What Are Solution Oriented Funds?
Mutual funds, as investment instruments go, are sought-after as they offer you a gamut of types to match your unique investing needs. You could say that there is a mutual fund for everyone today. Solution oriented mutual funds are a category of mutual funds that facilitate investment if you wish to maintain your corpus, or create capital appreciation for funding particular future costs, like those of retirement. These funds are managed by proficient fund managers who account for an investor’s financial goals, risk appetite, and estimated returns while furbishing a portfolio with the aim of generating the highest returns possible.
SEBI, or the Securities and Exchange Board of India, has announced five kinds of mutual funds, and solution oriented schemes are just one in the different categories. These funds give investors tailor-made portfolios that align with their financial goals.
Types of Solution Oriented Mutual Funds
There are as many kinds of investors as there are investments to opt for. Based on any given investor’s particular financial investment needs and goals, investments and the products thereof suit a range of investors. Within the category of solution oriented funds, there are two broad types and these cater to different requirements of investors:
Children’s Gift Mutual Funds
Children’s funds are specifically geared to collecting a corpus for children’s needs, such as future education expenses, or a marriage to be funded. However, funds can be easily used to gather a corpus for any other requirement under this type too. As education becomes more expensive each year, and parents clearly want the best for children, such a fund can balance costs and enhance an already-existing corpus for children’s requirements. Investing in such funds early is of the essence, with more capital accumulation guaranteed as years pass. Analysts recommend starting solution oriented schemes for children at the birth of the child, or just afterwards.
Retirement Mutual Funds
One of the most popular needs for investment today comes in the form of a retirement fund. The need for financial independence after retirement is seen as crucial by many investors and to target this group of investors, retirement mutual funds come in handy. Depending on different financial goals in retirement, funds cater to varying needs of investors. Overall, any retirement mutual fund aims to enhance the financial strength of retired people to cope with expenses at a time when there is no regular income source.
Retirement mutual funds are specifically begun while any potential retiree is in the earning stage of their life. Such funds approach investing aggressively to accumulate a corpus that can be achieved in time for retirement. Hence, funds invest in equity that has a high risk, but gives degrees of high reward as well. As investors come closer to retirement, mutual funds may shift the focus of investment to more stable debt products.
Key Features of Solution Oriented Mutual Funds
Solution oriented funds come with advantages that are a large part of the features of these funds. You can find the features according to your capital allocation and general features highlighted below:
- Equity Solution Oriented Funds - One of the main features of solution oriented mutual funds is that they invest in sole equity if investors wish. These are funds for investors to hold on to for longer spans, and they can tide market volatility (so are risky), but offer potentially high rewards. If you want capital appreciation, such funds are great.
- Hybrid Funds - Balanced funds that equally invest in equity and debt instruments are called hybrid solution funds. They tend to give investors an optimal balance between rewards and risks. Solution oriented funds can be balanced according to the way investors tolerate risks, with more or less investment in either of the two kinds of assets, debt and equity.
- Debt Funds - Debt funds invest your capital in purely debt instruments and offer you less investment risk. If you want your principal to survive, and gain moderate returns, you can go in for debt funds. These also have the features of providing serious investors with a hedge against rising costs due to inflation.
- Lock-In Periods - If you wish to maintain discipline in your saving and investment, these funds have a five-year lock-in period.
- Periodic Dividends - Solution oriented mutual funds that invest in equities can afford to pay out dividends of companies they invest in from time to time.
- Financial Planning Needs Met - Solution oriented funds meet all your financial needs and are unique in the way they work to meet your distinctive goals.
Limitations of the Solutions Oriented Mutual Funds
As much as solution oriented funds give you value for money and help you plan for your future in a systematic way, there are some limitations that you should be aware of:
- Management of a Passive Nature - Solution oriented mutual funds are passive ways of investing your capital. A fund manager has a role to play in investing your capital and tries to do so by matching performance with benchmarks in indexes. Funds are usually composed of large-cap stocks in the companies that are top-performing. This may restrict the investment in value stocks which have the potential to give you major future returns.
- Closed-Ended Funds - Solution oriented schemes, typically, refer to closed-ended funds. This means that these mutual funds have a mandatory lock-in period that lasts 5 years. During this period, funds cannot be redeemed. Hence, the liquidity level is low in these funds. Moreover, such mutual funds could be the subject of regular net asset value changes.
- Taxation - Taxation is inevitable with these mutual fund schemes, and although dividends are not taxed, there is a capital gains tax that is applicable due to the sale and purchase of assets under mutual funds.
Top Performing Solutions Oriented Mutual Funds
In India, the following are the leading solution oriented mutual funds available:
- Nippon India Retirement Fund Wealth Creation Scheme
With AUM of Rs. 2,275 crore, this fund has a to-date CAGR of 8.1%.
- ICICI Prudential Retirement Fund Pure Debt Plan
This fund has AUM of Rs. 212 crore, and a CAGR of 5.7% for three years.
- Franklin India Pension Plan
With a to-date CAGR at 11.6%, this scheme has AUM of Rs. 441 crore.
- LIC MF Children’s Gift Fund
This is a great fund for a child’s future financial needs, and has a to-date CAGR of 4.3%.
- Tata Young Citizen (after 7) Plan
This fund has a till-date CAGR of 4.3%, with AUM of Rs. 256 crore.
Who should invest in solution oriented mutual funds?
As per the financial requirements of the investor, solution oriented funds are equipped to yield returns accordingly. Essentially, these funds represent long-term funds of an income kind. They help investors to grow a corpus to meet the specific aims of any given investor. However, partial withdrawal of these funds is not possible, and there is a lock-in time of five years. Hence, investors who have liquidity potential, other than these funds, can look at investing. Additionally, if investors wish to fulfil short-term goals, then debt funds are the way to go. The key is to start your investment journey early so you get enough time to collect a lot. You get satisfactory returns with debt funds, and associated risks are avoided.
Things to Consider when Investing in Solution Oriented Mutual Funds
Here are some things to remember while you go in for solution oriented funds:
- Your financial goals should be kept in mind while investing, and your investment must be aligned with this.
- You should always consider your fund’s past performance before you invest. Do your research well in advance.
- Make sure that your fund house and its operations and management are reliable.
- Keep a track of the costs involved while you invest. The exit load and expense ratio of any given fund is worth looking into.
Solution oriented mutual funds are an effective way to preserve and grow your capital according to your financial requirements for the future. They also ensure that you are a disciplined investor and a timely saver of your income. These funds stand in good stead to meet specific aims of investors.
- How does one invest in solution oriented mutual funds?
You can invest in solution oriented funds online at different brokerages and AMCs. You can also invest in these at some banks. All you need to do is to submit your KYC details and invest.
- What is the lock-in period regarding solution oriented mutual funds?
Any solution oriented fund has a lock-in period that lasts five years.
- Is there a way to save any tax while investing in solution oriented funds?
These funds have some tax benefits. Those that invest capital in equity funds and have a lock in period of five years, get a reduction in tax, upto Rs. 1.5 lakh under Section 80C of the Income Tax Act.
- Will solution oriented mutual funds help in collecting a retirement corpus?
Solution oriented mutual funds do help you to gather a corpus for your retirement, provided you begin to invest early, while you are earning a regular salary.
- Is there a minimum age limit to start investing in solution oriented mutual funds?
The minimum age for you to begin investing in mutual funds is 18 years.