In NPS Vatsalya, parents and guardians can invest in their minors in NPS. What does this mean? Are we talking about our children’s retirement because we are living in times where although the corporate uptake in NPS has gone up and people are getting familiar with the idea of starting early as far as the retirement goal is concerned, we still see issues where people are finding it difficult to save money. Talking about NPS Vatsalya, are we going to use this money for a child’s education, are we talking about securing their retirement?
Hemant Rustagi: Every parent wants to start investing for their children’s future, obviously most of it is for their education and also ensuring that they understand the process of investment provided you involve them in that process. It is always a good idea to start investing in your children because even if we talk about education as a goal, you really need a large corpus to give them the kind of education you would like to give them and we also know that in our country, the education inflation is much higher than the normal inflation.
So, it makes sense to maybe look at different options. As you rightly mentioned we are awaiting details as to how exactly this will work, but this is going to be one more option. If you look at the existing options, there are always children’s plans. Also, there are plain vanilla mutual funds and equity-oriented funds. So, there are several options, plus the small savings schemes depending on each investor’s risk profile or understanding they choose different options.
This is going to add one more option. One tries to build a corpus for the children’s future that can be used for different purposes. Already like I said existing options are available. We need to look at and compare them in terms of liquidity, flexibility, and most importantly, because you will be investing for a very long period, you have to see the potential of return and what kind of investment plans allow that.
A lot of details are awaited, but having said that, the term NPS is attached to retirement and if parents or guardians are allowed to invest for minors, this primary should be for their education. But even then, would you consider NPS for your child’s education purpose?
Hemant Rustagi: Like I said, various options are available to us. When we compare NPS with other investment options, even for retirement, there are so many other options. Also with NPS, the issue in terms of retirement has been that the 40% of the money you get as a compulsory annuity where the returns are very low and not tax efficient.
So there are issues even though a lot of steps have been taken over the years to make it more investor-friendly and acceptable to investors. I think this is going to just add one more option. The fact is despite mutual funds being there, and despite other options being there, some investors in our country are still investing in a very conservative option for their children’s education thinking that this is one of the most important goals and they would not like to take any risk on that money which is not the right thing to do. Maybe this will add one more option. The important thing is to understand the nuances of each of the options you are looking at and then work out a suitable solution and then start investing in that.Even in a normal NPS scheme, partial withdrawals of around 25% are allowed after investing for three years and then almost 20% of your corpus after five years. These are also under certain criteria like children’s education, home loan, and health is that right?
Hemant Rustagi: Yes.Talking about aligning your child’s education goal via NPS, we are still not clear on the details but assuming NPS is a product that is not only for retirement but for your child’s future and specifically about education, can we also have a diversified portfolio?
Hemant Rustagi: It is important to analyze different options on different parameters. One of the important factors is when you start investing for your child, at what stage do you start? Let us say a parent starts investing in a child’s education immediately after birth, there is long enough time to invest even 100% into equity though equity can be volatile and risky.
But the fact is that when you are investing for such a long period, you will get a higher return. So, as I said, one of the crucial factors is at what stage you start investing. On different parameters, flexibility can be very important. What happens is any corpus that we accumulate is not something that you will require as soon as the child gets admission to a professional college somewhere. You pay it over some time.
It all depends on what kind of flexibility is provided in this because it is not that you are going to take out all this money and use it for the next four years whereas if you look at, let us say mutual fund as an option, if you have to do regularly, you can do systematic withdrawal plan or every year you can kind of withdraw and use that money for the child’s education.
It all depends on what kind of flexibility is there and what kind of investment option will be given to decide for the parent to decide the right kind of mix.