Get to learn all about Solution Oriented Mutual Funds
Goal-based Financial Planning
Goal-based financial planning is the best way of planning for goals such as building a fund for a child's higher education or retirement. One of the ways of planning for these goals is to invest in mutual fund schemes meant specifically for these goals. Such mutual funds are known as solution oriented mutual funds. This blog will explain what solution oriented mutual funds are, who should invest in them, the performance of these funds, etc.
What are Solution Oriented Mutual Funds?
Solution oriented mutual funds are open-ended mutual fund schemes meant for a specific purpose, such as investing for a child or own retirement. These funds have a lock-in period. For children's funds, the lock-in period is five years or till the child attains the age of majority, whichever is earlier. The lock-in period for the retirement fund is five years or until the individual attains retirement, whichever is earlier.
Who should invest in solution oriented mutual funds?
Solution oriented mutual funds are meant for the following two financial goals:
- The children's fund is meant to plan the future needs of a child, such as higher education (graduation and post-graduation), marriage, and any other child needs. When the child is growing up, you can invest a certain amount every month in this fund through a systematic investment plan (SIP). When the investment time horizon is long (more than five years), the investment can benefit from the power of compounding. Before the child is ready to take admission to a college, you can withdraw the accumulated corpus and use it for their education.
- The retirement fund is meant for planning your own retirement. You should have a retirement fund so that you don’t need to depend on anyone for your financial needs during your retirement years. The retirement fund will help you maintain your existing lifestyle and also take care of your healthcare needs (if any). You can start a SIP during your working years. You can increase the monthly SIP contribution every year by a certain amount or percentage as your income grows.
- A fund house may offer variants of the same solution oriented scheme to suit the investor's risk profile. For example, SBI MF offers the following variants of solution oriented schemes and their variants.
|SBI Magnum Children’s Benefit Fund||SBI Retirement Benefit Fund|
|a) Investment Plan||a) Aggressive Plan|
|b) Savings Plan||b) Aggressive Hybrid Plan|
|c) Conservative Plan|
|d) Conservative Hybrid Plan|
How to do Financial Planning Using a Solution Oriented Mutual Fund?
Child education planning using a solution oriented mutual fund
- You can plan your child’s higher education using the following steps:
- Finalise the higher education course you would like your child to take up when they grow up.
- Current cost: Find out the current cost of the course. If you don't have any specific course in mind, you can look at an MBA, engineering, or medical course fees. Whichever course costs the highest, you can take the fee of that course as the benchmark.
- Investment time horizon: Based on the child's current age and the age at which they will take admission to the college, calculate the number of years you have in hand to accumulate the amount. This will be your investment time horizon.
- Inflation: Taking the course's current cost, calculate the future cost based on the number of years and inflation rate. You may look at the past trends for the increase in the course cost. Else, you can take the 10% inflation rate as the benchmark. The course's future cost is your financial goal.
- Making the financial goal plan: Based on your risk appetite, you can decide your asset allocation. Considering your asset allocation, you can arrive at the expected rate of return on the overall portfolio. Based on the expected rate of return, the amount to be accumulated, and the investment time horizon, you can calculate the amount to be invested every month in the children’s fund.
- Implementing the financial goal plan: Now that your financial goal plan is ready, you can start investing in the solution oriented children’s fund. You can review the plan every year to assess whether you are moving in the right direction. If and when any changes are required, you can implement them till you reach your financial goal.
- Refer to this article for more details about child education planning. You can take a similar goal-based planning approach to accumulate money for your child’s marriage.
- You can plan your child’s higher education using the following steps:
- Retirement planning using a solution oriented mutual fund
- In the earlier section, we saw how to go about step-by-step building a fund for a child’s higher education using a solution oriented mutual fund. Now let us understand how to build a retirement fund using a solution oriented mutual fund.
- Calculate your retirement expenses: Based on your current annual expenses and the inflation rate, calculate the annual expenses in the first year of retirement. Look at the inflation trends for the last few years and take a benchmark inflation rate. Else, you can take 10% as the benchmark inflation rate.
- Calculate your retirement fund: Now that you know your expenses in the first year of retirement, based on your life expectancy, calculate the retirement corpus that you will need. You can take the age of 80 years as the benchmark for life expectancy. Consider the annual withdrawal you will make from your retirement fund for your annual expenses and the expected rate of return that you will earn on the remaining amount.
- Making the financial goal plan: You have calculated the required retirement corpus. Now, you need to calculate the amount you need to invest every month to accumulate the retirement fund. The monthly investment amount will depend on the investment time horizon, the expected rate of return, and the amount to be accumulated. The expected rate of return will depend on your risk appetite and asset allocation.
- Implementing the financial goal plan: Once you have made the retirement plan, you can start investing in the solution oriented mutual fund (retirement plan). You can review the plan every year to ensure you are heading towards your financial goal. If and when any changes are required, you can implement them till you reach your financial goals.
Things to consider when investing in solution oriented funds
When investing in solution oriented mutual fund schemes, you should consider the following points:
- Investment horizon: You should invest in these schemes only for the long term. These schemes have a lock-in period of five years. So you should invest if you have an investment horizon of five years or higher. Also, you will benefit from the power of compounding in the long run only.
- Investment objective: These schemes are meant for specific goals only, such as planning for children’s needs (higher education, marriage, etc.) or their own retirement. So, you should consider these schemes only if you are investing for one of these financial goals or both.
- Risk profile: Most fund houses offer different variants of the same scheme to suit the investor’s risk appetite. So, whether you have a conservative, moderate, or aggressive risk profile, select the appropriate variant of the scheme to suit your risk profile.
- Expenses: Consider the expense ratio of the scheme while investing in it. A higher expense ratio will directly eat into your returns. Also, check the exit load, if any, applicable at the time of redemption.
Performance of solution oriented schemes
Let us look at the returns that some solution oriented schemes have given.
|Scheme name||AUM (Rs. crores)||1-year||3-years||5-years|
|HDFC Retirement Savings Fund – Equity Plan||2,163||11.24%||17.68%||14.39%|
|HDFC Retirement Savings Fund – Hybrid Equity Plan||806||4.09%||12.39%||11.73%|
|Tata Retirement Savings Fund – Progressive Plan||1,193||1.25%||10.66%||10.87%|
|Tata Retirement Savings Fund – Moderate Plan||1,568||2.73%||10.11%||10.16%|
|HDFC Retirement Savings Fund – Hybrid Debt Plan||145||3.34%||7.98%||7.49%|
Note: The returns are as of 26 May 2022. The returns are for direct plans with growth option. The one-year returns are absolute, and the three and five-year returns are CAGR. The funds have been ranked based on five-year returns.
Investing in solution oriented funds with the Glide Invest App
In this blog, we understood what solution oriented funds are and who should invest in them. You can partner with the Glide Invest App for your financial goals like child education planning and retirement planning to get recommendations for the appropriate focused mutual fund schemes based on your risk profile. You will get advice on planning and systematically investing towards your financial goals.
With Glide Invest, you will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved