Solution-Oriented Mutual Funds: Are They a Prudent Choice for Planning Goals?

May 31, 2024 Mutual Fund

The importance of investing in mutual funds with a financial goal in mind is well known. Investing in an ad hoc manner would be akin to sailing in the ocean without a sense of direction; you could be a lost man at sea.

With a detailed financial plan and a prudently charted asset allocation in mutual funds, you can comfortably accomplish your vital financial goals viz. your child’s education needs, his/her wedding expenses, and your retirement.

However, it can be overwhelming to know where to start and how to create a plan that works for you. Taking note of this, mutual fund houses have been offering special mutual fund schemes that cater to the specific needs of individuals. Such funds are known as solution-oriented mutual funds.

What are solution-oriented mutual funds?

Solution-oriented mutual funds are designed to help investors meet two crucial financial goals viz. retirement planning and securing children’s future. Below are the types of solution-oriented mutual funds available in India:

Retirement Fund – It is an open-ended solution-oriented mutual fund scheme having a lock-in period of 5 years or till retirement age (whichever is earlier).

Children’s Fund – It is an open-ended solution-oriented mutual fund scheme having a lock-in period of 5 years or till the child achieves age of maturity (whichever is earlier).

The portfolio of a solution-oriented fund can be equity, hybrid, or debt oriented. Some mutual fund houses provide multiple offerings within each type to help investors select the most suitable scheme. For instance, under Retirement Funds they may offer equity plans for young investors, hybrid plans for middle-aged investors, and debt plans for those nearing retirement. They may also provide the option to automatically switch between these schemes (for example from equity to debt) based on the investor’s age.

What are the benefits of investing in solution-oriented funds?

It is often observed that investors end up utilising the corpus built for the long term to meet short-term commitments or during phases of financial constraints. If such impulsive decisions are not controlled it can hinder your financial progress. Thus, one of the key benefits of solution-oriented funds is that the mandatory lock-in period of 5 years instils discipline, encouraging investors to stick to their long-term goals.

The lock-in period of solution-oriented funds ensures that your corpus stays invested through market highs and lows to generate significant capital appreciation over the long run. Subsequently, investors can benefit from the power of compounding of wealth over a period.

How have solution-oriented funds performed?

The table below shows the performance of equity-biased solution-oriented funds (both Retirement Funds and Children’s Funds). It includes schemes that have allocated over 75% of their assets in equities.

As we can see, most solution-oriented funds have trailed the broader Nifty 500 – TRI index, while some have also underperformed the Nifty 100 index. They have also trailed the category average returns of Large Cap Funds and Flexi Cap Funds. HDFC Retirement Savings Fund-Equity Plan and ICICI Pru Retirement Fund-Pure Equity Plan were among the few schemes that outpaced the index by a notable margin.

Performance of equity-biased solution-oriented funds over 5 years

The securities quoted are for illustration only and are not recommendatory.
Returns are point-to-point and in %. Direct Plan-Growth option.
Data as of May 27, 2024
(Source: ACE MF, data collated by PersonalFN) 

In the case of equity hybrid solution-oriented funds, HDFC Children’s Gift Fund, HDFC Retirement Savings Fund-Hybrid-Equity Plan, and ICICI Pru Retirement Fund-Hybrid Aggressive Plan performed better compared to the CRISIL Hybrid 35+65 – Aggressive Index as well as the Aggressive Hybrid Fund category average. The outperformance rate for equity hybrid solution-oriented funds has been better compared to pure equity solution-oriented funds.

Performance of equity hybrid solution-oriented funds over 5 years

The securities quoted are for illustration only and are not recommendatory.
Returns are point-to-point and in %. Direct Plan-Growth option.
Data as of May 27, 2024
(Source: ACE MF, data collated by PersonalFN) 

As regards debt hybrid solution-oriented funds, most schemes displayed performance nearly in line with the comparable benchmark indices, while a few schemes such as Aditya Birla SL Retirement Fund-50 and Nippon India Retirement Fund-Income Generation trailed the benchmark index.

Performance of debt hybrid solution-oriented funds over 5 years

The securities quoted are for illustration only and are not recommendatory.
Returns are point-to-point and in %. Direct Plan-Growth option.
Data as of May 27, 2024
(Source: ACE MF, data collated by PersonalFN) 

Thus, barring a few schemes, the performance of solution-oriented mutual funds has not been noteworthy when compared to the relevant benchmark indices and diversified mutual fund schemes.

Solution-oriented funds vs diversified funds: What should investors choose?

While the lock-in period in solution-oriented funds ensures that you, the investor, stay invested for the long term to reap the benefit of capital appreciation, if the scheme underperforms you may fall short of the desired corpus.

On the other hand, when you opt for diversified mutual funds such as Large Cap Funds, Flexi Cap Funds, Value Funds, Aggressive Hybrid Funds, etc. you have the option to switch or redeem if the scheme falters (owing to various reasons) and move to the best-performing and suitable schemes. This nimble approach usually helps potentially clock an efficient return on investment and accomplish the envisioned financial goals.

Another benefit of opting for diversified mutual funds is that investors can tailor the portfolio as per their risk profile, and investment horizon. For instance, if an investor wants to adopt an aggressive approach to boost the portfolio returns, they can consider adding exposure in Mid Cap Fund and Small Cap Fund categories. Likewise, if their goal is to earn stable returns from equities, they can add Large Cap Funds to their portfolio.

Moreover, investors can set the desired equity-debt allocation ratio as per their preference by selecting the suitable schemes across asset classes, which may not be possible with solution-oriented funds.

Final thoughts

Drawing a personalized asset allocation plan and then diligently choosing the most suitable schemes for the portfolio is a must for achieving your envisioned financial goals.

Therefore, don’t just simply depend on Solution-oriented Mutual Fund Schemes; they aren’t a definitive solution to plan for your financial goals. Instead select among the diverse categories and sub-categories of mutual funds as per your risk profile, investment objective, and investment time horizon would help you succeed in providing for your child’s future needs and living a blissful retirement.

[Read: What Should Be Your Mutual Fund Asset Allocation Strategy Amid Rising Global Uncertainty]

Broadly, here’s the approach to achieving your financial goals:

• You must know the cost of living and education expenses in today’s terms. For example, if you are planning to send your child abroad for higher studies, estimate the corpus you will need currently to cover all the expenses.
• Assuming the rate of inflation appropriately, then forecast the amount you would need in future, say 15 years down the line.
• Thereafter, arrive at the amount you might need to invest every month in various asset classes such as equity, debt, gold, and real estate, depending on the return expectations, risk appetite, and the years left to fulfil the financial goal.

Ensure that you choose the best schemes from each category/sub-category after evaluating them on various quantitative and qualitative parameters.

Watch this video to know the 7 factors to choosing the best mutual funds:

Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Registration granted by SEBI, Membership of BASL and certification from NISM no way guarantee performance of the intermediary or provide any assurance of returns to investors.

This article first appeared on PersonalFN here