Investment query: Where should I invest with options like NPS Vatsalya, Sukanya Samruddhi Yojana, Children MF plans available for minors?

My daughter is 3 years and me and my wife are keen on saving for her studies, higher studies, and abroad visit. With the government-backed options, like  NPS Vatsalya, Sukanya Samruddhi Yojana, available, should I risk my money in mutual funds for children. 

Name withheld.

Reply by Adhil Shetty, CEO, BankBazaar.com

When considering investment options for securing your child's financial future, you'll find a variety of choices available. Among these, solution-oriented mutual funds and government-backed investment schemes like NPS Vatsalya and Sukanya Samrudhhi Yojana (SSY) stand out.

While mutual funds may present potentially higher returns, government-backed schemes are characterised by their low-cost structure and lower risk profile. Analysing the overall risk tolerance and financial objectives can help in making an informed decision regarding the most suitable investment avenue for your child.

NPS Vatsalya is a pension scheme for minors, where parents can invest in their child’s pension account. So, 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 an inflation of 6%, the value of this corpus would be only Rs 50 lakh at 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. 

For instance, if you have Rs 5,000 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 Rs 6.3 lakh. 

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. 

 (Views expressed by the investment expert are his/her own. E-mail us your investment queries at askmoneytoday@intoday.com. We will get your queries answered by our panel of experts.)