What Is Solution-Oriented Schemes?

If you’ve invested in mutual funds, you might be familiar with the available kinds, like equity, debt, and hybrid funds. But have you come across solution-oriented mutual funds yet? If not, this piece is especially for you.

The regulatory body, SEBI, has outlined two types of solution-oriented funds that Asset Management Companies (AMCs) can provide: retirement and children’s funds. As the names imply, these are designed to meet particular needs, offering ‘solutions’ to specific financial goals.

These schemes provide investors with a targeted investment solution to meet specific life goals. This article delves into what solution-oriented mutual funds are and explains the intricacies of solution-oriented mutual funds.

What are Solution Oriented Mutual Funds?

SEBI has recently rolled out a new type of mutual fund called Solution Oriented Mutual Funds. This innovative category allows you the flexibility to tailor your mutual fund portfolio to meet specific future needs, such as funding your child’s education or marriage or preparing for your retirement.

Even though this concept may seem novel, options to invest in what could now be classified under this category were previously available through equity or balanced advantage fund schemes. This distinct category, however, enables fund managers to employ specialised strategies to achieve higher returns.

With Solution-Oriented Mutual Funds, you can switch between equity mutual funds and debt funds depending on your needs. Fund managers can adjust their strategies based on your age, offering a more personalised investment experience. Some of these funds also offer the perk of tax savings. It’s important to note that these funds are designed for the long haul and come with a mandatory lock-in period of 5 years.

This new approach provides a structured way to invest, ensuring that your investments align closely with your life’s significant milestones. Whether you’re planning for your child’s future or your own retirement, Solution Oriented Mutual Funds offer a strategic path to meet those financial goals with greater precision.

Types of Solution-Oriented Mutual Funds

In India, you’ll find a variety of solution-oriented schemes tailored by asset management companies to meet specific investment goals. These solution-oriented mutual funds come in different forms, each serving a unique purpose.

1. Retirement Planning Mutual Funds

Many asset management companies allow you to invest in retirement planning mutual funds through systematic investment plans. This approach allows you to allocate your investments in equity or debt instruments, depending on how much risk you’re willing to take.

One key feature of these funds is their mandatory five-year lock-in period, which prohibits early withdrawals. This strict rule encourages you to save money for a significant period, maximising your potential gains.

2. Children’s Gift Mutual Fund

Regulated by SEBI, these mutual funds are often selected by individuals aiming to grow their invested capital. The earnings from these funds can support various future expenses for your children, such as higher education costs, wedding expenses, or other significant financial needs.

Advantages of Investing in Solution-Oriented Schemes

Solution-oriented schemes offer a range of advantages that make them attractive investment options for individuals looking to secure their financial future. Here’s how these schemes can work for you:

1. Future Financial Planning: Solution-oriented schemes are designed as a secure way to plan financially for significant future expenses. If you’re looking to build a reliable fund for your retirement or save for your child’s higher education or wedding, investing periodically through a Systematic Investment Plan (SIP) or via lump-sum deposits in these schemes can help you accumulate a substantial return.
2. Lock-In Period Advantage: With a typical lock-in period of five years, solution-oriented schemes allow your investment to weather short-term stock market volatility, paving the way for higher returns in the long run. This feature is particularly beneficial as it helps in stabilizing your investment against the market’s ups and downs.
3. Offers Debt and Equity Schemes: If you choose funds that primarily invest in equity securities within the solution-oriented schemes category, you could enjoy substantial investment growth. The growth of your investment can significantly benefit from the mandatory holding period, which helps to smooth out short-term market dips that might otherwise negatively impact your portfolio. Similarly, debts solution-oriented mutual funds framework can offer considerable advantages. Thanks to the power of compounding interest over a minimum of five years, debt-oriented solutions can yield impressive returns, helping you fulfill any long-term financial goals you might have.

Limitations of a Solution-Oriented Schemes

When you decide to put your money into solution oriented schemes, it’s like picking a path specifically designed to meet your big life goals. However, every path has its bumps, and it’s important to know about these before you start your journey. Here’s a simplified look at what you might face with solution oriented mutual funds.

1. Passive Approach: Many solution oriented schemes tend to follow the market’s lead rather than trying to outdo it. This means they often try to replicate the performance of a specific market index, mostly focusing on the big players in the market.
2. Missed Opportunities: Because these funds usually focus on well-established companies, you might miss out on the chance to invest in smaller, lesser-known companies that have the potential to grow much more.
3. Five-Year Lock-in: Often, when you invest in solution-oriented mutual funds, your money is tied up for five years. This is because these funds typically don’t allow you to take your money out before this period is up.
4. Market Sensitivity: The value of your investment can go up and down because of market trends, which is something you’ll need to be prepared for with solution oriented schemes.

Taxation on Solution-Oriented Mutual Funds: 

When you invest in solution-oriented schemes, it’s essential to understand how they’re taxed. Let’s break down what this means for you, using simple terms and a direct approach.

Equity Solution-Oriented Schemes Taxation

1. Short-Term Capital Gains: If you sell your equity solution-oriented mutual funds before a year has passed, you’ll need to pay a tax of 15% on any profit you make.
2. Long-Term Capital Gains: Selling your funds after holding them for over a year? The gains are taxed at 10%. However, gains up to Rs. 1 lakh are not taxed, thanks to a recent amendment by the government.

Debt Solution-Oriented Schemes Taxation

1. Short-Term Capital Gains: For debt solution-oriented schemes, if you sell within a year, the profit is added to your income and taxed according to your income tax slab.
2. Long-Term Capital Gains: If you hold your investment for more than a year, the profit is taxed at 20% after indexation. Indexation helps adjust the purchase price for inflation, which can lower your taxable gain.

Although, periodic dividends you receive from these funds don’t attract any tax. This makes them an attractive option for earning tax-free income periodically.

Who Should Consider Solution-Oriented Mutual Funds?

Before you dive into investing in solution oriented mutual funds, it’s crucial to ensure you have a solid financial foundation with enough liquid assets. It’s important to note that these funds do not offer the option for partial withdrawals before hitting the 5-year mark. Therefore, to truly leverage the growth potential of these funds, you should aim for an investment horizon that extends well beyond this period.

For those of you with shorter-term goals in mind, you might want to look into debt-oriented funds instead. On the flip side, if you’re considering solution-oriented schemes, it’s wise to start investing sooner rather than later. Starting early allows your investment more time to mature, potentially yielding more satisfying returns over an extended period. This strategy is particularly effective because the longer investment tenure generally lowers the associated risks with these funds.

Conclusion

Solution-oriented schemes are essentially closed-end funds with a five-year lock-in, ideal for you if your investment goals span a longer period and are aimed at specific targets. By opting for solution-oriented mutual funds, you not only stand to benefit from potential tax savings but also might see greater growth due to the extended investment duration. Remember, though, that all investments carry market risks.

Ready to target your financial goals with precision? Open your free Demat account with Angel One today and begin your journey with solution-oriented funds.

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