Everything you need to know about solution-oriented mutual funds

Mutual funds are among the most popular investment products for goal-based investing. You can achieve your short-, medium-, and long-term financial goals by strategically investing in various types of mutual funds. There is a mutual fund to cater to every type of investor in terms of their goal, risk appetite, and investment horizon.

The major types of mutual funds are equity funds, debt funds, and hybrid funds. They are further classified into a wide range of schemes, ranging from large-cap funds and international funds to liquid funds and aggressive hybrid funds. Moreover, there are tax-saving funds such as equity-linked savings schemes (ELSS) and gold mutual funds. Given this variety, mutual funds represent a great avenue for building an investment portfolio that covers multiple asset classes, financial goals, and investment horizons. However, before you invest in a mutual fund, it’s essential to understand which schemes are suitable for you and devise a financial plan to ensure that your investments can truly prove to be fruitful.

While a carefully crafted mutual fund investment strategy can help to achieve your financial goals, it may be tricky to come up with such a strategy in the first place. This is especially true if you are new to investing or do not have the time and knowledge needed to draw out a plan. Nonetheless, it is important to invest in the right type of mutual fund and in the right way to meet specific financial goals. In this light, what can you do if you are stuck at the planning stage? In such a case, solution-oriented funds could be the answer.

What are solution-oriented mutual funds?

Solution-oriented mutual funds are one of the five mutual fund categories according to the Securities and Exchange Board of India (SEBI). They are offered by different Asset Management Companies (AMCs) to help investors achieve specific long-term goals such as building a retirement corpus or funding their children’s education.

Based on the specific goal, fund managers follow an investment strategy that is suited for maximizing returns for that goal in the given investment horizon while considering the possible risks. Most solution-oriented funds are either equity funds or hybrid funds, and the fund managers are free to use the strategies and tools they see fit to help investors achieve the specified goal/investment objective.

Solution-oriented funds are a great starting point if you wish to start saving for large, one-time events, such as funding your child’s education or wedding, because these funds are designed carefully by considering such specific financial requirements. For the aforementioned goals, it’s essential to invest strategically over the long term so that you may be able to accumulate an adequate sum at the right time to fulfil important needs that you and your family may have. Let us delve into the features of solution-oriented mutual funds to obtain a better understanding.

Features of solution-oriented mutual funds

The exact features of a solution-oriented fund depend on the specific scheme and the AMC offering it. However, typically, solution-oriented mutual funds have the following features:

· Closed-ended

Solution-oriented funds can be either open-ended or close-ended funds, but they are usually close-ended. Close-ended mutual funds are not available to investors for investing at all times but only when the AMC launches a New Fund Offer (NFO). They have a predetermined maturity period, and investors must retain their holdings over this period.

· Hybrid

Many solution-oriented funds are hybrid funds, that is, they invest in both equity and debt instruments to balance the risk-return profile of the two asset classes and provide investors best of both the worlds—capital appreciation from equity instruments and capital preservation from debt instruments. For this reason, hybrid solution-oriented funds are typically safer than pure equity funds, but their returns may be lower than those of pure equity funds.

· Come with lock-in periods

Most solution-oriented funds have a lock-in period. Usually, mutual funds do not have a lock-in period and offer high liquidity because you can sell your mutual fund units in the secondary market at any time. However, typically, solution-oriented funds have a lock-in period of five years. Even those funds that do not have a lock-in period may charge an exit load for premature withdrawal of your mutual fund units. However, because solution-oriented funds cater to long-term goals, the lock-in period is generally not an issue.

· Flexibility

Solution-oriented funds, like other mutual funds, offer flexibility in terms of the payment mode—lumpsum or Systematic Investment Plan (SIP). If you opt for the lumpsum mode, you need to make a one-time investment in the solution-oriented fund of your choice. You can choose this mode if you have a large investible corpus on hand. If not, you can choose the SIP mode and invest small amounts regularly over a predetermined period.

· Typically passively managed

Solution-oriented funds are typically passively managed. This means that the fund manager attempts to mimic the performance of the fund’s benchmark index and, hence, the composition and holdings of the solution-oriented fund are in line with those of its benchmark index. Usually, solution-oriented funds include stocks of established, large-cap companies.

Types of solution-oriented mutual funds

Most AMCs offer solution-oriented funds for two to three long-term goals that are common for most people.

1. Child gift fund

Most parents’ primary savings and investment goals revolve around providing a secure future to their children. Hence, one of the types of solution-oriented funds offered by AMCs is child gift or child care fund. The purpose of investing in this fund is to build a substantial corpus over the long term so that when your child comes of age, this money can be used for their education, higher education, or wedding.

Education and wedding are the two milestones which parents typically help their children with, and the completion of these milestones requires a large sum of money. Investing bit by bit toward these milestones over time and letting returns compound is an effective way to amass the required amount.

2. Retirement planning fund

Another major long-term goal that all investors focus on is building an adequate retirement corpus. Hence, AMCs offer solution-oriented funds for retirement planning. To secure your golden years, it’s crucial to have enough money so that you can sustain your lifestyle and necessary expenses, even when you no longer have an income.

For this purpose, investing in a mutual fund from an early age, when you still have decades of income-earning years ahead of you, would be a wise decision. Solution-oriented funds, with their lock-in periods and debt and equity allocation, can help you build your retirement corpus in an easy and convenient manner over the long term.

Benefits of solution-oriented mutual funds

· Support financial planning

Investing without financial planning is not fruitful. However, at times, you may not have the time or the knowledge to create a solid financial plan, even if you know the goals for which you wish to invest. In such a case, solution-oriented funds come in handy because they are designed to help you meet specific long-term financial goals. The way in which a fund manager invests, asset allocation, and other investment moves are all determined by the investment objective, whether it is building a retirement corpus or funding your children’s education.

· Lower risk

Most solution-oriented funds are hybrid funds. Because such funds invest in both stocks and debt instruments like bonds, the carry lower risk than that of pure equity funds, which invest primarily in stocks. Hence, with debt investments, solution-oriented funds hedge the stock market’s volatility. Meanwhile, the lock-in period of five years allows your investment to iron out short-term market fluctuations and recover so that you do not incur any capital loss.

Limitations of solution-oriented mutual funds

· Lack of liquidity

Because most solution-oriented funds have a lock-in period of at least five years, they are illiquid for that period. Hence, it’s important to invest in solution-oriented funds only after you have a sufficient emergency fund—money that can cover 6 –12 months’ worth of living expenses—parked in a highly liquid avenue such as fixed deposits or liquid funds. This is because in an emergency, you may not be able to access the money you have invested in solution-oriented funds.

· Returns

A few solution-oriented funds may not only provide returns that are lower than those of equity funds but also lower than those of aggressive hybrid funds. For this reason, in some cases, aggressive hybrid funds may emerge as a better option compared to solution-oriented funds. However, the returns of any scheme are not guaranteed, and past performance is not an indicator of future returns. You need to carefully study various fundamentals of a mutual fund scheme before you decide to invest in it, regardless of whether it is a solution-oriented scheme, a pure equity fund, or an aggressive hybrid fund.

Should you invest in solution-oriented mutual funds?

You may park a certain amount of your investible corpus in solution-oriented funds if you are planning to save and invest for events in the future that require a hefty sum of money but are not confident about coming up with your own investment strategy. If you wish to play a more passive role in building your portfolio, solution-oriented funds could serve you well.

However, if your risk appetite is higher, you could consider investing in open-ended equity mutual funds that may provide higher returns in the long term and better liquidity. Moreover, you could consider consulting a financial advisor to devise an investment plan for your long-term goals. This could be more effective because the financial advisor can guide you to invest your money in specific mutual funds that are aligned with your goals and risk tolerance to maximize returns and minimize risk.

If you do not have access to a financial expert right away, you could consider investing in solution-oriented funds to avoid delaying your investment journey. For long-term goals, the earlier you start investing, the better it is because of the power of compounding. Compounding allows your money to earn you more money by attracting returns on your returns and facilitating wealth generation over time.

It’s important to remember that your investment portfolio should be well-diversified. Hence, all of your money should not be invested in one type of mutual fund or one type of investment product. Instead, your money should be spread across different asset classes that cater to different financial goals such as wealth creation or tax-saving. This is because a well-diversified portfolio reduces investment risk and helps to better protect your money from different systemic risks.

Source: Axismf Research
Note: Views and opinions contained herein are for information purposes only and should not be construed as investment advice/ recommendation to any party or solicitation to buy, sale or hold any security or to adopt any investment strategy. It does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient should exercise due caution and/ or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.

Statutory Disclaimer: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC). Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

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