Reading time: 7 minutes
Subscribe

Solution Oriented Mutual funds – Meaning, Benefits, and Limitations

solution oriented mutual funds
solution oriented mutual funds

Introduction

Solution Oriented Mutual fund is designed to help an investor achieve composite goals like marriage, child education, retirement planning are achieved. Of late there have been various categories of the fund in India like equity fund, debt fund and hybrid fund which helps investors in wealth creation. In this light, SEBI introduced a special category of funds called Solution Oriented Funds or solution based funds.

Mutual Funds in India help an investor achieve financial stability. Solution Oriented Mutual Funds help investors achieve long term goals such as retirement planning funds, education, marriage, etc. The risk is lower is such funds as the investment tenure is longer. These mutual fund schemes have unique features and objectives.

Solution Oriented Mutual Funds are designed in such a way that investors can easily meet their future lump sum obligations. The future obligation is fulfilled by maturing these funds at a specific tenure. Accordingly, The Asset Management Company in India offers these funds to help its investors achieve a particular financial objective.

What are Solution Oriented Mutual funds? 

SEBI has recently introduced a special category of funds called the Solution Oriented Mutual Funds. This kind of planning funds gives the investors flexibility to design their mutual fund portfolio. This will further help an investor meet specific future obligations like child marriage/gift/child education or retirement planning goals. 

Though this scheme is relatively new, schemes to invest under this category are offered under the equity fund or balanced advantage fund schemes even before its formation. However, the introduction of a separate category helps fund managers special strategies to generate higher returns.

Solution Oriented Mutual Funds gives an investor the liberty to switch between equity mutual funds or debt funds. A fund manager may change the strategy as per the age of the investor. Some of these funds also come with tax saving benefits. However, being long term in nature there is a lock-in period of 5 years. 

Features of Solution Oriented Mutual funds

The key features of Solution Oriented Mutual Funds are the following:

  • Solution Oriented Mutual fund helps an investor to meet the specific financial objective. These funds further help overcome huge financial expenses that may arise in the future like retirement, child education, marriage.
  • Certain Solution Oriented Mutual Funds offer tax saving benefits. The funds invested in Equity funds have a lock-in period of 5 years. Hence, under section 80C the taxable income can be reduced by a maximum of Rs. 1.5 Lakh.
  • In Solution Oriented Mutual Funds, the investment is generally for a long duration. 
  • These schemes are close-ended mutual fund schemes. Hence, cannot be liquidated at the time of emergencies.  
  • There is a minimum lock-in period of 5 years. Hence, one cannot withdraw investments made in these mutual fund schemes before a period of 5 years.

Types of Solution Oriented Mutual funds

Solution oriented funds are funds where the investment is for a future goal or objective. Hence, based on the investment objective of an investor, SEBI has divided these funds into two categories or types. The types of Solution Oriented Fund are:-

Retirement Funds

Every individual wish to achieve financial independence even when he/she has no means of income. This is one of the key objectives of many individuals. However, in order to cater to the needs of investors in retirement planning, Asset Management Company offers customised schemes to invest in order to help investors achieve their retirement goals. 

Hence, every Retirement Mutual scheme aims at providing retirement financial goals to its investors. This is achieved by accumulating funds during their earning period. These funds follow an aggressive way of investment. They select high-risk stocks in the mutual fund portfolio during his earning age. This further helps in building a retirement corpus for the investor.

However, once the investor attains the retirement age, the corpus so built is usually shifted to a more conservative and moderate plan. Though, the scheme remains the same market risk reduces. 

The Retirement Funds allows an investor to redeem either the lump sum amount or periodic withdrawals which would act as a pension. This will help the investor maintain his financial stability on retirement. These funds have a lock-in period of 5 years and also includes certain charges on early withdrawals.

Children’s Funds

As the expense of education in India is increasing with leaps and bounds, it has become very necessary to save for the education of the children. It can be very burdensome for a middle-class family to pay huge school fees. This may also debar a highly potential child from pursuing further education due to lack of capital.

Thus, proper planning and necessary steps taken at the right time may help overcome these difficulties. Various Asset Management Company in India has customised schemes keeping in mind the educational needs of the children. These schemes work according to the age of the child.

Most Mutual Fund schemes offering children funds offer two different plans. The equity-oriented plan which is ideal for a young child or a child who is about to be born. The equity scheme generates high returns and is usually for long term financial goals. 

On the other hand, debt-oriented plans are apt for children completing their primary education. Thus, one can select these plans keeping in mind the age of the children.   

Things to remember before investing

It is very important for an investor to do proper research and analysis before investing. The various factors like the risk associated with the investment, the financial goal and the returns accrued should be considered before making the investment.

The following are some of the most important things an investor should remember before investing in a Solution Oriented Mutual Funds:
  1. Financial Goal: In Solution Oriented Mutual Funds a particular financial objective of an investor is looked upon. Every investor has a particular financial goal to achieve. Hence, it is very important to analyse whether the investment objective is aligned with the financial goal of the investor.
  2. Fund Performance:  Before making an investment one should thoroughly research the performance of the fund. A consistently top performing fund will ensure good growth for the investors.
  3. Fund House and Management: With various fund houses operating, it becomes very important to choose the right fund house with experts at the management wheel. This will ensure the allocation of funds in the right channel.  With expert fund managers steering your investment in the right path, the investment will flourish even during adverse market conditions.
  4. Costs Involved: Every mutual fund comes at a certain cost. These costs include the entry and exit load, management fee, expense ratio etc. Hence one should keep in mind the cost involved before making the investment.

Who should invest in a Solution Oriented Mutual funds?

Solution Oriented Funds are customisable as per the future financial requirement of an investor. These funds are long term income funds. This fund helps in building a corpus which further ensures adequate capital for a specific objective. 

However, before investing in solution oriented mutual funds the investor should have sufficient liquidity of capital. In these funds, partial withdrawal option is not available before the completion of 5 years. The investment duration in these funds should be higher in order to allow the fund to grow. 

Also, investors who choose to invest for a short term goal should consider debt-oriented funds. Investors who prefer these funds should start investing as early as possible. This will generate satisfactory returns over a longer duration as the risk associated with these funds is lower if the tenure is longer. 

Conclusion 

Solution Oriented Mutual Funds are illiquid close-ended funds with a lock-in period of five years. Accordingly, these funds are suitable for investors who are looking for investment for a longer duration investment with a specific objective in mind. Investors enjoy tax saving by investing in solution-oriented funds. Further, these finds generate higher growth given the longer tenure investments horizon. However, all fund investments are subject to market risk. 

Published on September 9, 2020