The NPS Vatsalya scheme, introduced by the Pension Fund Regulatory and Development Authority (PFRDA), has already created a buzz in India’s pension landscape. Launched on September 18 by Finance Minister Nirmala Sitharaman, the scheme is designed to help parents and guardians build a substantial retirement corpus for their children by leveraging the power of compounding.
On the first day alone, an impressive 9,700 minor subscribers were enrolled in the scheme, marking an enthusiastic start. This includes 2,197 accounts that were opened through the e-NPS portal, reflecting growing digital engagement in financial planning. The scheme, which was announced in the Union Budget 2024-25, is seen as a game-changer for early retirement planning in India.
How the NPS Vatsalya Scheme Works for Children’s Financial Future
The primary goal of NPS Vatsalya is to encourage parents to start saving early for their children’s future, with a focus on long-term growth and retirement security. With various investment choices available, parents can customize the fund’s portfolio according to their risk appetite and financial goals.
Here’s a quick breakdown of the investment options available under the scheme:
1. Active Choice: Flexibility to Choose Investments
In the Active Choice option, parents have complete control over the allocation of their contributions. They can invest up to:
- 75% of the amount in equities
- 100% in corporate bonds
- 100% in government securities
- 5% in other assets
This option allows parents to choose a mix that aligns with their financial goals.
2. Auto Choice: Life Cycle-Based Allocation
Auto Choice simplifies the investment process by offering three different life cycles (LC) based on the level of risk:
- LC-75 (Aggressive): 75% investment in equity
- LC-50 (Moderate): 50% investment in equity
- LC-25 (Conservative): 25% investment in equity
This option automatically adjusts the risk as the child grows older, providing a balanced investment strategy.
3. Default Choice: A Balanced Approach
In this option, 50% of the invested amount goes into equities, offering a balanced approach for parents who prefer a simplified and risk-moderate investment plan.
Building a Fund of Rs 11.05 Crore for Your Child’s Future
The NPS Vatsalya scheme is designed to offer significant growth over the long term due to the benefits of compounding and interest on interest. For instance, if a parent contributes Rs 10,000 annually to their child’s NPS account for 18 years, they can accumulate a fund of Rs 5 lakh at an estimated return of 10%. However, if the investment continues until the child turns 60, this could potentially grow into a fund of Rs 2.75 crore, assuming a steady 10% return.
By investing in a balanced portfolio that includes 50% in equities, 30% in corporate debt, and 20% in government bonds, the corpus could grow to Rs 5.97 crore with an average return of 11.59%. For those opting for a more aggressive approach, with 75% allocation to equities and 25% in government bonds, the fund could reach Rs 11.05 crore by the time the child reaches retirement age, assuming a return of 12.86%.
A New Milestone in India’s Pension System
The overwhelming response to NPS Vatsalya on its first day indicates that Indian parents are becoming more conscious about securing their children’s financial future. With flexible investment options and the power of compounding, NPS Vatsalya provides an opportunity for parents to build a substantial retirement corpus, ensuring financial security for their children well into the future.
