Solution-Oriented Funds – A Definitive Solution For Your Financial Goals?
Nov 26, 2018

Author: PersonalFN Content & Research Team

Rajeev is a result-oriented person.

He believes in people and products that offer solutions to problems and help him achieve his objectives.

Naturally, he doesn’t spend time on things he doesn’t like.

Investment planning is one such area.

Though he understands the importance of taking prudent financial decisions, he doesn’t conduct a thorough analysis of the available options.

Even a thought of actively managing his investment portfolio bothers him a lot.

So how does he address this issue? He invests merely in products that offer a solution to his financial goals

He has two prominent and big-ticket goals to achieve:

  • Sending his children abroad for higher education,

  • Maintaining his current lifestyle even post retirement

stragicy
(Image source: flickr.com)
 

To attain these goals, he has invested in mutual fund schemes Children’s Funds and Retirement Funds.

The schemes he has invested in have underperformed the broader markets. Moreover, the performance of childcare and retirement planning schemes, at large, has been ordinary.  

Table: Solution-oriented schemes: Offering a solution?


Category Average Returns
Absolute (%) CAGR (%)
Year-To-Date 3 Months 6 Months 1 Year 2 Years 3 Years 5 Years
Solution-oriented children's funds -4.7 -7.0 -2.2 -2.3 9.6 9.5 14.3
Solution-oriented retirement funds -2.8 -4.4 -1.3 -1.0 10.4 10.0 15.4
NIFTY 500 – TRI -5.3 -9.8 -2.0 -2.2 15.4 11.7 15.2
Data as on November 23, 2018
(Source: ACE MF)
 

Some schemes made their mark though. They include:

HDFC Children's Gift Fund-Direct Plan

 ICICI Pru Child Care Fund-Gift Plan-Direct Plan

SBI Magnum Children Benefit Plan-Direct Plan

Tata Retirement Sav Fund - Prog Plan(G)-Direct Plan

 Tata Retirement Sav Fund - Mod Plan (G)-Direct Plan

According to SEBI’s mutual fund scheme categorisation norms, retirement funds are open-ended schemes that have a lock-in period of five years or years left to official retirement, whichever is lower. Children funds have a similar lock-in period of five years or equal to the number of years left for your child  to turn 18.  

Are solution-oriented funds bad?

They aren’t bad. But, they aren’t ideal either.  

Distributors and mutual fund houses that promote solution-oriented funds often pitch their ‘so-called’ advantages. At PersonalFN, we believe they don’t hold much weight and terming them as ‘myths’ won’t be wrong.

Myth #1

The mandatory lock-in period gives the fund manager more leeway in managing schemes and taking pure long-term investment calls, without fearing redemption pressure.

Reality – Don’t mutual fund houses and distributors often say the same about close-ended schemes as well? The track record of close-ended funds, in particular, doesn’t give you confidence in them, just like the case is with solution-oriented funds.

Read: 5 Reasons To Avoid Close-ended Mutual Funds] 

Myth#2

Solution-oriented funds offer you wide array of choices. Depending on your risk preferences, age, and time left in fulfilling a specific goal, you can select an option provided by solution-oriented funds.

Reality –  Depending on the type of solution-oriented fund and its mandate, there are multiple investment options indeed. However, by and large, solution-oriented funds work like aggressive hybrid funds unless you are selecting a conservative or life-stage linked fund option.

Myth#3

Solution-oriented funds help you do away with the need to draw a personalised asset allocation plan. Also, they let you sit back and enjoy your life without compromising on your financial goals.

Reality – Drawing a personalized asset allocation plan and following it diligently to accomplish your envisioned financial goals is a must. Although solution-oriented funds carry conventions, ignoring your personalized asset allocation could prove perilous, as you might miss your financial goals completely despite having invested in solution-oriented funds.

[Read: Why You Should Not Ignore Personalized Asset Allocation While Investing]

Myth#4

Fund houses and mutual fund distributors claim that solution-oriented funds give you more flexibility in deciding how to utilise your investments.

Reality – During the lock-in period, you do not have the flexibility to move in to another scheme even if the solution-oriented fund underperforms.

What should investors do?

You need to be careful of the mis-selling that goes on while advisers claim to offer you a solution to achieve your financial goals. Also, be aware of the tall claims of the mutual fund industry.

The bottom line is, solution-oriented funds can be avoided entirely –– and that won’t cause any damage to your financial goal if you select diversified equity mutual funds wisely to accomplish your financial goals.

In fact, if you focus on your asset allocation and invest accordingly, you would succeed in providing for your child’s future needs and living a blissful retirement.

[Read: Step-By-Step Approach To Retirement Planning]

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

  • You must know the worth of your financial goals in today’s terms. For example, if you were to send your children abroad for higher education today.

  • 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.

  • To take care of the ‘equity portion’ of your asset allocation, you can rely on diversified equity mutual funds. If you choose them carefully, you won’t need any solution-oriented fund in your lifetime.

[Read: Which Equity Mutual Funds To Buy Now?]

Nonetheless, selecting the right diversified equity fund for your portfolio isn’t as easy as it sounds. You must analyse every available scheme on various quantitative and qualitative parameters. And then select schemes with a sound track-record across market cycles and timeframes. Always prefer schemes offered by fund houses that adhere to sound investment processes.

Editor’s note:

Do you think that effective planning can take care of your children’s future and your retirement?

Then don’t invest in solution-oriented funds. They will be unable to satisfy your financial needs.

Instead, trust handpicked undiscovered funds that may surprise you with their superlative performance.

PersonalFN’s special report 5 Undiscovered Funds may help you take care of your goals without investing in any solution-oriented fund.

These undiscovered funds, recommended in the report, have passed through a stringent scheme selection criteria process set by PersonalFN.

To know more about the Undiscovered Funds, click here.

  


Add Comments

Financial News. Simplified


Knowledge Center


Money Simplified Guides (FREE)


Mutual Fund Fact Sheets


Tools & Calculators