NPS Vatsalya is a contributory pension scheme regulated and administered by the PFRDA for all minor Indian citizens. Just like PPF, the account will be opened in the name of the minor and operated by Guardian with the minor as the sole beneficiary.
The minimum contribution each year is Rs. 1000 with no maximum limit. While any pension fund manager registered with PFRDA can be chosen, three asset allocation choices are available:
- Default Choice: Moderate Life Cycle Fund -LC-50(50% equity)
- Auto Choice: Guardian can choose Lifecycle Fund – Aggressive
-LC-75(75% equity), Moderate LC-50 (50% equity) or Conservative-LC-25
(25% equity) as per his/her risk appetite. - Active Choice: The Guardian actively decides the allocation of funds across
Equity (up to 75%), Corporate Debt (up to 100%), Government Securities
(up to 100%) and Alternate Asset (5%).
After the child turns 18, the NPS Vatsalya account will be converted to an NPS Tier–I (All Citizen) account. The features, benefits, and exit norms of the NPS-Tier I for All Citizen Model will apply.
Although well-intentioned, NPS Vatsalya has some serious drawbacks. As a parent, I would like my child to start planning for retirement from the day she earns. Before that, investing in a child’s retirement planning makes no sense because her undergraduation post-graduation expenses are a much higher priority.
If we can set up a firm platform for children to educate themselves in the best institutions, then they will earn reasonably high enough salaries to start planning for retirement from the day they start creating an income stream.
So, this is of much higher priority than investing in a child’s retirement. Let us also not forget most parents today cannot invest enough for their retirement!
In the NPS Vatsalya scheme, partial withdrawal of up to 25% of contribution on a declaration basis after a lock-in period of 3 years for education, specified illness, and
disability for a maximum of three times till subscribers attain 18 years of age is allowed. This is way too little to pay for college fees, and much of college education occurs after the child turns 18.
Once you start an NPS Vatsalya account and keep contributing, the money is locked until the child turns 60! Unless the corpus is less than 2.5L (when the child is a minor) or less than 5L (when the child is a major), 80% of the corpus will be lost to an annuity. So, it makes no sense to start an NPS Vatsalya account. NPS fans can urge their kids to start one when they begin earning, but even then, it is imminently unnecessary.
Teach your kids how to do product research and make informed decisions. Teach your kids the importance of a balanced asset allocation in investment (once they start earning), and urge them to use simple options like index funds. There is no need for any “product” with its inherent limitations.
A possible fix: NPS Vatsalya would make more sense if it is promoted as a children’s future fund with about 90% of the corpus withdrawal for UG and PG costs up to the age of 25. After this, the account can be turned into a Tier I account. Then, the product becomes a genderless market-linked alternative for the Sukanya Samriddhi Account Scheme.
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