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Will NPS Vatsalya Give Your Child Eleven Crores When They Retire?

Posted on 20 Sep 2024
Author: Sayan Sircar

Tags: News ; NPS ; Children

6 mins read
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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.

Will NPS Vatsalya Give Your Child Eleven Crores When They Retire?

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:

NPS Vatsalya details revealed: is it good for your children's future or avoidable?

This article discusses the NPS Vatsalya scheme that does not really offer any greate benefits over simply investing in mutual funds.

NPS Vatsalya: A Gimmicky Product That Should Be Avoided If You Are Serious About Investing For Your Children

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.

Why LIC Amritbaal policy is a complete wastage of money: how to invest for your child in the right way

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.

📚 Topics covered:

Will NPS Vatsalya Give Your Child 11 Crores When They Retire?
Where do the ₹11 Crores come from?
What is the impact of inflation on ₹11 crores after 60 years?
What will be the pension from ₹11 crores of corpus after 60 years?
What if we invest more or get a higher return?

Will NPS Vatsalya Give Your Child 11 Crores When They Retire?

We saw this tweet when analysing the NPS Vatsalya launch on 18 September 2024. The source is the official Twitter account of the Press Information Bureau (Chandigarh office):

Projection: Will NPS Vatsalya Give Your Child 11 Crores When They Retire

What does the Tweet (X?) say?

If you invest a small amount like ₹10,000/year
and continue investing the same amount for 60 years in NPS Vatsalya
and get the same 12.86% that has been seen in NPS since inception

Then, your child will get ₹11.05 crores when they reach the age of 60.

Where do the ₹11 Crores come from?

There is nothing wrong with the projection mathematically. After all,

Corpus = FV(return,years,annual_contribution,0,0)

Corpus = FV(0.1286,60,-10000,0,0) = ₹11.03 crores

Using Excel / Google Sheets, you can type in this formula “=FV(0.1286,60,-10000,0,0)” and get the same result.

We will also make the, albeit ludicrous, assumption that the underlying NPS Vatsalya portfolio with equity and debt in a pre-defined proportion behaves like an FD and gives a fixed 12.86% a year.

The bigger problem, for those who have not come across the nuance, is that the ₹11 crores is not after inflation. Let us not ignore that this corpus was created after 60 years.

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What is the impact of inflation on ₹11 crores after 60 years?

Rule of 72

We use the rule of 72 to estimate the effect of inflation quickly. 7% inflation of goods and services shows that the cost will double in approximately 10 years or the purchasing power of money will be cut by half. So if you have 8 crores today, somehow, then the

value of 8cr will be 4cr in 10 years
value of 8cr will be 2cr in 20 years
value of 8cr will be 1cr in 30 years
value of 8cr will be 50 lakhs in 40 years
value of 8cr will be 25 lakhs in 50 years
value of 8cr will be 12.5 lakhs in 60 years

Effect of inflation over 60 years on NPS Vatsalya corpus

Applying the same logic to the ₹11 crore corpus, we see that after 60 years, the accumulated ₹11 crores will have the same worth as ₹34 lakhs today.

A quick mental maths shortcut to calculate this is:

7.2% inflation = halving in 10 years
60 years = 6 halvings
2 ^ 6 = 64
Value of corpus = 1103 / 64 = 17

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What will be the pension from ₹11 crores of corpus after 60 years?

This is where the absurdity of ignoring inflation in making a 60-year projection hits.

Let’s assume that the entire NPS corpus at retirement is invested into a pension plan at the age of 60.

Let’s also assume, that 60 years later, Indian annuities are still offering a 7% return.

What is the pension per year?

₹11 crores at 7% gives ₹77 lakhs/year or ₹6.43 lakhs/month pension

After 60 years of inflation, these numbers were reduced by 64 times

₹17 lakhs at 7% gives ₹1.2 lakhs/year or ₹10,000/month pension

Let’s not forget that this ₹10,000 stays fixed for life and loses 50% value every decade. You need to understand what exactly your child will do with ₹10,000/month where on paper, they are sitting on ₹11 crores of corpus.

What if we invest more or get a higher return?

That is not the point of this article. We can always plug in numbers in Excel and make assumptions to get any number after 60 years.

However, the point of this article is not to discuss the alternatives to NPS but to complete the picture when rosy scenarios like the PIB tweet are shown.

We anyway strongly believe that NPS Vatsalya is a gimmicky product that is best avoided. There are much better options to create a huge, inflation-adjusted corpus for your children: NPS Vatsalya details revealed: is it good for your children’s future or avoidable?.

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