Writing, I have come to realise is like a muscle. When there is a prolonged period of disuse, there is very little that can rouse you out of that slumber. There will be a few half hearted attempts, easily drowned out by the much more convenient excuses.

Yet, there can indeed be reasons that finally make you shake off the dust and rise to the occasion. That reason for me, happens to be the newly launched NPS Vatsalaya scheme.

What is NPS Vatsalaya?

When you look at the name, you can see that it is an add-on of sorts to the much touted social security provision of NPS scheme by the government. In a nutshell, NPS Vatsalaya allows you to open an NPS account for your minor child, transfer it in their name to a regular NPS scheme and let it operate out to serve as a start pension fund at retirement. Yup, at the retirement of your currently minor child.

Alternately, when the child becomes an adult, there is an option to withdraw upto 20% of the corpus with minimum 80% to be converted into an annuity for amounts more than Rs. 2.5 Lakh.

While the scheme was announced as part of the Union budget, it was officially rolled out last week through a Youtube launch. And what a first day, first show with 9,705 minors being signed up on Day 1.

Benefits of NPS Vatsalaya

Apart from giving the government some more investor money, there are some benefits that they have built in for the people who opt for it.

1. Minimal investing amount

Families can invest as little as Rs. 1,000 per year. This ties in well to the long term objective of the government for financial inclusion. Additionally, there is no penalty in case you miss out investing in any of the years.

2. Choices in investing

Like a regular NPS account, investors can choose from the available pension schemes. If you don’t make a choice, the default option of the Moderate Life Cycle Fund (LC-50) kicks in with just a 50% allocation to equity. Be it any of the three lifecycle funds under the Auto option (Aggressive LC-75, Moderate LC-50 and Conservative, the maximum equity allocation remains limited to 75%.

3. Government backing

Considering it is a government scheme, you have some reassurance about the safety of your money. Although, considering the assets in which it will be invested come with their own risks, the government backing may come with limited downside protection.

So, what’s your beef with NPS Vatsalaya?

Before I go into my list of issues, let me issue a disclaimer that personally, I am someone who isn’t truly bought in to the idea of the regular NPS either. But, in this case, the objections literally write themselves.

1. Is it the right goal?

Like the Financial Planning variant of Rick Blaine would muse in Casablanca – “Of all the goals, in all of the financial plans in all the world, all you could think of was children’s pension?” Really?

Isn’t the aim of parenting to get kids to sustain themselves financially? While many Western countries have evolved to having children fund their own education and wedding, we seem to want to provide for them out of our own graves.

More importantly, we are still at a stage where people are still making sense of their own retirement planning. Yet, we seem to want to skip that level altogether and go to childrens’ retirement altogether. Just doesn’t sit well with me.

2. Liquidity

I am a long-term investor by choice. Someone who does not intend to touch her investments for years. But, I like to know that I can get out when I want. Liquidity or just knowing that you can get out is a powerful choice.

The idea of investing for 5-6 decades sounds akin to a blackhole to me. You keep adding some little amounts only for your kid to some day (if they even remember this bit of money stashed somewhere) reap the benefits. Nature has a better track record here. Even a toughie like an oak tree produces acorns in 20-25 years.

3. Asset class flexibility

For anyone who has read this space for long enough knows that I am an equities fan. Yes, fixed income and low risk products serve a place but more for shorter liquidity purposes. For such long periods, there is no better use for your money than investing in equities. For that matter, a maximum allocation of 75% sticks out like a sore thumb for me.

4. No tax incentive

Currently, there is no tax incentive to the product at all. You invest your post-tax income and everything seems to fall under then marginal tax bracket, be it the lumpsum or the annuity amount. Considering past trends, this could obviously change which could also flood the amount flowing into the scheme.

So, what are my other options?

Honestly, just about anything else. Mutual funds insistently spring to mind for they can really serve every possible purpose you can think of. If you were to look at government-backed guaranteed returns schemes, then Public Provident Fund (PPF) with a shorter 15-year duration or Sukanya Samriddhi Yojana which matures at adulthood for a girl child work far better.

As for NPS Vatsalaya, I am hoping to be proved wrong and to see whether there is even the slightest reason for me to invest. For now, the forecast seems bleak.

What do you think of NPS Vatsalaya? Are you planning to invest for your child’s retirement already? Let me know in the comments below.