A financial goal is essential when investing in mutual funds or any other sort of investment. A specific goal, such as saving for retirement, a child’s education, or a down payment on a home, might help guide your decisions. Knowing your goal enables you to select the appropriate investment horizon (short-term or long-term) and a mutual fund with a risk profile and asset allocation that match your timeframe.
Individuals with different financial goals have different risk tolerance levels. For example, because retirement savings have a longer investment horizon, they can afford a higher risk profile with the potential for greater returns. On the other hand, a short-term objective like vacation savings might require a lower-risk investment to protect the principal. In the absence of a clear objective, you may end up choosing a risk profile that isn’t appropriate for your needs.
This highlights the need for solution-oriented mutual funds. These funds are specifically designed to help investors achieve two key financial goals: Retirement planning and securing their children’s future. The kinds of solution-oriented mutual funds that are offered in India are listed below:
Funds that focus on solutions provide flexibility to suit different schedules and risk tolerances. Below is a summary of their main characteristics:
All things considered, solution-oriented funds provide a simple way to use a preset asset allocation strategy to invest for specific goals.
The proof of the pudding is in the eating. Mutual fund investors like to make choices based on past-year returns. An assessment of past year returns by some of the listed solution-oriented funds reveals a dismal performance of these funds in the past five to 10 years. The fact that these funds would need time to achieve the desired corpus compared to other equity funds makes these funds unpopular.
Many investors put their money in these funds hoping that they would provide them the much-needed financial solution to their various life goals, viz., children’s higher education, marriage, retirement, etc. Assuming that one has invested in any of these funds for 20 years to pay for their children’s higher education, the following illustrates the nature and quantum of returns that can be expected from these funds.
Name of the fund | 10-year returns (in %) | Monthly SIP (in Rs) | Estimated Returns (in Rs) | Maturity Amount (in Rs) |
HDFC Children’s Gift Fund | 15.88 | 5000 | 73,97,298 | 85,97,298 |
UTI Children’s Equity Fund | 14.56 | 5000 | 59,21,367 | 71,21,367 |
ICICI Prudential Child Care Fund | 14.11 | 5000 | 54,84,045 | 66,84,045 |
Tata Young Citizens Fund | 13.76 | 5000 | 51,64,490 | 63,64,490 |
SBI Magnum Children’s Benefit Fund | 12.49 | 5000 | 41,40,293 | 53,40,293 |
LIC MF Children’s Fund | 10.58 | 5000 | 29,31,353 | 41,31,353 |
Source: AMFI as of May 31, 2024 |
Solution-oriented funds provide investors with a range of benefits when they pursue particular long-term goals. Here are a few key benefits:
Fund performance of solution-oriented funds is not too impressive, which means that investors may not have much to look forward to. Additionally, even though they are simple, solution-oriented funds might restrict your ability to customise your investing approach. One, your investment horizon and risk tolerance may not be fully matched by the allocation. Compared to individual funds, some solution-oriented funds may have higher fees. You have more control over the allocation of your equity and debt, but it might require more work.
However, investors looking to stay invested for the long term may consider a diversified array of funds consisting of large-cap funds, small-cap funds, multi-cap funds, value funds, aggressive hybrid funds, and more with a dash of one or two thematic funds depending on risk appetite.
Investing in diversified mutual funds offers investors the advantage of customising the portfolio to suit their investment horizon and risk tolerance. For instance, if an investor wants to adopt a more aggressive approach to boost portfolio returns, they might think about increasing their exposure to the categories of small and mid-cap funds. In a similar vein, they can add large-cap funds to their portfolio if their objective is to receive steady returns from stocks.
Establishing a customised asset allocation strategy might be a more efficient way to start building your financial future. The asset allocation plan acts as a roadmap, guiding the amount of risk you take in the form of equities versus debt for stability to accomplish your goals within the time frame you designate. Selecting particular schemes within each asset class enables you to potentially increase returns while aiming for particular investment goals.
The following approach can help you achieve your financial objectives:
However, there’s no one-size-fits-all approach. Your unique situation, level of risk tolerance, and financial objectives will dictate the optimal asset allocation and schemes. For individualised guidance, consult a financial expert if you’re unsure of where to start.
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