The government launched the National Pension System in 2004, and in 2009 it was rolled out to all Indians. With NPS, you can save money for the long term through regulated market-linked instruments and build a corpus for your retirement. Recently, the government launched NPS Vatsalya, a contributory pension scheme designed specifically for minors. It is regulated and administered by the Pension Fund Regulatory and Development Authority (PFRDA).
You can open an NPS account for your child and start saving for her pension at a very early age. With a minimum investment of Rs1,000 a year, you can introduce children to the concept of saving and investing and educate them on money management from an early age. “By encouraging early investment and providing a structured savings plan, NPS Vatsalya aims to build a robust financial foundation for young individuals,” says Kurian Jose, CEO, Tata Pension Management.
The NPS Vatsalya account can be opened online or physically at a point of presence registered with PFRDA. The parent can choose a pension fund registered with the PFRDA.
The account is opened in the name of the minor and operated by the parent or guardian. The minor is the sole beneficiary. Once the minor turns 18, it is shifted seamlessly to NPS Tier-1 (all citizen) account.
The money will be invested by pension funds in a basket of equity, debt and alternative assets. If you choose the default choice, then the money gets invested in a moderate life cycle fund, where equity investment is capped at 50 per cent. In the case of active choice, the guardian can decide the allocation of funds, between equity (capped at 75 per cent), government securities or corporate debt (up to 100 per cent allocation in both) or alternate asset (capped at 5 per cent). You can choose between aggressive, moderate or conservative life cycle funds based on your risk appetite.
An advantage of NPS Vatsalya is that the child starts saving early, and so a huge corpus can be generated over time. For example, if you start investing at 10 for retirement at 60, an investment of Rs10,000 per month will leave with you a corpus of more than Rs17 crore, assuming 10 per cent compounded annual return. But, if you start the same investment at the age of 25, you would accumulate only around Rs4 crore.
There are, however, liquidity issues with NPS Vatsalya. You can withdraw only up to 25 per cent of the contribution for the child’s education or an emergency like some illness. Also, should the child decide to exit the scheme on turning 18, only 20 per cent will be paid as lump sum, and the rest goes towards buying an annuity plan.
This is a major drawback, says Vidya Bala, co-founder of Primeinvestor.in, a research solutions platform for retail investors. “If a parent is investing for a child, it is typically for a medium-term goal like education and wedding. Here the problem is locking the money into annuity or converting it into NPS Tier-1 account once the child turns 18. So, the parent will have to invest separately for the child’s education simply because you can withdraw only 20 per cent in NPS Vatsalya at 18. There is a lot of restriction on the usage of money here,” she says.
NPS also does not allow investing fully in equity in the early years. Bala said a parent could rather invest in equity mutual funds considering the investment is for the medium-to-long term and they have the flexibility to withdraw the money as and when required.