Parents will find such a government-monitored scheme more credible.
The Budget PROPOSAL to introduce NPS (National Pension Scheme) — Vatsalya will help parents to plan the very long financial needs of children with special needs. Experts say a low-cost, tax-efficient product like NPS will enable parents to accumulate funds for such children and get periodic annuity payouts.
Typically, such children are left at the mercy of relatives or an institution after the parents are gone, with the probability of misuse of funds accumulated by their parents. A government-monitored pension scheme could thus ensure better utilisation of funds for their welfare in the later part of their lives.
In the new scheme, parents and guardians can contribute for minors and on attaining the age of majority, the plan can be converted into a normal NPS account. While the details of the scheme are awaited, experts say the product should be structured in such a way that grandparents and other relatives can contribute to the account as gifts on various occasions. This way the corpus will grow and the child will get the benefits of compounding returns.
Sushil Jain, CEO, PersonalCFO.in, a wealth management firm, says as the proposed NPS Vatsalya account will be opened for a minor, it will enable to accumulate a huge corpus on retirement. “The corpus and the periodic annuity payout will help a child, especially with special needs, to stay financially independent.”
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Accumulate a corpus
The contributions made in NPS are invested in market-linked instruments such as equities, corporate bonds and government securities offering higher returns than bank-deposits. At the time of retirement, the subscriber can withdraw 60% of the corpus in the NPS account.
Anil Rego, founder, Right Horizons, says NPS-Vatsalya for children will allow the money to grow over a longer period of time. “This extended time period utilises compound interest and increases the final corpus,” he says. Opening an investment account at an early stage can instill financialdiscipline in children.
Experts say while the proposed plan will help parents to initiate pension planning for their children, they should channel savings to investment avenues giving higher returns to fund the ever-increasing costs of higher education. Here are some alternative schemes that parents should look consider.
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Long-term equity funds
Equity mutual funds can offer higher returns compared to other investment options like fixed deposits or public provident fund, especially in the long term. An early investment allows for increased efficiency, which significantly increases the value of the investment over time. “Investors can choose from a variety of equity funds, including large-cap, mid-cap, small-cap and multi-cap, based on their risk tolerance and investment objectives,” says Rego. Systematic Investment Plans (SIP) allow for regular investments that make it easy to build a large corpus over time. Long-term equity funds can be an excellent investment option for children as they offer the potential for high returns and diversification, along with better liquidity. Jain says individuals should look at goal based-investment and go for mutual fund SIPs as per time horizon and asset allocation.
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Sukanya Samriddhi Yojana
A natural or legal guardian can open a Sukanya Samriddhi account in the name of a girl child up to the age of 10 years. An account can be opened with a minimum of Rs 250 and up to Rs 1.5 lakh per account per financial year. Benefit under Section 80C of the Income Tax Act, 1961 is available to the depositor.
Sukanya Samriddhi account matures after 21 years from the opening of the account or on the marriage of the account holder, whichever is earlier. However, when the girl turns 18, she can withdraw up to 50% of the previous financial year’s balance to cover educational expenses. The interest of Sukanya Samriddhi for the quarter of July-September 2024 is 8.2% per annum; the interest is credited at the end of the financial year and is compounded annually.
