14% Equity CAGR with NPS Vatsalya: Building Your Child’s Future from Birth

Securing your child’s financial future is one of the most important responsibilities of a parent. With rising education, healthcare, and general living costs, ensuring a strong financial foundation for your child is vital. One of the most innovative solutions to secure your child’s future financially is the National Pension Scheme (NPS) Vatsalya. Launched by the Indian government, this scheme is designed to help parents and guardians build a nest egg from birth, ensuring long-term financial security.

Since its inception, NPS has delivered highly competitive returns, with a compounded annual growth rate (CAGR) of 9.5% for the government sector. In the non-government sector, returns have been 14% in equity, 9.1% in corporate debt, and 8.8% in government securities. Initially introduced in 2004 for government employees, NPS was extended to non-government employees in 2009.

This article will explore how NPS Vatsalya works, its benefits, and how it can be a crucial tool in your child’s financial journey.

What Is NPS Vatsalya?

NPS Vatsalya is a new pension plan announced by the Indian government, specifically aimed at securing children’s financial future. Launched by Finance Minister Nirmala Sitharaman on September 18, 2023, NPS Vatsalya allows parents to start investing in their child’s future right from birth. The idea behind the scheme is to create a lifelong financial cushion that matures into a reliable pension once the child reaches adulthood, securing them against life’s uncertainties.

NPS Vatsalya is an extension of the existing National Pension Scheme (NPS), but its unique focus on children sets it apart from other investment options.

Key Features of NPS Vatsalya

Early Start	Parents can begin saving for their child’s retirement from infancy, leveraging the power of compounding.
Flexible Contributions	The minimum annual contribution is ₹1,000 with no upper limit, making it accessible to all.
Investment Options	Offers various investment options, including equity, government bonds, and corporate bonds, to cater to different risk appetites.
Partial Withdrawal	Allows for partial withdrawals before retirement under certain conditions.
Seamless Transition	Offers various investment options, including equity, government, and corporate bonds, to cater to different risk appetites.
Government-Backed	The scheme is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), providing government assurance and security.

*Note: It’s important to note that parents’ contributions to NPS Vatsalya do not provide any tax benefits, unlike contributions made to the regular NPS, which qualify for deductions under Section 80C of the Income Tax Act.

How NPS Vatsalya Works

Parents or guardians can open an NPS Vatsalya account for their children by submitting key documents like Know Your Customer (KYC) details, the child’s birth certificate, and proof of identity. The account can be opened through banks, pension fund houses, or the e-NPS portal. The funds will remain locked until the child turns 60. At retirement, they can withdraw 60% of the corpus tax-free, while the remaining 40% will be converted into annuities. 

For partial withdrawals, up to 25% of the corpus can be withdrawn for specific needs such as education or medical treatment for certain illnesses or disabilities. Withdrawals can be made a maximum of three times during the entire NPS tenure.  

Eligibility

Parents or legal guardians can open the NPS Vatsalya account for their children as soon as they are born. The account remains active until the child reaches the age of 18, after which it converts into a regular NPS account. This allows the child to continue benefiting from the pension scheme, contributing further, or withdrawing the accumulated amount as per NPS rules.

Contribution Structure

Parents can start investing with as little as Rs. 500 per month. There is no upper limit, allowing flexibility in contributions depending on the financial situation of the family. The funds are then invested in a diversified portfolio that includes equity, corporate bonds, and government securities.

Withdrawal and Maturity

Once the child reaches adulthood (age 18), the NPS Vatsalya account transitions into a regular NPS account. The child can choose to continue contributing or withdraw a portion of the funds while keeping the remainder invested to accumulate further for retirement.

Comparison With Other Investment Options

When it comes to investing in a child’s future, NPS Vatsalya is not the only option available. Let’s compare it with other popular schemes:

	NPS Vatsalya	PPFs	MFs
Annual Min	Rs.1000 p.a.	Rs.500 p.a.	None
Annual Max	No Limit	Rs.1.5 Lakh	None
Assuming 75:25 Equity to Debt Portfolio (Since Equity Capped at 75%)
Last 10 Years	12%	7-8%	16% Flexicap Avrg.
How to Open	Via eNPS, nsdl.com, Banks	Through Bank	RIA/Distributor/Direct
Maturity	Matures at 60	Matures in 15 Yrs.	Anyday Withdrawl
Partial Withdrawal	Max 25% of Contributions	Max 50% after 4 Yrs.	No Restriction, 5 Yr. lock-in for Child Plan
Tax Deduction on Contribution	Not Clear	Yes	No
Tax on Maturity	60% Tax Free	No	12.5% Capital Gains after 1 Year.
	Corpus in 18 Yrs at 12%	Corpus in 18Yrs at 7.5%	Corpus in 18 Yrs at 15%
For 10K SIP	Rs.76.54 Lakh	Rs.45.74 Lakh	Rs.1.10 Crore
10k SIP + Step up 10%	Rs.1.44 Crore	N/A Due to Max Limit	Rs.1.94 Crore

Source: Mint

NPS Vatsalya vs. Mutual Funds

While mutual funds are good investment options, NPS Vatsalya offers certain distinct advantages.

• Controlled Investment: NPS Vatsalya provides a controlled investment environment, ideal for long-term wealth accumulation.
• Flexibility of Mutual Funds: Mutual funds offer greater flexibility, allowing withdrawals at any time, though some child-specific funds may have a five-year lock-in period.
• Choosing Based on Goals: The decision between NPS Vatsalya and mutual funds depends on your preferences and your child’s future financial goals.
• Controlled vs Flexible Approach: If you prefer a controlled investment, NPS Vatsalya is a strong option. For more flexibility and withdrawal access, mutual funds may be a better fit.

NPS Vatsalya vs. Public Provident Fund (PPF)

PPF is another popular investment option, but it has a longer lock-in period of 15 years. The maximum annual contribution to PPF is ₹1.5 lakh, and the interest rate is currently 7.1%, subject to quarterly revisions.

Benefits of NPS Vatsalya

1. Secure Future Planning

NPS Vatsalya provides a secure way to plan for long-term financial needs, including education, healthcare, and other life events. By investing consistently, you can accumulate a substantial amount that can cater to future financial needs.

2. Power of Compounding

One of the biggest advantages of starting early is the power of compounding. When you invest in NPS Vatsalya from the time of your child’s birth, the returns start compounding over time, generating wealth without requiring large contributions in the initial years.

3. Low Management Costs

NPS Vatsalya comes with very low management fees compared to mutual funds or other child-focused schemes. This makes it a cost-effective way to accumulate wealth over a long period.

4. Professional Fund Management

The funds under NPS Vatsalya are managed by professional fund managers, ensuring that your investments are diversified and optimized for returns. This takes the burden of actively managing the investments off your shoulders, giving you peace of mind.

Key Considerations for Parents

While NPS Vatsalya offers a host of benefits, there are certain factors you should consider before investing:

• Market Risk: Since part of the investment is in equities, there is a certain level of market risk involved. However, this risk is balanced with investments in government bonds and corporate debt.
• Liquidity: Unlike some other child investment schemes, NPS Vatsalya does not allow premature withdrawal except under specific conditions. Parents should be prepared for long-term commitment.
• Investment Horizon: Since the scheme matures only when the child reaches 18, it is ideal for parents looking for long-term financial planning.

Conclusion: Securing Your Child’s Future

NPS Vatsalya is a forward-thinking scheme that enables parents to build a strong financial foundation for their children. With its flexibility, low management fees, and the benefit of market-linked returns, it stands out as a viable option for parents looking to create a nest egg from birth. By leveraging the power of compounding and professional fund management, NPS Vatsalya ensures that your child’s future is secure, regardless of the uncertainties of life.

Investing in NPS Vatsalya early on can set your child on the path to financial independence, giving you peace of mind that their future is well taken care of.

*Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as recommendation or investment advice by Research & Ranking. We will not be liable for any losses that may occur. Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

FAQ