NPS Vatsalya is a conservative retirement scheme, best complemented with higher-return investments like mutual funds, SSY, and PPF.

With financial planning at the core of security in old age, the Union Finance Ministry’s NPS Vatsalya Scheme has offered a unique window for parents to plan for the financially sound future of their children. Led by Union Finance Minister Nirmala Sitharaman, the effort at large through the National Pension System (NPS) is, specifically conceptualized to guide parents with the necessity of investing for the retirement of their child from a very young age. It’s on other investment options like mutual funds, Public Provident Fund, and Sukanya Samriddhi Yojana that need to consider their boundaries, benefits, and proper use.

What is NPS Vatsalya?

NPS Vatsalya is an option for parents or guardians to save their savings towards the pension of the child right from the child’s birth. It is an institutional way to save for the retirement of a child. The transition to a normal NPS account is very smooth when the child is 18 years of age. Parents have to contribute an initial contribution of Rs 1,000, and the minimum annual contribution has to be Rs 1,000. There is no upper limit to contributions; hence, this scheme can well be customized to suit every financial situation.

Risk and Return in Equilibrium

Apart from equity mutual funds, this scheme is rather more conservative. Compared to most equity mutual funds, the absolute return of NPS Vatsalya has been decent, though not so aggressive. It offers a balanced portfolio with a combination of equity and debt instruments to ensure steady but modest returns. The return that NPS offered historically was around 10%. While respectable enough, it may not compete with the long-term returns that equity mutual funds up to 12-15% can offer.

For example, it would be possible to build a corpus worth Rs 10 crores by investing Rs 10,000 every month in NPS Vatsalya over the next 50 years. The inflation reduces the same corpus to what it would become of Rs 50 lakhs. It is a very conservative growth figure and, thereby, goes on to establish that the scheme works for the longer term. In contrast, the growth rate of mutual funds can significantly outpace inflation over a much longer period but at the same time carries higher market risk that would be corrected in the long run.

Liquidity and Flexibility

One of the prime drawbacks of NPS Vatsalya is it is constitutionally an illiquid account. The withdrawal before the attainment of 18 years is restricted to 25% corpus and only if the conditions are for education, illness, or disability. There are also restrictions on parents in terms of the withdrawal. The parents will have limited withdrawals to three before the child reaches 18 years of age, which is less flexible as compared with other investments such as mutual funds or fixed deposits. For example, if after 12 years the parent withdraws, then the maximum amount accessed would be around Rs 6.3 lakh, which is much less than what could be gotten from equity mutual funds in the same period.

In contrast, mutual funds provide better liquidity, allowing withdrawal at any given time to fund education or marriage. The flexibility this offers can prove essential when covering costs as big as those incurred at these junctures in a child’s life, like undergraduate or postgraduate education.

Comparison with NPS Vatsalya Vs. PPF and SSY

There are other more effective options for long-term financial planning regarding education and marriage, such as options under SSY and PPF. For instance, SSY gives a relatively higher interest rate of 7.6% with tax-free returns. All contributions to SSY are tax-deductible and hence can be liquidated in full once the child is 18 years of age, to finance higher education or marriage.

For example, PPF yields returns of about 7.1 percent, far lower than that of mutual funds, but it is by far more flexible than NPS Vatsalya in terms of liquidity and tax efficiency. For example, investing an annual sum of Rs 12,000 in PPF over 15 years would yield a corpus of Rs 4.4 lakh, which can be accessed without the curbs that come along with NPS Vatsalya.

A Balanced Approach to Financial Planning

A new scheme under NPS by Union Finance Minister Nirmala Sitharaman, NPS Vatsalya, has been launched recently. Although such a scheme can be a very good option for saving for retirement, it may not necessarily be the solution to the overall financial future of a child. Instead, for parents planning for retirement as well as for intermediate goals, such as education, marriage, or entrepreneurship, a diversified portfolio could be more beneficial. A perfect blend of such stabilizing investments is NPS Vatsalya with higher-returning investments like equity mutual funds, SSY, or PPF that would help parents create the best possible monetary future for their child.

Conclusion

 In summary, NPS Vatsalya is a fine anchor for long-term pension saving because of its conservative nature and limited liquidity. However, it may not help much for the short-term goals. Using the NPS Vatsalya scheme along with a large investment portfolio instead of relying solely on it will be a much better step for securing children’s financial futures.