This article discusses the NPS Vatsalya scheme that does not make any sense as a product for anyone even if you plan to invest for your children’s retirement.
This article is a part of our detailed article series on avoidable investment plans for your children. Ensure you have read the other parts here:
This article discusses the corpus projections shared officially when launching the NPS Vatsalya scheme and how parents should be aware of the danger of ignoring inflation.
This article discusses the NPS Vatsalya scheme that does not really offer any greate benefits over simply investing in mutual funds.
We review the new LIC Amritbaal insurance cum investment plan so that parents are aware that the plan is not good for most people. We will also show what to do instead for your kid’s goals.
Union Budget 2024 introduced the concept of the NPS Vatsalya Scheme. This scheme allows parents to open an NPS account for their child and contribute to it. Once the child becomes an adult at 18, this NPS Vatsalya Scheme account will become the child’s own NPS account for their retirement at the age of 60. There are no tax deductions available to the parent if they invest in the NPS Vatsalya Scheme.
We need to understand which problem the NPS Vatsalya Scheme is supposed to solve. Let us ask these questions and answer them:
The NPS Vatsalya Scheme account is for the “retirement” of the child and not that of the parent.
For a minor child, the account will mature at least 42 years later when the child turns 60 as per the current NPS rules. In fact, the age of the child and the NPS Vatsalya Scheme account maturity period look like this:
| Age of child | Years until maturity |
|---|---|
| 1 | 59 |
| 2 | 58 |
| 3 | 57 |
| 4 | 56 |
| 5 | 55 |
| 6 | 54 |
| 7 | 53 |
| 8 | 52 |
| 9 | 51 |
| 10 | 50 |
| 11 | 49 |
| 12 | 48 |
| 13 | 47 |
| 14 | 46 |
| 15 | 45 |
| 16 | 44 |
| 17 | 43 |
That is true since the maturity of the NPS Vatsalya Scheme is more than 40+ years as per the table above. So there is immense potential for growth.
But then, why is this an avoidable gimmick?
We will ask the parent, looking at the NPS Vatsalya Scheme for their child, these three questions:
If the answer to any of the above questions is a “No” or “Maybe” then NPS Vatsalya Scheme is not for you. You have more important and urgent goals to take care of:
Related:
Why parents should invest for the downpayment of their child's first home?
If after all of these considerations, you are still interested in NPS Vatsalya Scheme then we have more questions for you:
In the end, there is one more point that we need to mention here. Every investment has multiple criteria for checking suitability:
as described here: RRTTLLU: check these when choosing products for investing
We have so far addressed the Liquidity aspect here since the investment is locked until maturity. Now we will address the second L i.e. Legal / regulatory (L):
Since NPS is essentially a mutual fund with extra rules around liquidity and regulatory aspects, there is very little justification to open up another NPS account just for your child.
We are not saying that NPS Vatsalya Scheme is bad. We are saying that better alternatives with full flexibility and more options exist once you follow the process described below step-by-step:
Your child’s school and other regular expenses will come from monthly income. But you need to plan for bigger expenses in advance:
Which of these are you saving for:
To understand how to create a child’s education plan:
You need to ensure that an untimely death will not prevent your child from going to their future dream college. Term insurance is the right product here. Every earning member of the family must have adequate term insurance.
The whole family, i.e. child and parents should also have sufficient health insurance. This step prevents loss of income or a setback to investment goals due to illness.
Children’s education and other goals do not exist in isolation. They are a part of the comprehensive goal-based planning that parents need to do for their own retirement and everything else. The process is explained best with these examples:
There are more case studies here: Case Studies.
We have proven that the goal-based investing process works in most market conditions in this article: What is the best way to invest for your child’s college education?.
As time passes, things change:
Therefore the plan created in Step 3 has to be reviewed and rebalanced to check if you are still on track: Are your investments on track for your goals?.
Please use the Find feature of your browser to look for specific items of interest.
The NPS Vatsalya Scheme, introduced in Budget 2024, is a National Pension Scheme (NPS) designed specifically for minors. Parents and guardians can open an NPS account for their children and make contributions until the child turns 18. Upon reaching adulthood, the account can be converted into a regular NPS account.
All parents and guardians, including Indian citizens, NRIs, and OCIs, are eligible to open an NPS Vatsalya account for their minor children.
The benefits include promoting early savings habits, providing a substantial retirement corpus, ensuring portability of the account, and teaching children responsible financial management. The account can be converted to a standard NPS account upon the child reaching adulthood.
By opening an NPS Vatsalya account for minors, parents can teach children to save and invest from an early age. Once the child turns 18, they can manage and contribute to the account independently.
The NPS Vatsalya account is converted into a regular NPS account, which the child can manage and contribute to independently.
Yes, parents and guardians can make regular contributions to the NPS Vatsalya account on behalf of their children until they turn 18.
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More posts...Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.
This post titled NPS Vatsalya: A Gimmicky Product That Should Be Avoided If You Are Serious About Investing For Your Children first appeared on 26 Jul 2024 at https://arthgyaan.com
