Securities Exchange Board of India (SEBI) recategorised mutual funds in 2017-18. While SEBI did it, it also made another classification of some schemes. These were named solution-oriented mutual funds. Assets that were under the general equity funds category or balanced plans were renamed as solution-oriented plans. In this way, according to the recategorisation of schemes by SEBI, solution-oriented plans are one of the products that the asset management companies can offer to investors.
What are solution-oriented mutual funds?
Solution-oriented mutual funds are funds that have a portfolio that is intended to accomplish a particular objective, for example, retirement planning or a kid’s higher education. These funds are not exactly open-ended. They come with a base lock-in period. Previously, some of these plans had a lock-in of three years or no lock-in and an exit load for those who wanted to redeem the funds within three years. Later, an obligatory lock-in time of five years was announced. Presently, for retirement planning, the lock-in is for a period of five years or up to the time of retirement, whichever is prior and for a kid’s plan the lock-in period is five years or till the time the kid turns 18 years old, whichever is earlier. These assets offer tax benefits under Section 80C of the Income Tax Act, 1961.
Here are the pros and cons of solution-oriented funds.
The primary advantage of solution-oriented funds (if they are used for retirement) is that you don’t need to purchase an annuity as you do for the National Pension Scheme (NPS) or any of the plans that the life insurance organizations offer. Also, solution-oriented funds help you meet your retirement needs. How? You can go for the systematic withdrawal plan (SWP) to get your regular cash flows after you retire. You could do this for kid’s plans as well.
Numerous fund houses are offering schemes specifically for the higher education of the investor’s children. These funds follow a strategy to ensure capital appreciation at a gradual pace when the kid is still young. The funds invest in various securities in equity, debt and other investment products to accomplish the long-term capital appreciation objective. By and large, the investment starts right after the birth of the child. As a rule, if the child is young, you could choose an equity-oriented approach. The debt plans are for those whose kids are going to finish their schooling. You can switch between the equity and debt plans based upon the age of your child.
The primary disadvantage of solution-oriented funds is the obligatory longer lock-in period before which you can’t get the money. You can’t sell the funds in the event that you need cash. Another point is that you can’t change to another plan during the investment time frame. This is regardless of whether the fund lags its benchmark’s returns or gives low returns in the long haul when compared to other open-ended funds.
The chance of another open-ended mutual fund performing better than the solution-oriented fund is high. There are numerous mutual funds with a comparative portfolio and equity exposure of solution-oriented funds, that have performed well. For instance, ICICI Prudential Child Care Plan, which is a named solution-oriented mutual fund, has given an annualized return of only 3.45% over the most recent five years while the Motilal Oswal Focused 25 fund, which is an open-ended fund has given over 7.35%.
Along these lines, investment advisors frequently advise that it is smarter to put resources into open-ended plans with a solid portfolio and good trading strategies. Why? When one invests in open ended equity funds, the asset allocation is fundamentally the same and one can exit from the plan easily.
Are many solution-oriented schemes available?
After the SEBI reclassification, some of the fund houses renamed their funds or merged several schemes to make a new fund, just to categorise schemes under the solution-oriented categories of funds. So, actually many of the fund houses renamed their old schemes to make them solution-oriented.
For instance, SBI Asset Management Company (AMC) renamed its Magnum Children’s Benefit Plan as Magnum Children’s Benefit Fund. Now, the fund has a lock-in period of five years. Earlier there was no lock-in period for the scheme. HDFC AMC renamed Children’s Gift Fund Investment Plan to HDFC Children’s Gift Fund to add it to the solution-oriented funds category. Other fund houses too incorporated changes to offer solution-based schemes as per SEBI’s circular.
Top Solution-Oriented schemes
|Tata Retirement Sav Fund – Cons Plan(G)||7.74%||5.50%||7.85%||9.90%|
|Axis Children’s Gift Fund-Compulsory Lock in(G)||1.44%||5.22%|
|Axis Children’s Gift Fund-No Lock in(G)||1.44%||5.22%|
|HDFC Retirement Savings Fund-Hybrid-Debt Plan(G)||6.29%||5.06%|
|Nippon India Retirement Fund-Income Generation(G)||6.13%||4.98%||6.45%|
|HDFC Retirement Savings Fund-Hybrid-Equity Plan(G)||2.41%||4.64%|
|Tata Retirement Sav Fund – Mod Plan(G)||5.66%||4.50%||9.55%||16.04%|
|SBI Magnum Children’s Benefit Fund-Savings Plan||5.30%||4.49%||9.84%||13.08%|
|Franklin India Pension Plan(G)||2.41%||4.11%||5.96%||10.32%|
|ICICI Pru Child Care Fund-Gift Plan||-1.53%||2.64%||6.32%||13.34%|
|Principal Retirement Savings Fund-Cons(G)||1.85%||2.19%|
|LIC MF Children’s Gift Fund(G)||-1.27%||1.03%||4.40%||7.77%|
|Tata Young Citizen Fund||2.37%||0.10%||4.22%||8.57%|
|ICICI Pru Retirement Fund-Pure Debt Plan(G)||9.85%|
|Aditya Birla SL Retirement Fund-50 Plus Plan(G)||5.56%|
NAV data as of Sept 30, 2020
Who should invest?
These schemes could be considered by those investors who want to save money for their retirement or children’s education/marriage savings using mutual funds and are not very confident about how to choose funds. Solution oriented funds may be suitable to those who don’t know much about asset allocation or don’t do any portfolio rebalancing.
Note that even though solution-oriented funds could offer higher returns when compared to schemes of traditional life insurance companies, they might not give returns that are more than that of open-ended equity funds. Those who can afford to keep their funds for a longer duration can look at investing in solution-oriented funds. Note that solution-oriented mutual funds come with very low expense ratios if you choose the direct plans. This might eventually lead to higher returns.