening date.
  

• Mutual Funds
  Mutual funds collect money from many investors to invest in types of assets like stocks, bonds (both government and corporate), and other financial instruments according to specific investment goals. A professional fund manager oversees these investments. Selecting the right mutual fund should be based on your financial objectives and risk appetite, making it crucial to make a well-informed choice.

  Mutual funds are mainly categorized into Equity Mutual Funds, which invest in stocks, and Debt Mutual Funds, which invest in government securities and corporate bonds. For long-term investments, such as saving for 18 years, Equity Mutual Funds are often more suitable. They come in different types based on your risk tolerance.

Factors to Consider When Evaluating These Options

Now that you understand the available investment options for your child’s education, consider the following factors to compare PPF, Sukanya Samriddhi Yojana, and Mutual Funds more effectively.

1. Lock-In and Withdrawal
When choosing an investment, it’s important to consider how long your money is locked in and the options for withdrawing it. Mutual funds offer the advantage of no lock-in period (except for Equity Linked Savings Schemes, which have a three-year lock-in) and easy access to your funds. This liquidity allows you to withdraw your entire investment if needed, though you should be aware of capital gains tax and exit loads.

In contrast, PPF and Sukanya Samriddhi Yojana have longer lock-in periods—15 years and 21 years, respectively. However, both offer partial withdrawal options under certain conditions. For PPF, you can make partial withdrawals five years after opening the account, with the ability to withdraw 50% of the funds at the end of the fourth year. After the 15-year term, you can either withdraw the entire balance or extend the account for an additional five years, with or without further contributions. For Sukanya Samriddhi Yojana, partial withdrawals are allowed after your daughter turns 18 and completes 10th grade, up to 50% of the balance, for higher education or marriage.

2. Returns
Returns from the Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY) come from compounded interest on your investments. In contrast, mutual funds generate returns through capital appreciation and dividends. Here’s a summary:

Public Provident Fund (PPF): The interest rate 2024 is 7.1% per year, compounded annually. To earn interest for a specific month, make sure to deposit your funds by the 5th of that month.

Sukanya Samriddhi Yojana (SSY): This scheme offers an interest rate of 8.2% per year. You can open an SSY account any time after the birth of a girl child, up until she turns 10.The minimum deposit is Rs 250, while the maximum annual deposit is capped at Rs 1.5 lakh.

Mutual Funds: Mutual funds can potentially provide higher returns than PPF and SSY through capital gains and dividends. There are no limits on how much you can invest, allowing you to put in as much as needed to achieve your financial goals.

3. Tax Implications
PPF and Sukanya Samriddhi Yojana are classified under the Exempt-Exempt-Exempt (EEE) category. This means that your invested amount, the interest earned, and the final returns are all exempt from taxes. Additionally, there’s a tax deduction on the annual investment up to Rs. 1.5 lakh as per Section 80C of the Income Tax Act, 1961.

For mutual funds, only Equity-Linked Savings Schemes (ELSS) offer tax benefits. Other mutual fund investments do not qualify for tax exemptions. Returns from mutual funds are taxed as capital gains, with different rates depending on whether the gains are categorized as short-term or long-term.

So, What Should You Choose?

If your child is currently one year old and you’re considering the Public Provident Fund (PPF), keep in mind that after the 15-year lock-in period, you’ll still have time until your child turns 18 to grow your savings further before college.

On the other hand, the Sukanya Samriddhi Yojana offers a higher interest rate but comes with a longer lock-in period. It’s most suitable if your daughter is very young, as the funds will only be available when she turns 26, which might be too late for college expenses. However, partial withdrawals are allowed after she turns 18 and completes 10th grade, which can be useful for education or marriage.

Given that the inflation rate is higher than the interest rates of PPF and Sukanya Samriddhi Yojana, the amount accumulated might not be sufficient to cover future expenses. This is where mutual funds can be advantageous due to their higher returns and liquidity.

For a long-term investment, here are two types of Equity Mutual Funds to consider:

Mid-Cap Funds: These invest in mid-sized companies with potential for significant growth. They offer high returns but come with higher risk similar to private equity.

Flexi-Cap Funds: These invest across large-cap, mid-cap, and small-cap stocks, providing diversification that can help reduce risk.

Conclusion

As the cost of education continues to rise faster than inflation, early and strategic planning is crucial for ensuring your child’s future academic expenses are covered. Each investment option—Public Provident Fund (PPF), Sukanya Samriddhi Yojana, and Mutual Funds—has its unique features and benefits, making it important to align your choice with your financial goals and risk tolerance.

For those looking for long-term growth with higher potential returns, Equity Mutual Funds, particularly Mid-Cap and Flexi-Cap Funds, stand out due to their higher returns and flexibility. While PPF and Sukanya Samriddhi Yojana offer stability and tax benefits, their longer lock-in periods may not always align with the immediate financial needs for education.

Ultimately, combining various investment options to balance risk and returns can help you build a robust financial plan for your child’s education. By understanding the features of each investment and planning accordingly, you can ensure you are well-prepared to support your child's academic journey without compromising your financial stability.

Disclaimer: This information is for private use only and does not constitute investment advice. Recipients must assess risks and seek advice from financial, legal, and tax professionals. Private market investments carry risks, and there are no guarantees of returns or capital protection. We are not liable for investment decisions.