Should you consider solution-oriented mutual schemes?

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Over the last three decades, mutual funds in India have increased financial stability and aided investors in achieving their financial goals. While pure equity, debt, or hybrid mutual funds can achieve long and short-term capital appreciation and wealth creation, mutual fund houses also offer solution-oriented mutual funds specifically designed to accomplish a specific goal such as retirement planning or child education.

What are solution-oriented mutual fund schemes?

Mutual funds that are solution-oriented enable investors to invest for capital preservation or capital appreciation to fund future expenses such as retirement, marriage, or child education.

To construct a portfolio that generates the highest yields consistent with their expectations, managers of solution-oriented funds consider investors’ financial objectives, expected returns, and risk tolerance.

The Securities and Exchange Board of India (Sebi) has established five primary categories of mutual funds available in India: equity funds, debt funds, balanced hybrid portfolios, solution-oriented funds, and others that include index funds, gold ETFs, and fund of funds overseas. Individuals benefit from solution-oriented funds because they can create custom portfolios based on their risk tolerance and primary investment objective.

Presently, there are two types of solution-oriented mutual funds, i.e., retirement planning mutual fund and children’s mutual fund.

Retirement mutual fund

The majority of asset management companies offer systematic investment plans for such mutual funds. The investor’s money is invested to purchase either equity or debt instruments, depending on their risk tolerance.

Additionally, these instruments are subject to a mandatory five-year lock-in period and do not allow early withdrawals. This restrictive lock-in period is intended to ensure that individuals retain their corpus for a specified period of time to maximise their gains.

Children’s mutual fund

Individuals invest in these mutual funds primarily for capital appreciation of the corpus invested. The returns generated by such schemes can be used to cover the costs of children’s higher education and marriage, as well as other corresponding funding requirements.

Additionally, parents can choose a flexible lock-in time ranging from five years through the child’s 18th birthday, depending on their financial situation. It serves as a substitute for long-term investment, with terms and circumstances tailored to a specific goal.

Due to their hybrid portfolio composition, these funds provide an adequate balance of security and return. Combining debt and equity instruments results in great returns with significantly lower risk.

A hefty exit penalty on children’s mutual funds in India discourages early redemption, allowing the funds to earn more income over their tenor. Fund houses typically assess a penalty of up to 4% if an investor chooses to sell a children’s fund prior to the minimum lock-in period (5 years.)

Should you invest in solution-oriented mutual funds?

-Solution-oriented funds can be customised to meet an investor’s future financial needs. These funds invest in long-term income. This fund contributes to the development of a corpus, which ensures adequate capital for a specific objective.

-However, before investing in solution-oriented mutual funds, the investor should ensure that they have sufficient liquidity of capital. Partial withdrawals from these funds are not permitted before the end of the five years. The duration of investments in these funds should be longer to allow the fund to grow.

-Additionally, investors seeking a short-term return should consider debt-oriented funds. Investors interested in these funds should begin investing immediately. This will result in satisfactory returns over a more extended period, as the risk associated with these funds is reduced with a longer tenure.