Nowadays, saving money is one of the highly advised and acknowledged practices all across the globe. That means the people who work hard and earn money, keep aside some amount of their income to save it for their future and contingent plans, such as retirement, education, marriages of their own, or of their children.
Further, in India, Mutual Funds have boosted financial stability and assisted investors in accomplishing their financial goals and objectives over the last three decades.
Furthermore, goals like long term and short term wealth creation and capital appreciation can be achieved by debt, pure equity, or by hybrid mutual funds. However, to achieve a composite goal, such as retirement planning or the child’s education, mutual fund Asset Management Companies (AMCs) deliver solution-oriented mutual funds, which are sternly designed to accomplish a specific objective.
In this learning blog, we will be learning regarding the Meaning of Solution-Oriented Mutual Funds, together with its types.
Meaning of Solution Oriented Mutual Funds?
The concept of Solution Oriented Fund is a newly announced category of mutual funds by the Securities and Exchange Board of India (SEBI). It has formed an easy trail for the financial planning of multifaceted long term objects which may or may not require modification in the approach with respect to time.
It shall be noted that the schemes or plans under this category of mutual funds have been functioning long before the creation of the category. Earlier, these funds were categorised under the head of equity or balanced schemes.
However, now this separate category permits all the fund managers to follow exclusive strategies and deliver unconventional outputs.
Further, the fund manager of a solution oriented fund is allowed to furbish the portfolio with both equity or debt tools and can even change the policy for investors of different age groups. Moreover, it shall be noted that some of the solution oriented mutual funds provide tax deductions as well. Also, the majority of the schemes and plans under this category have a lock-in period as the objective of investment is of long term.
Different Types of Solution Oriented Mutual Funds
The different types of Solution-oriented Mutual Funds are as follows:
One of the most upheld objectives for the majority of investors in the post-retirement era is Financial Independence. To accommodate the retirement planning goals, numerous AMCs (Asset Management Companies) in India have formulated plans for this specific reason that, too, in a convenient, reliable, and innovative manner. However, it shall be noted that every retirement fund trails a different strategy to improve the financial strength of the retirees.
Further, retirement mutual funds purpose to offer financial assistance to all the retirees by gathering the capital throughout the earning age of an investor.
Also, these funds pursue an aggressive style of investment by choosing the high-risk stocks in the portfolio when the investor is in the young and earning stage.
As the phase of retirement is majorly away for more than 15 years from such investors, high-risk stocks add a significant value to their investment by allowing more capital to be built for retirement planning. Furthermore, as the investor approaches the age of retirement, the corpus is usually shifted to a moderate or conventional plan of the same scheme, which makes it a less risky portfolio.
When the retirement age is reached, the investor would have gained enough funds over the aggressive plan and henceforth a defensive portfolio can preserve the gathered amount and add consistent incomes finished debt securities.
In laymen’s words, the risk factor in the portfolio of a retirement planning fund keeps minimising as the garnered amount due to high-risk tools increases. Moreover, these funds permit redemption either as a lump-sum or by way of periodic withdrawals, which act as a retirement pension to uphold the financial firmness of the investor in the post-retirement period.
Lastly, these funds have a total lock-in period of five years and levy exit load if in case redemption is made prior to retiring or reaching sixty years of age.
The Children’s Fund objects for the financial backing of the young ones till their education is finished. Nowadays, in India, the cost of education is getting expensive by each day and for a common person, it can be a hard task to pay massive fees for the education of their children. Also, the same can get on sudden financial inequalities on parents while some children with the potential to learn are lined from studying further and attaining their dreams because of the financial situation. Therefore, proper planning and required steps taken at the accurate time can aid in avoiding these kinds of disrupts.
Further, in India, Mutual Fund Asset Management Companies have planned mutual funds which precisely aim for the financial planning of children’s education and other financial requirements of the young ones.
Furthermore, these funds follow an exclusive strategy to collect the amount at a slow and steady rate when the child is young and the outlays are low. Afterward, when the child reaches at the age of getting expensive education or any other financial support is required, the capitalized capital can be used. However, it shall be noted that these funds may or may not use diverse plans with diverse portfolio structures to realize their objective.
Also, the period of investment must be commenced before or just after the birth of the child to design a better future for your young ones.
Moreover, most of the mutual funds dealing with children have 2 different plans out of which, one is equity-oriented and the other one is debt-oriented. If a child is of young age or is about to be born, then, in that case, equity-oriented plan can be chosen, as the same will deliver higher returns in the long-term. Further, the debt oriented plans are the best suited for those children who are about to finish their primary schooling. Also, it shall be noted that the investment between both the schemes and plans can be switched easily depending on the age of the said child.
Individuals who want to meet their future financial objectives and goals can select from the different solution-oriented mutual fund plans and schemes. However, they require to maintain the regular or lumpsum investments and cannot break the said investment before the expiry of 5 years lock-in period.
However, if in case an investor withdraws any amount from the plan or scheme before the maturity period, then, in that case, they need to pay off a higher expense ratio that can be around 4%.
Further, solution-oriented fund schemes are helpful for long term future goals, such as retirement, marriages, education of children, etc. as they have a tendency to evade short term variations of the marketplace. Staying invested for a lengthier period in such investment structures can avoid short term perils and get higher returns from it.
In a nutshell, having prior knowledge of the mutual fund industry can assist the investors to choose a good scheme or plan that can satisfy their financial goals and minimise any associated risks, all while receiving higher returns from their respective chosen fund scheme.