Solution-oriented mutual funds – Should you invest in them?
Solution-oriented mutual funds are funds that have a portfolio that is meant to achieve a specific goal such as retirement planning or children’s education planning. It is a category of mutual funds which has unique features, objectives, and strategies to help investors meet a specific goal.
These funds are open-ended hybrid equity schemes that have a minimum lock-in period. For retirement plans, the lock-in period is for five years or up to the age of retirement, whichever is earlier, and for a child plan,the lock-in period is five years or till the time the child turns 18 years of age, whichever is earlier.These funds offer tax deductions under Section 80C of the Income Tax Act, 1961.
What are the advantages of solution-oriented mutual funds?
The main advantage of solution-orientedmutual funds for retirement is that you don’t have to buy an annuity-like you do for the National Pension Scheme (NPS) or any of the pension plans that life insurance companies provide. In the case of solution-oriented funds, you can opt for a systematic withdrawal plan to meet your regular cash flow needs once you retire. You could do this for children’s funds too.
Many mutual fund houses have structured funds specifically for meeting the expenses of children’s education. These funds offer different plans with different portfolio structures to achieve the long-term objective. The plans typically offer equity-oriented, balanced, and debt-oriented plans.
If the child is young, an equity-oriented plan can be chosen. The debt-oriented plans are for those whose children are about to complete their primary schooling. You can switch between the equity and debt plans depending on the age of the child.Learn how to mange your money & create wealth, Download your FREE eBook now
What are the disadvantages of solution-oriented mutual funds?
The disadvantages of these schemes are much more than the advantages.
The main drawback is the mandatory longer lock-in period before which you can’t get the funds.
- You can’t liquidate solution-oriented funds if you need money.
- You cannot switch to another scheme between the investment periodeven if the performance of the solution-oriented scheme lags the benchmark index.
The possibility of anaggressive mutual fundperforming better than the solution-oriented fund is high. There are many mutual funds with an almost similar portfolio and equity exposure of solution-oriented funds that have performed well. For instance, Tata Retirement Savings Fund, which is a solution-oriented fund, has given an annualized return of just 9.4% in the last five years while the SBI Equity Hybrid fund, which is an open-ended fund has given more than 11%.
So, financial advisors often recommend that it is better to invest in open-ended hybrid schemes with a strong portfolio and performance. This is because the asset allocation is very similar and one can easily exit from the scheme.
Who should invest in these schemes?
Solution-oriented mutual funds are devised for specific goals. These funds can simplify youroptions for investing for specificgoals. For long-term goals, equity-oriented schemes must be chosen and for short-term goals, debt-oriented can be selected.
These schemes might be helpful for those investors who want to create their retirement savings or children’s education/marriage savings through mutual funds and are not very confident about fund selection, asset allocation, and portfolio rebalancing.These mutual funds have the potential to offer higher returns when compared to plans offered by traditionallife insurance companies. However, they might not provide returns that are higher than that of open-ended equity funds.
Those investors who get affected by volatile market conditions can invest in these funds as these funds have a longer lock-in period. Note that the direct plans of solution-oriented mutual funds have very low expense ratios, which might eventually lead to higher returns.
Should you invest in Solution-Oriented Mutual Funds?
Note that solution-orientedschemes cannot replace open-ended equity schemes as open-ended funds offer better returns and are more liquid. Don’t assume that the mandatory lock-in period gives the fund manager more leeway in managing schemes and that there will be no redemption pressure.
Don’t think that solution-oriented funds will help you do away with the need to draw a personalized asset allocation plan. These funds don’t let you sit back and enjoy your life without compromising your financial goals. Why? Because drawing a personalized asset allocation plan and following it diligently will help you accomplish your envisioned financial goals. This is especially true if you take the help of a financial planner such as mymoneysage.in.
Although solution-oriented funds are for long-term, ignoring your personalized asset allocation could prove perilous and you might miss your financial goals completely despite having invested in these funds.
To conclude, solution-oriented mutual funds are an easy path for investors with specific objectives that they need to invest for only if they think there are no other better funds available. The risk associated is lower if the investment tenure is longer.