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Solution-Oriented Schemes

Solution-oriented mutual funds facilitate investment for preservation of corpus or capital appreciation to fund specific expenses in the future, such as retirement, marriage or education of children, etc. Fund managers of solution-oriented schemes take into account the financial goals, expected returns, as well as risk aptitude of investors, to furbish a portfolio generating highest yields at par with their expectations.

The Securities Exchange Board of India (SEBI) has declared five primary classifications of mutual funds available in India- equity funds, debt, balanced hybrid portfolios, solution-oriented funds, and others. Under solution-oriented funds, individuals get the benefit of choosing customised portfolios based on the risk associated and the primary goal of an investment.

Types of Solution-Oriented Mutual Funds in India

The various types of solution-oriented schemes offered by asset management companies depend upon the purpose of investment, respectively. Most financial institutions offer such mutual funds under the following titles –

  • Retirement planning mutual fund

Most AMCs offer systematic investment plans for investing in such mutual funds, wherein the amount can be used to procure equity or debt tools, as per the risk aptitude of investors.

Also, such tools come with a mandatory lock-in period of five years, without the benefit of premature withdrawals. Such stringent lock-in period aims to ensure individuals keep the corpus for a stipulated amount of time for maximum gains.

  • Children’s gift mutual fund 

Such SEBI mandated mutual funds are primarily chosen by individuals for capital appreciation of the corpus invested. Returns generated through such schemes can be used to fund higher education costs and marriage expenses of children, or for other corresponding funding requirements.

Nature of Solution-Oriented Funds 

Solution-oriented mutual funds in India offered by renowned asset management companies can choose to build the corpus that it resembles any of the following schemes –

Equity oriented solution mutual funds bear substantial market risks, as they are readily affected by any market fluctuations. The risk factor of such mutual funds is higher than that associated with any other type of mutual fund, as equity securities don’t act as an obligation to the issuing companies; hence they can choose to pay out the dividends if substantial profits are realised in one financial year. Consequently, returns generated by such schemes are highest among other stock market-related mutual funds available in the market.

Individuals choosing to invest surplus funds in solution-oriented schemes with the main aim of capital appreciation should select equity mutual funds for this purpose.

Such mutual funds have a lower risk factor, as they primarily comprise debt securities which act as a liability for issuing companies, and hence, interest on such investments are paid first from annual revenues. Thus, investors having a lower aptitude for risk can choose to park their funds for the preservation of principal, along with stipulated returns generated on investment. Correspondingly, individuals looking for investment options which act as a hedge against inflation can choose solution-oriented mutual funds investing in debt corpus respectively.

Also known as balanced allocation schemes, such solution-oriented plans aim to achieve an optimal balance between risk and return by investing in both equity and debt securities. Balanced allocation mutual funds are ideal for investors willing to assume lower risk (through debt tools) while simultaneously earning higher returns (as a part of the portfolio is allocated to equity securities).

Further classification among hybrid funds can be made depending upon the percentage of allocation, wherein portfolio managers investing at least 60% – 65% of the assets in equity schemes is known as equity hybrid funds. On the other hand, if 60% – 65% of the corpus is invested in debt tools, it is known as debt hybrid mutual funds. Depending upon the risk aptitude of investors, any respective type of solution-oriented schemes can be chosen.

Advantages of Solution-Oriented Schemes 

A solution-oriented scheme comes with the following advantages, making it a popular investment tools among individuals –

  • Adequate financial planning – 

Solution-oriented schemes are primarily developed as a secure tool for financial planning to meet any hefty expenses in the future. Individuals aiming to build a reliable corpus for retirement expenses, or to fund their child’s higher education or marriage can do so by investing periodically through a SIP plan or lump sum deposits to generate substantial returns.

  • Limited risks – 

A solution-oriented scheme usually comes in with a lock-in period of five years. This allows the corpus to ride out any short term adverse fluctuations of the stock market, thereby generating high returns in the long run. Additionally, solution-oriented mutual funds in India are also available in the form of debt mutual funds as well, where the risk factor is mitigated even further.

  • High yields –

Solution-oriented funds entirely or majorly investing in equity securities can enjoy high returns on investments. Substantial appreciation of the corpus amount ensures maximum returns on total investment through such solution-oriented schemes.

Such extensive returns can also be attributed to the stipulated holding period of the scheme, as it eradicates any short term market variations which might bear a negative impact on the portfolio. Debt funds enjoy such benefits as well, through long term compounding interest feature, for a minimum of five years. Debt oriented solution mutual funds thereby generate substantial yields for investors, helping them meet any financial requirement of the future.

Limitations of a Solution-Oriented Scheme

Investing in a solution-oriented scheme comes with the following restrictions –

  • Passive management – 

Most solution-oriented schemes are usually passively managed mutual funds wherein the portfolio manager tries to match the performance of a benchmark index. Such investment portfolios, correspondingly and primarily consist of instruments from the best performing large-cap companies in a country.

Such corpus restricts individuals from investing in value securities selling at a discounted price in the market, which has the potential to generate manifold returns in the future.

  • Closed-ended mutual funds 

Solution-oriented investment schemes are usually closed-ended mutual funds, wherein the investment remains locked in for five years. Investing in such mutual funds is tricky, as it is subject to frequent NAV fluctuations due to cyclical trends of the stock market.

  • Liquidity 

As stated above, any deposits in a solution-oriented mutual fund cannot be withdrawn before completion of five years. Such rigid lock-in periods often pose as a disadvantage for investors, as funds cannot be withdrawn in the vent of emergencies, requiring extensive finances.

Taxation 

Solution-oriented schemes are taxed under the same rules applicable to equity and debt mutual funds, respectively. While periodic dividend pay-outs don’t attract any taxation, any capital gains generated through purchase or sale of assets are subject to taxation as per the income Tax Act of 1961.

  • Solution-oriented equity schemes – 

Equity mutual funds levy short term capital gains tax at 15% if such funds are transferred prior to 1 year. In case transference of funds takes place after a holding period of 1 year, long-term capital gains tax at the rate of 10% is levied on such capital gains.

An important point to note in this regard is that long term capital gains realised below Rs.1. Lakh is not taxed under the new amendment of the government.

  • Debt Solution-oriented schemes – 

Short term capital gains realised through the resale of securities in less than a year is taxed at rates based on the respective income tax slab. Long term capital gains, on the other hand, is applicable on profits realised after holding debt securities for more than one year and is taxed at 20% of total earnings after adjusting the same for indexation.

Who Should Consider Solution-Oriented Schemes?

Individuals planning finances to meet hefty expenses in the future can opt for solution-oriented schemes to ensure adequate corpus development without causing extensive monetary strain. However, sufficient liquid funds have to be maintained when investing in such rigid plans, as partial withdrawals are not permitted before completion of five years.

Also, individuals should check out the average predicted returns and associated risk factor before choosing to invest the total portfolio in a solution-oriented scheme. The nature of securities present in the corpus (equity or debt) should be looked into as well, to get an average idea about the security of investment and rate of return which can be generated through such deposits.

Solution-oriented schemes are one of the most popular types of mutual funds available in the market, as they come with customisation benefits as per the requirements of investors. Individuals investing in such mutual funds can enjoy substantial capital appreciation along with the security of investment, owing to its high return generating capacity as the corpus remains locked in five years, during which all short term fluctuations are negated.

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