Solution-oriented funds: Should you invest in them?

As investors, we often seek opportunities to grow our wealth that would help us meet our financial goals effectively. In this pursuit, mutual funds offer a wide array of options catering to various investment objectives. Solution-oriented funds are a relatively recent addition to the mutual fund landscape in India. They are designed with a specific financial solution in mind, making them distinct from other fund categories.
In this article, we will explore solution-oriented funds, their types, and whether they should be a part of your investment strategy.

• Table of contents

1. What are solution-oriented funds?
2. Key features of solution-oriented funds
3. Types of solution-oriented funds in India
4. Benefits of solution-oriented funds
5. Who should invest in solution oriented funds?

What are solution-oriented funds?

Solution-oriented funds, as the name suggests, are mutual fund schemes designed to address specific financial needs or goals. These funds are introduced with a predetermined solution, and their investment strategies revolve around achieving that solution. They come with a lock-in period as mandated by the Securities and Exchange Board of India (SEBI).

Key features of solution-oriented funds

Solution-centric approach

These funds are structured to help investors achieve a particular financial goal, such as retirement planning or higher education expenses, over the medium to long term.

Lock-in period

Solution-oriented funds have a mandatory lock-in period of five years, offering a disciplined approach towards meeting the predefined financial objective.

Tax benefits

Investors may also enjoy tax benefits, as solution-oriented funds are eligible for Long-Term Capital Gains (LTCG) tax after the lock-in period, which is currently taxed at a lower rate.

Types of solution-oriented funds in India

In India, solution-oriented funds primarily come in two types:

Retirement funds

Retirement funds are mutual funds that are specifically designed to address long-term financial goals, such as retirement planning. They typically come with a lock-in period of five years or until the investor reaches the age of 60, whichever is earlier. These funds often employ a dynamic asset allocation strategy, gradually shifting from higher-risk assets to lower-risk assets as the investor approaches retirement age. They are suitable for individuals who want to save for their retirement and are looking for a tax-efficient way to do so.

Children's education and marriage funds

These funds aim to provide for a child's higher education or marriage expenses. They offer a structured approach to building a financial corpus for these specific needs.

Benefits of solution-oriented funds

Investing in solution-oriented funds offers several benefits, making them an attractive choice for investors with the corresponding financial goals:

Disciplined saving

The mandatory lock-in period of five years instils a sense of discipline and discourages impulsive withdrawals. This helps in maintaining a long-term investment outlook, which is often crucial for achieving goals like retirement or funding a child's education.

Focused approach

Solution-oriented funds are specifically designed to cater to distinct financial needs. This ensures that the fund's investment strategy aligns with the chosen solution, increasing the likelihood of meeting the intended goal.

Tax efficiency

After the lock-in period of five years, solution-oriented funds are eligible for Long-Term Capital Gains (LTCG) tax, which currently attracts a lower tax rate. This can lead to tax savings for investors, especially in the case of retirement funds.

Professional fund management

These funds are managed by experienced fund managers who understand the nuances of investing to achieve specific financial goals. Investors benefit from their expertise.

Diversification

Solution-oriented funds typically invest in a diversified portfolio of assets, reducing concentration risk. This diversification can help mitigate the impact of market volatility while working towards long-term financial goals.

Who should invest in solution oriented funds?

Individuals planning for retirement

Solution-oriented funds, by design, are aimed at helping individuals save for their retirement. If you have a long-term retirement goal and want to build a substantial corpus to secure your post-retirement financial needs, these funds can be a suitable choice.

Long-term investors

Investors who have a long investment horizon and are willing to commit their money for the medium to long term (typically 5 years or until the age of 60) can benefit from solution-oriented funds. The lock-in period enforces discipline and discourages premature withdrawals.

Professional fund management

Solution-oriented funds are managed by professional fund managers. If you prefer to delegate investment decisions to experts and want your portfolio to be actively managed, these funds can be a good choice.

Conclusion

Solution-oriented funds offer a structured and goal-oriented approach to investing. They are particularly well-suited for investors with specific financial objectives like retirement planning or saving for their children's education and marriage. However, it's essential to carefully evaluate your own financial goals and risk tolerance before investing in solution-oriented funds, as they come with a mandatory lock-in period. Consulting with a financial advisor can help determine whether these funds align with your unique financial circumstances and goals.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.