In the evolving landscape of personal finance, mutual funds have emerged as a versatile and accessible investment vehicle for a wide range of investors. As a mutual fund investor, you might be familiar with the various types available, like equity, debt, and hybrid funds. But, have you encountered solution-oriented mutual funds yet? If not, this blog is tailored just for you.
In India, Securities Exchange Board of India (SEBI) has categorized mutual funds into 5 primary classifications - equity funds, debt, hybrid schemes, solution-oriented funds, and others.
Solution Oriented funds, as the name suggests, are meant to serve specific purposes and hence provide ‘solution’ to specific requirements. Solution based schemes are particularly helpful for those investors who wish to build a corpus for their retirement or children’s future through mutual funds but lack the expertise to make decisions on fund selection, asset allocation, and portfolio rebalancing. They provide investors with the benefit of selecting customized portfolios based on their risk preferences and the specific objective of their investment.
The types of solution-oriented mutual funds that are available to the investors in India are:
-
Retirement Fund:
This fund is designed to help investors build a corpus for their post-retirement life. It has a lock-in period of 5 years or until retirement age, whichever is earlier.
-
Children’s Fund:
This fund focuses on long-term wealth creation to meet your child's future expenses like education, marriage, etc. It has a lock-in period of at least 5 years or until the child reaches the age of majority (whichever is earlier).
Retirement and children’s education or marriage are long-term goals that have a high emotional appeal. This seems to set these funds apart from the rest.
Moreover, the inherent asset allocation of these funds is an added advantage. By investing in these funds, you likely won't need to worry about allocating your corpus between equity and debt, nor will you need to concern yourself with periodic rebalancing. The mandatory lock-in period of these funds can also prevent impulsive withdrawals during market corrections, which can be especially beneficial for investors who tend to panic when the markets fluctuate.
The longer investment horizon allows the fund to take advantage of market fluctuations and potentially generate higher returns compared to more conservative options.
Last but not least, some investors might find it psychologically more appealing to invest in these funds, preferring that the money remains locked in until it is needed. Such investors can also consider these funds.
When you choose to invest in solution-oriented schemes, it’s like selecting a path specifically designed to meet your needs. However, every path has its challenges, and it's essential to be aware of these before beginning your journey. Here’s a simplified overview of what you might encounter with solution-oriented mutual funds.
-
Missed Opportunities: Since these funds typically invest in large cap companies, you might miss the opportunity to invest in other categories such as small and mid caps that have the potential for significant growth.
-
Five-Year Lock-in: Often, when you invest in solution-oriented mutual funds, your money is tied up for five years. This is because these funds typically don’t allow you to take your money out before this period is up. If the performance of a scheme lags, the investor cannot switch to another scheme in between the investment period.
-
Market Sensitivity: The value of your investment can go up and down due to market trends, something you need to be prepared for when investing in solution-oriented schemes.
When selecting a retirement fund or children’s fund, consider which variant aligns with your requirements. In the case of retirement funds, if you're in the accumulation phase, the equity or aggressive hybrid variant may be more suitable. However, if retirement is imminent in the next few years, the more conservative debt-tilted variant would likely be a better choice.
Conclusion:
Solution-oriented funds provide a strategic way to achieve specific financial needs through disciplined investing and professional management. They offer a structured approach to saving for retirement, children’s education, or marriage, making them an attractive option for need based investing. However, like any investment, they require careful consideration of one’s financial situation, needs, and risk tolerance to ensure they align with the investor's overall financial plan.
