Should You Invest in Mutual Funds That Offer Investment Solutions?

However, the question remains - do they really serve as a definitive investment solution, or should investors look beyond these funds for a more comprehensive portfolio strategy?

In this article, we will explore what solution-oriented mutual funds are, their performance over the last five years, and whether they truly help in achieving financial goals.

In recent months, the Indian equity market has been witnessing heightened volatility, driven by factors such as inflationary pressures, geopolitical tensions, changes in regulatory policies and economic uncertainties. Investors are struggling with market swings, making it increasingly important to choose investment avenues that align with their financial goals while offering stability.

Having said that, in such a volatile market, it is essential for investors to understand if solution-oriented mutual funds are a worthwhile addition to their portfolio.

What Are Solution-oriented Mutual Funds?

Solution-oriented mutual funds are designed to help investors meet specific long-term goals like - retirement planning and securing children's future.

Unlike traditional equity or debt mutual funds, these funds emphasise structured asset allocation aligned with a predefined financial goal. These funds often come with a recommended lock-in period to encourage long-term investing discipline.

SEBI's Definition

The market regulator has categorised mutual funds under different classifications to ensure clarity and transparency. According to SEBI, solution-oriented funds fall under two categories:

• Retirement Fund - Aimed at helping investors build a corpus for their post-retirement life.

• Children's Fund - Designed to secure a financial future for a child's higher education and other needs.

SEBI mandates a lock-in period of 5 years or your retirement age, whichever comes earlier. Similarly, Children's Funds have a lock-in of 5 years or until the child attains the age of majority, whichever is earlier. This restriction ensures that investors remain committed to their financial goals without premature withdrawals.

A solution-oriented fund's portfolio may consist of equity, hybrid, or debt-oriented. Some mutual fund companies offer multiple options within each kind to assist investors in selecting the most suitable strategy. For example, Retirement Funds may include equity plans for young investors, hybrid plans for middle-aged investors, and debt plans for those approaching retirement. They may also offer the option of automatically switch between different schemes (for example, equity to debt) based on the investor's age.

[Read: Should You Stay Invested in Mutual Funds]

The advantage of investing in solution-oriented funds is that it prevents investors from using their invested corpus to meet short-term commitments or during periods of financial restriction. If such impulsive decisions are not constrained, they could risk your financial success. Thus, the lock-in period for solution-oriented funds fosters discipline, encouraging investors to stick to their long-term goals. The lock-in duration of solution-oriented funds assures that your money remains invested through market highs and lows, generating significant capital appreciation in the long run. Consequently, investors can benefit from the potential of compounding wealth over time.

How Have Solution-Oriented Funds Performed So Far...

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 from the above table, Solution-oriented Mutual Funds, both Children's Funds and Retirement Funds as a category, have lagged on wealth creation in a 5-year time frame compared to some of the sub-categories of diversified equity mutual funds.

Solution-oriented funds are not regretful, but what matters is a prudent selection based on your suitability. Only a few schemes such as  ICICI Pru Retirement Fund-Pure Equity Plan, HDFC Retirement Savings Fund-Equity Plan, ICICI Pru Retirement Fund-Hybrid Aggressive Plan, Tata Young Citizen Fund, HDFC Children's Fund, HDFC Retirement Savings Fund-Hybrid-Equity Plan, UTI Children's Equity Fund and Tata Retirement Sav Fund - Prog Plan have managed to generate respectable returns and alpha over a longer time frame.

Most solution-oriented funds have tracked the broader Nifty 500 index, while some have also trailed the category average returns of Large Cap Funds, Muti Cap Funds and Flexi Cap Funds. HDFC Retirement Savings Fund-Equity Plan and ICICI Pru Retirement Fund-Pure Equity Plan are among the few schemes that have outpaced the index by a notable margin.

Given that Solution-oriented Mutual Funds typically have a 5-year lock-in (no option to redeem or switch until then), while this ensures that the investor stays invested for the long term to reap higher returns, in reality, if the scheme does not perform, it may derail your plan to meet your financial goals on time.

On the other hand, in the case of certain open-ended diversified equity mutual funds (excluding ELSS), you can switch or redeem if the scheme falters (for a variety of reasons) and shift to the best-performing and most appropriate schemes. This agile approach typically aids in generating an efficient return on investment and achieving the desired financial objectives.

Are Solution-oriented Funds a Definitive Solution for Achieving Financial Goals?

While these funds provide a structured way to invest for specific goals, they are not necessarily the best or only solution for every investor. Here's why:

1. Limited Flexibility

Solution-oriented funds come with a mandatory lock-in period, restricting liquidity. An investor needing funds before the lock-in period may face challenges.

2. One-Size-Fits-All Approach

These funds provide a predefined structure that may not align with an individual's unique financial needs. A customised portfolio comprising a mix of equity, debt, and hybrid funds could be a more effective way to achieve financial goals.

3. Performance Volatility

Since these funds often have high equity exposure, their performance depends on market conditions. Investors need to assess whether these funds align with their risk appetite before committing.

4. Better Alternatives Exist

Investors can construct their own goal-based portfolio using individual equity funds, debt funds, and hybrid funds that better match their risk tolerance and financial horizon.

Building a Portfolio: Why a Mix of Mutual Fund Schemes Is Essential

You see, solely relying on solution-oriented mutual funds may not offer the flexibility and diversification required to navigate the market volatility over the long run. Investors should adopt a holistic portfolio approach based on their risk profile, investment objective, and time horizon.

In order to ensure a balanced and flexible investment strategy, one must complement the Solution-oriented funds by adding suitable diversified equity schemes to the portfolio. This may include large-cap funds, flexicap funds, hybrid mutual funds or debt funds to optimise growth, liquidity and stability.

By combining these funds strategically, investors can not only achieve financial goals but also maintain flexibility to adjust their portfolio based on changing market conditions and personal financial needs.

Moreover, different investment approaches are required at various phases of an investor's life. In the initial years, one may adopt higher allocation to equities as they have a longer investment horizon to override the market swings. However, relying solely on equities could also make the portfolio vulnerable to market risks.

On the contrary, as one nears their financial goals, gradually shifting towards hybrid and debt funds helps protect the gains and reduce exposure to market fluctuations. This dynamic asset allocation strategy ensures that an investor's financial journey remains on track, regardless of external economic conditions.

A well-balanced mix of mutual funds enables investors to optimise returns while mitigating risks, ensuring a smoother and more effective path toward financial security.

To conclude...

While solution-oriented mutual funds offer a structured approach to investing for retirement and child education, they are not a definitive solution for financial planning.

A better approach is to construct a goal-based investment strategy using a mix of funds tailored to an investor's risk profile, investment horizon, and financial objectives. Instead of blindly investing in a Solution-oriented fund, investors should consult a financial advisor to build a robust portfolio that truly aligns with their long-term goals.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.