Investing In Solution-Oriented Funds

Investing In Solution-Oriented Funds

In case you have not planned for building a corpus for your children’s education or generating substantial income post-retirement, it would be a wise step to consider solution-oriented funds. The article takes a closer look at what such funds entail and measures their performance



Financial planning is one activity that attracts the highest level of enthusiasm, not just because it concerns your money but also for the fact that it involves your emotions. And one of the most emotional things to plan for is the future of your children, whether it is for their education or marriage. Planning for retirement is also one such emotional phase for many even though it takes a while to register since it dawns upon you in full strength only when your retirement age draws near. The underlying factor here is that financial planning is a crucial aspect of your life. And none understood it better than life insurance companies which were the first to start providing plans central to health, retirement and your children’s future.

Taking a quick cue from what life insurance companies were offering, even mutual funds started providing financial solutions for these important aspects of an individual. They too now offer child and retirement-centric offerings which the Securities and Exchange Board of India (SEBI) has categorised as solution-oriented funds. The question is: are such funds good enough? Do they provide the much-needed financial security that you seek? In the following paragraphs we would help you understand what solution-oriented funds are, the different types of such funds, their performance and whether it makes sense to consider them or not.

Solution-Oriented Mutual Fund Schemes

As said earlier, solution-oriented fund is a new category of mutual funds as classified by SEBI. These funds have tried to create an easy path for an individual’s complex financial planning objectives. Actually, the schemes under this category have been there long before the formation of the category. Prior to SEBI’s re-categorisation norms, these funds were mostly categorised under balanced schemes. However, having a separate category aids a fund manager to follow unique strategies and deliver unconventional outputs.

The fund manager of a solution-oriented fund is free to furbish the portfolio with equity and debt and can also change the strategy for investors of different age groups. As the investment objective of such a scheme is long-term, a majority of the schemes under this category have a lock-in period as mandated by SEBI. According to SEBI, retirement funds should at least have a lock-in period of five years or till the age of retirement, whichever is earlier, and in case of children’s fund a minimum lock-in period is five years or until a child attains age of majority, whichever is earlier.

Types of Solution-Oriented Funds
Solution-oriented funds can be divided into two sub-categories as explained below:

1. Retirement Funds: Millions of investors look at financial independence in the post-retirement phase as one of the core investment objectives. In order to cater to retirement planning goals, various asset management companies (AMC) in India have launched plans for this specific purpose in a convenient, reliable and innovative manner. However, every retirement fund follows a different strategy to enhance the financial strength of retirees. The main purpose of retirement schemes is to provide financial assistance to the retirees by accumulating capital during their earning age.

Being long-term in nature, these funds follow an aggressive style of investment by selecting high-risk stocks in the portfolio when the investor is in the young and earning stage. As retirement is mostly more than 15 years away for such investors, high-risk stocks add significant value to the investment, allowing for the building of a better corpus by retirement. As the investor approaches the retirement age, the corpus is generally shifted to a moderate or conservative plan of the same scheme which has a lesser risky portfolio.

When the age of retirement is reached, the investor might have gained enough funds through the aggressive plan and now can have regular income via debt securities. These funds allow redemption either as a lump sum or through periodic withdrawals via the systematic withdrawal plan (SWP) which acts as a pension to maintain the financial independence of the investor in the post-retirement period. These funds have a lock-in period of five years and charge exit load if redemption is made before that or on reaching 60 years of age, whichever is earlier.2.

2. Children’s Funds : Getting the best education for children is probably on top of the list of priorities for parents in India. Moreover, it is getting expensive each passing day and out of reach for the common man. It can be a tough task to pay exorbitant fees for the education of children, especially when it comes to opting for post-graduation studies in a foreign country. This can create sudden financial imbalances in a parent’s savings, which may also force some children to compromise on their education or choose a different career.

Therefore, proper planning for a child’s education is important and one should take some necessary steps at the right time that can help in avoiding these kinds of inconveniences. Investing in children’s fund aims to create financial assistance for your child’s education. These solution-oriented schemes specifically aim for the financial planning of a child’s education and other related financial needs. Again, such schemes follow a unique strategy to accumulate the corpus at a slow and steady pace when the child is young and the expenses are low.

Later on, when the child reaches the age of attaining expensive education or any other financial goal, such an accumulated corpus can be utilised. Most of such funds have two different plans out of which one is equity-oriented and the other is debt-oriented. When the child is young an equity-oriented plan can be chosen which can deliver higher returns in the long term. Debt-oriented plans would be better for those who are about to complete their primary schooling. The investment between both the plans can be switched depending on the age of the child.

Performance

Having got a better understanding of what solution-oriented funds are, it’s time to look at their performance. This would help us understand whether at all it makes sense to invest in them.

As can be seen from the above graph, though in this rally the children and retirement funds performed as well as other equity funds, the interesting point is that they performed almost in line with other major equity categories even in the longer timeframe. However, among retirement and children funds, it was the latter which did quite well. Retirement fund was indeed a laggard. One must, in this case, also look at its risk parameters



The above table shows you the risk metrics of different equity mutual funds. As is seen, in terms of pure risk, standard deviation is lowest for solution-oriented funds. Even in terms of risk and return metrics like Sharpe ratio and Sortino ratio, solution-oriented funds posted better numbers. Therefore, based purely on investment in individual category, we can say that solution-oriented funds can be considered for investing provided you are investing in a fund performing at least at par with the category. You should also check the portfolio style of the fund that will help you to understand its expected return and volatility. Therefore the theory that selecting the right fund can help you to meet substantial cash outflows stands validated.

 Following is the list of top five solution oriented funds bases on last five year annualised returns. These are not our recommendation and are for illustration purpose only.

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