Mutual Funds: Should you invest in solution-oriented funds? MintGenie explains

While some investors may find solution-oriented mutual funds to be a wise option, they are not the best option for everyone. Most importantly, investors may not achieve the goals for which they invested if the nominal returns on these funds are insufficient.

Abeer Ray
First Published3 Jun 2024
Solution-oriented funds provide investors with a range of benefits when they pursue particular long-term goals.
Solution-oriented funds provide investors with a range of benefits when they pursue particular long-term goals.

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.

Deciding between solution-oriented funds

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:

  • Retirement fund: This is an open-ended, solution-oriented mutual fund scheme with a five-year lock-in period or until retirement age, whichever occurs first.
  • Children’s fund: This is an open-ended, solution-oriented mutual fund plan with a five-year lock-in term or until the kid achieves maturity, whichever occurs first.

Why invest in solution-oriented funds?

Funds that focus on solutions provide flexibility to suit different schedules and risk tolerances. Below is a summary of their main characteristics:

  • Diverse asset allocation: Investors can choose these funds based on their risk tolerance as they are available in debt, hybrid, and equity options.
  • Target-specific decisions: Fund houses typically provide a range of plans in every category. Retirement funds, for instance, might include cautious debt plans for individuals getting close to retirement, balanced hybrid plans for middle-aged investors, and aggressive stock plans for younger investors.
  • Automatic asset adjustment: Certain funds feature automatic glide paths that, as the investor gets closer to their objective, change the investment mix (going from stocks to debt, for example), thereby assisting in long-term risk management.

All things considered, solution-oriented funds provide a simple way to use a preset asset allocation strategy to invest for specific goals.

Are solution-oriented funds worth considering?

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

Why invest in solution-oriented funds?

Solution-oriented funds provide investors with a range of benefits when they pursue particular long-term goals. Here are a few key benefits:

  • Goal-oriented approach: By concentrating on specific objectives, like retirement or a child’s education, these funds streamline the investment process and enable you to maintain a long-term outlook.
  • Pre-defined asset allocation: By creating a balanced combination of debt, equity, and hybrid instruments according to the intended goal and risk tolerance, fund management reduces complexity for individual investors.
  • Promotes self-control: Typically, solution-oriented funds have a 5-year lock-in period, or until the objective is achieved. This promotes self-control and dissuades rash choices that can imperil your financial goals.
  • Potential for higher returns (equity options): Compared to pure debt funds, equity-oriented solution funds may offer higher returns, which is particularly advantageous for long-term objectives requiring a sizable corpus buildup.
  • Automated rebalancing: Certain funds that are solution-oriented provide automatic rebalancing, which adjusts asset allocation over time to maintain the desired risk profile. As you progress toward your objective, this keeps your portfolio on course.
  • Convenience and simplicity: Solution-oriented funds offer a simple and straightforward way to save for specific objectives for those who would rather take a hands-off approach to investment management.

Alternative to solution-oriented funds

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.

Do it yourself

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:

  • Check how much living expenses and education currently cost. If your child is going to attend college abroad, for instance, calculate how much money you will require immediately to pay for all of the costs.
  • Assuming a reasonable rate of inflation, project how much you will need in, say, 20 years.
  • Calculate how much you might need to invest each month in different asset classes, such as debt, equity, gold, and real estate, depending on how much you want to return on your investment, how much risk you can take, and how many years you have left to reach your financial objective.
  • Make sure you evaluate each category/sub-category scheme using a variety of quantitative and qualitative criteria before selecting the best ones.

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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