Solution-oriented funds are a category of mutual fund scheme with unique features than that of other funds. Essentially, these funds design their portfolio to achieve certain specific goals such as retirement planning, child's education, etc. These funds have unique features, objectives and strategies. Let us discuss the same in detail.
Retirement planning funds
Most of the investors aim for financial independence in the post-retirement period. To cater to this particular objective, various fund houses have evolved plans. These funds generally follow an aggressive style of investment by selecting high-risk stocks in the portfolio when the investor is in young and earning stage. Such a strategy adds significant value to the investor.
As the investor approaches the retirement age, the corpus is generally shifted to a moderate or conservative scheme which has a less risky portfolio. These funds allow redemption either as a lumpsum or through periodic withdrawals which act as a pension to maintain the financial stability of the investor during their post-retirement life. These funds have a lock-in period of five years and charge exit load if redemption is made before retiring or reaching 60 years of age.
This type of fund aims for the financial assistance of the young ones until their education is completed as education is getting expensive. Many mutual fund houses have structured funds specifically for the financial planning of children's education and other financial needs of the young ones. These funds follow a unique strategy to gather the corpus at a slow and steady pace when the child is young, and the expenses are low.
These funds use different plans with different portfolio structure to achieve their objective. Generally, the investment starts right after the birth of the child and these mutual funds have plans to invest in equity or debt. If the child is young, then equity-oriented plan can be chosen which can deliver higher returns in the long term. The debt oriented plans are for those children who are about to complete their primary schooling. The investment between both the plans can be switched depending on the age of the child.
Who should invest?
Solution-oriented mutual funds are devised for a specific goal. The portfolio of these funds is designed in such a way that the investor need not invest in any other scheme for that specific objective. These funds can simplify financial planning for specific goals. For long-term goals, equity-oriented schemes must be chosen as these funds can be volatile for short-term investments.
Those who plan to invest in solution-oriented mutual funds for short-term goals must choose the debt-oriented funds. The investment tenure in solution-oriented mutual funds must be long enough to allow the investments to amplify.
To conclude, solution-based funds are created as an easy path for the investors with specific objectives. However, the risk associated is lower if the investment tenure is longer and the returns are always subject to market risk.
The writer is a professor of finance & accounting, IIM Tiruchirappalli