NPS Vatsalya Vs MFs Vs SSY: Which one to choose for your child's future?

NPS Vatsalya is a specialized scheme within the National Pension System (NPS) designed specifically for children. Under NPS Vatsalya, parents can begin saving for their child's retirement even before their kids turn 18.When the child reaches 18, NPS Vatsalya will seamlessly convert into a regular NPS (National Pension Scheme), which is currently the most effective retirement investment option.

As parents or guardians, you need to make an initial contribution of Rs 1,000 when opening the account. After that, an annual contribution of at least Rs 1,000 is required, with no maximum limit on how much you can invest.

NPS Vatsalya withdrawal rules

 

Parents or guardians can withdraw up to 25 per cent of the corpus after three years for:

a) education

b) specified illness

c) disability

However, they are limited to three withdrawals until the child turns 18. While the scheme allows parents to secure their child’s future through compounded returns, it comes with limitations when compared to other investment options like the Sukanya Samriddhi Yojana (SSY), Public Provident Fund (PPF), and mutual funds.

NPS Vatsalya vs Mutual Funds Vs  SSY  and PPF: Which one to choose for investment for your child’s future?

 Let's compare these investment vehicles based on key factors:

Source: Merisis Wealth

  

Risk and Return: Equity mutual funds generally have higher risk and return potential compared to NPS Vatsalya. NPS Vatsalya offers a more balanced approach with a mix of equity and debt investments.  

Liquidity: Equity mutual funds offer more liquidity than NPS Vatsalya, as you can withdraw your investments at any time. NPS Vatsalya has a lock-in period until your child turns 18, and even then, you can only withdraw a portion of the corpus.   

Retirement Focus: NPS Vatsalya is primarily designed for retirement savings, while equity mutual funds can be used for various financial goals.

" If your child is currently 10 years old and you open a pension account for them, a monthly deposit of Rs 10,000 may end up creating a corpus of Rs 10 crore over the next 50 years. However, assuming inflation at 6%, the value of this corpus would be only Rs 50 lakh t that point. However, if the investments are scaled up by 10% each year, the retirement fund for your children could be in place with very little effort.  Other investments such as Sukanya Samruddhi Yojana or mutual fund child plans are structured in a way that regular investment will help you put together finances for key milestones in the life of your child, such as higher education, entrepreneurship, weddings, etc. Mutual funds, especially those aimed at funding children’s expenses, tend to be actively managed and have long lock-in periods to provide higher returns of 12-15%. They do have market risk, but over the long term, these tend to get corrected. This means you have a much higher corpus and liquidity at specific points when you need it the most," said Adhil Shetty, CEO, BankBazaar.com.

For instance, if you have Rs.5000 invested in two mutual funds schemes, one for 8 years and one for 12, you will have liquidity of roughly Rs 8 lakh and Rs 15 lakh, respectively at each milestone. Compared to this, you will be able to withdraw a maximum of 25% from Vatsalya. If you decide to do this at the end of the 12th year, you will be able to get roughly around Rs 6.3 lakh, said Shetty.

"If you adjust your child plan mutual fund investment amount based on your requirement, you would be able to finance your child’s undergraduate and post graduate education without straining yourself too much and without them having to take on too much liability, something which the NPS Vatsalya may not be able to help as effectively due to lower returns and limited liquidity.  NPS Vatsalya, works as a very long-term investment plan but may not have the necessary flexibility. So it would always be a good idea to diversify your investments and make NPS Vatsalya a small part of your overall investment portfolio, which includes instruments such as mutual fund schemes, instead of making it your sole investment for your children," said Shetty.

NPS Vatsalya vs FDs

• Returns: Fixed deposits generally offer lower returns compared to NPS Vatsalya and equity mutual funds.
• Liquidity: Fixed deposits are highly liquid, allowing you to withdraw your funds at any time.   
• Risk: Fixed deposits are considered relatively low-risk investments.   

NPS vs  SSY and  PPF

"Let’s assume that you invest Rs 1000 per month i.e Rs 12,000 a year for 18 years in NPS Vatsalya. Based on historical performance of NPS and 75% equity limit, Vatsalya is expected to have a return of around 10%. That means after 18 years you will have a corpus of Rs. 6,05,568. But the catch is you can only withdraw  20% of the amount. So, you will only get approximately Rs 1,21,000 for your child’s higher education. On the other hand, a 100% equity-based investment for the same amount with a minimum rate of return of 12% will give you Rs. 7,65,439 after 18 years that you can withdraw fully to fund your child’s education or other needs. Only thing to remember is that the gains will be taxed.

For the same investment amount and a tenure of 15 years, PPF will give approximately Rs 4,41,000. Sukanya Samriddhi Yojna (SSY) will accumulate approximately Rs 4,94,100 out of which you’ll be able to withdraw only 50% at the 18th year. Both PPF and SSY are better than Vatsalya to meet your goals, save tax on the contributions made, and the interest will be tax free.

Vatsalya is a pension scheme designed for an extended period of investment and is conservative in nature; it should be used in that manner. For child’s future planning such as secondary and university education, parents should consider investing in different options such as mutual funds and PPF as they offer higher returns and better liquidity," said Tushar Bopche, Co Founder, Invest4Edu. 

"One of the primary advantages of NPS Vatsalya is the power of compounding, which could potentially lead to significant wealth accumulation over time. For instance, investing ₹10,000 per month could yield over ₹11 crore at retirement, as per PIB Chandigarh. However, the funds are locked until the child turns 60, with limited withdrawal options before that, making it impractical for education or early financial needs. In contrast, SSY and PPF offer greater flexibility and liquidity, with tax-free returns. For example, ₹10,000 invested monthly in SSY for 15 years at 7.6% interest grows to approximately ₹40 lakhs, accessible when the child turns 18 for education or marriage. Mutual funds, too, offer higher returns with complete flexibility in withdrawals. While NPS Vatsalya is a robust retirement tool, it’s less suited for short-term goals like education," said Vinnaayak Mehta, Founder The Infinity Group.

Choosing the Right Option

The best investment option for your child's future depends on your financial goals, risk tolerance, and investment horizon. If you are seeking a long-term, retirement-focused investment with tax benefits and a balanced risk-return profile, NPS Vatsalya could be a suitable choice. However, if you prioritize higher returns and liquidity, equity mutual funds or children's mutual funds might be more appropriate.