By Shriram Iyer
The author, Shriram Iyer, is the Managing Director & Chief Executive Officer at HDFC Pension Fund.
In today’s world, securing a financially stable future is crucial. The “NPS Vatsalya scheme” provides a unique opportunity to build a retirement corpus for children from birth, setting them on the path to financial independence. Aimed at minors, this scheme enables parents to begin contributing early on, ensuring their child’s financial future is off to a strong start.
Upon turning 18, children can continue to invest, allowing their wealth to grow through compounding—setting them up for success well into adulthood.
Empowering the Next Generation
NPS Vatsalya represents more than just an investment; it empowers young individuals to achieve financial freedom. By encouraging parents and guardians to start early, the scheme plays a pivotal role in safeguarding the financial well-being of future generations. This aligns perfectly with the government’s broader vision of creating a financially secure nation.
During the announcement of the scheme in this year’s budget speech, Finance Minister Nirmala Sitharaman emphasized, *“NPS Vatsalya, a plan for contributions by parents and guardians for minors, will be launched. Once they turn 18, the plan can seamlessly convert into a regular NPS account.”
What is NPS Vatsalya?
NPS Vatsalya is a customized version of the National Pension System (NPS) designed for minors. This scheme allows parents or guardians to open an investment account for their children, with contributions made regularly. As the child turns 18, the account transitions to a standard NPS, giving the young adult full control over their investment decisions.
Post-18 Benefits
Once the child reaches adulthood, NPS Vatsalya morphs into a regular NPS account. It encourages continued contributions, fostering financial discipline and long-term wealth building. The scheme instills the habit of saving, a crucial step in creating financial security.
How Does It Work?
NPS Vatsalya follows the same structure as the traditional NPS. It provides a well-balanced portfolio mix of equities, government securities, and corporate bonds, ensuring stability and growth potential. The core idea is to start investing early, which leads to compounding benefits over the long term.
Designed to support children at key life milestones, the scheme offers parents flexibility in their investments, helping them create a diversified portfolio. Upon turning 18, the child can take over, deciding how to invest and grow the fund, just as with the adult NPS.
Power of Compounding: A Game Changer
One of the most significant advantages of NPS Vatsalya is the power of compounding. By starting early, subscribers benefit from 18 additional years of compounding, which can result in substantial wealth accumulation.
For example, if a parent contributes ₹50,000 annually starting from their child’s birth, with a conservative 10% annual return, the corpus could grow to approximately ₹25 lakhs by the time the child turns 18. If the young adult remain invested till he starts earning, the fund could reach ₹40 lakhs by age 25. If they then contribute ₹50,000 annually from their income till the age of 60, the corpus could balloon to around ₹12.5 crores. Without the initial contributions through NPS Vatsalya, this figure would only be about ₹1.5 crores—an 8x difference, showcasing the scheme’s potential to supercharge wealth creation. All calculations have been made assuming a conservative lifetime return of 10% p.a. in the scheme.
Investment Choices
Just like the standard NPS, NPS Vatsalya offers a blend of equities, government securities, and corporate bonds. Subscribers can opt for auto choice (life cycle funds like LC25, LC50, and LC75) or active choice based on their goals and risk appetite.
The success of NPS, which boasts ₹13 lakh crores in assets under management as of August 2024, sets a strong precedent for NPS Vatsalya.
Why Choose NPS Vatsalya?
Parents constantly strive to provide both financial and emotional security to their children. The NPS Vatsalya scheme strengthens this commitment by offering a dedicated investment account that grows with time. It not only supports major life goals, such as education, but also leverages the power of compounding to build substantial wealth for the next generation.
Additionally, it instils savings discipline in children at an early age, encouraging them to plan their finances and develop a healthy attitude towards wealth management.
Conclusion
NPS Vatsalya is an innovative financial tool designed to empower parents in future-proofing their children’s lives. By fostering a disciplined approach to saving and offering long-term wealth generation, it stands as a smart investment for the next generation.
With its focus on compounding and early financial planning, NPS Vatsalya ensures that the journey towards financial security starts at birth.
Shriram Iyer
MD & CEO
HDFC Pension Fund
Ph – 9819866000, Email Id – srirami@hdfcpension.com
