What are solution-based schemes?

These are tailored schemes offered to people with different financial objectives and risk tolerance. They provide capital appreciation to fund future expenses (retirement, marriage, education of children, etc.). These funds are the least aggressive and less prone to risk.

What are the financial goals aligned with them?

These funds are designed to cater to two specific needs: Retirement and securing a child’s future.

• Retirement: Open-ended scheme with a five-year lock-in period or until retirement age, whichever occurs first. There are no premature withdrawal benefits.
• Securing a child’s future: Open-ended scheme with a five-year lock-in term or until the child achieves maturity, whichever occurs first. Returns from these schemes are targeted to cover higher education or the child's marriage. Premature withdrawals are prohibited under the scheme.

What are the brighter sides (advantages) of these funds?

• Financial planning: It is a secure tool planned to cover hefty expenses in the future. Individuals aiming to plan financially for a corpus towards a target of retirement or child security can consider these schemes as their best option.
• Diverse asset allocation: Investors can choose wisely between debt, equity, or hybrid depending upon their risk tolerance. They can also consider diversity to avail maximum benefits from different investment options.
• Target-specific decisions: Fund houses typically offer a variety of plans in each category. Retirement funds, for example, could include conservative debt plans for people nearing retirement, balanced hybrid plans for middle-aged investors, and aggressive stock plans for younger investors.
• Limited risk and high yields: Solution-oriented mutual funds have the potential to yield higher returns than traditional savings instruments in addition to limiting risk. This is accomplished by following a predetermined investment strategy and asset allocation. Investors with a long-term investment horizon and a specific financial goal may benefit from these funds.
• Automatic asset adjustments: Certain funds have automatic glide paths that change the investment mix as the investor gets closer to their goal (for example, switching from stocks to debt), assisting in long-term risk management.

What are the darker sides (limitations) you need to know?

• Passive mutual funds: These are generally the predominant solution-oriented scheme. Such investment portfolios, to a large extent, are instruments of the country's most successful companies. Such corpus restricts individuals from investing in value securities selling at a discounted price in the market, which has the potential to generate manifold returns in the future.
• Closed-ended mutual funds: A solution-oriented investment scheme is usually a closed-ended mutual fund, where the investment is locked in for five years. It is difficult to invest in this type of fund because it has a frequently fluctuating net asset value as a result of the cyclical stock market trends.
• Rigid lock-in periods: Because funds cannot be withdrawn in the event of an emergency requiring a large amount of funding, such rigid lock-in periods are often disadvantageous for investors.

Is it right for you to have solution-oriented funds? Let's analyse!

• Investment Horizon: These funds are an excellent option for the long-term objectives of five or more years.
• Risk tolerance: The risk profile of the fund should be proportionate to your comfort level.
• Financial Savvy: If you enjoy researching and managing your portfolio, solution-oriented funds might be too restrictive.