NPS Vatsalya vs Long-term equity funds vs Children MFs: In which segment will you get maximum returns?

Mutual fund investment: Since the introduction of NPS Vatsalya, many have been speaking about long-term investment plans, which extends for decades and can offer a multicrore asset on maturity. NPS Vatsalya, which is similar to the National Pension System, and equity MFs, or children mutual funds, are important tools for long-term wealth creation. Choosing the most suitable scheme depends on factors such as financial goals, risk tolerance, investment horizon, investment preferences, and tax advantages.

NPS Vatsalya, where the investment is expected to continue for at least two decades, is specifically designed as a long-term investment vehicle focused on retirement planning. It aims to provide a steady income stream post-retirement. 

On the other hand, mutual funds cater to various financial objectives, including wealth accumulation, retirement planning, and tax optimisation, depending on the chosen scheme’s goal. Investors have the flexibility to select schemes based on their preferred investment horizon, ranging from short to long term.

Individuals who prioritise financial security and tax benefits are often drawn to NPS Tier 1. Conversely, those with a higher risk tolerance, medium to long-term objectives, and diverse investment requirements tend to favor mutual funds. 

“The three investment options— NPS (Vatsalya), long-term equity funds, and children mutual funds — cater to different financial goals and risk profiles. NPS Vatsalya is tailored for retirement planning with a minimum investment of Rs 1,000 annually and equity exposure capped at 75%. It offers tax benefits under Sections 80C and 80CCD (1B) and has a structured withdrawal plan, allowing 100% withdrawal if the corpus is under Rs 2.5 lakh. This option is low to moderate risk. Long-term equity funds focus on wealth creation, offering up to 100% equity exposure with flexible withdrawals. Starting from Rs 500, they are ideal for high-risk investors seeking long-term growth, though gains over Rs 1.25 lakhs are taxed. Children mutual funds are designed for future child-related expenses, with 65-100% equity allocation and a starting investment of ₹100. They may offer tax exemptions, making them a solid option for moderate-risk investors planning for their child’s future,” said Swapnil Aggarwal, Director, VSRK Capital.  

“Overall, NPS (Vatsalya) is best for conservative, long-term retirement planning, long-term equity funds suit investors looking for higher returns with higher risk, and Children mutual funds offer a balanced approach for future-focused financial planning,” Aggarwal added.

Here’s a look NPS Vatsalya vs Long-term equity funds vs Children Mutual Funds

NPS Vatsalya

When opening an NPS Vatsalya account, parents or guardians are required to make an initial contribution of Rs 1,000. Following the initial deposit, an annual contribution of at least Rs 1,000 is mandatory, with the flexibility to invest additional funds beyond this minimum requirement without any maximum limit imposed.

NPS Vatsalya will provide all the benefits of a regular NPS scheme. The plan offers three distinct investment choices:

a) Moderate Life Cycle Fund: By default, this option allocates 50% of the funds into equity investments.

b) Auto Choice: Parents or guardians can select from three options based on their risk appetite and investment goals:

Lifecycle Fund – Aggressive (allocates 75% to equity)
Moderate (allocates 50% to equity)
Conservative (allocates 25% to equity)

c) Active Choice: In this scenario, parents or guardians have the flexibility to actively manage their investment portfolio for their child’s future. They can allocate up to 75% of the funds into equity and up to 100% into corporate debt and government securities.

PFRDA has noted that the National Pension System (NPS) has amassed a substantial corpus of Rs 13 lakh crore. The equity funds within NPS have demonstrated a noteworthy compounded annual growth rate (CAGR) of 14.2%. NPS Vatsalya is designed to harness the potential of compounding to secure advantages for minors. 

Long Duration Mutual Funds

Long Duration mutual funds present the potential for high returns, but also come with high volatility and risks. Investors should regularly assess the performance of these funds to stay informed about market dynamics. Investing in Long Duration mutual funds can provide attractive dividends, making them an appealing option for those seeking higher returns despite increased risk. These funds diversify portfolios by investing in shares of various companies based on specific criteria, allowing investors to potentially benefit from the growth of the underlying investments. Equity mutual funds offer returns influenced by market conditions and do not guarantee fixed returns over time, unlike debt funds. The fund’s performance is linked to the daily performance of the companies it invests in.

Children Mutual Funds

Mutual Funds for Children are investment options created to help build savings for future needs such as education, marriage, and overall well-being. In India, these funds are tailored for long-term financial planning for children, underscoring the significance of early education planning. 

There are currently eight children’s mutual funds available in the market. Among these, the HDFC Children’s Gift Fund’s Assets Under Management (AUM) is Rs 9,867.80 crore as of August 31, 2024. 

The UTI Children’s Hybrid Fund’s AUM was at Rs 4,669.42 crore as of August 31. SBI Magnum Children’s Benefit Fund Investment Plan’s (Regular – Growth) AUM stands at Rs 2,693.38 crore. 

UTI Children’s Equity Fund – Growth stands at Rs 1,172.0 Cr crore as of August 31, 2024. The AUM of Axis Children’s Gift Fund – Lock in – Regular – Growth is at Rs  913.37 crore, SBI Magnum Children’s Benefit Fund – Savings Plan at Rs 2693.38 crore, Union Children’s Fund – Regular – Growth at Rs 57.68 Crore crore, and LIC MF Children’s Fund stands at Rs 17.27 crore as of August 31 2024.