For investments related to long-term goals such as retirement, children’s higher education or wedding, both mutual funds companies and life insurers offer investment products. In mutual funds, children’s funds and retirement funds are classified as solution-oriented funds, which manage about Rs 30,000 crore of investor money, according to data from Association of Mutual Funds in India (AMFI).

These funds are suitable for those who cannot decide on investing in open-ended funds to link investments to long-term goals or not deft at asset allocation and periodic portfolio rebalancing. These funds have a five-year lock-in period and returns are lower compared to open-ended equity funds.

How solution-oriented funds work

Most of the solution-oriented funds are hybrid funds. They predominantly invest in the equity and debt asset classes in their portfolio. Individuals can invest in these funds through systematic investment plans or lumpsum. The longer holding period helps balance any short-term market volatility impacting the portfolio. These funds are passively managed as the fund managers match the performance of a benchmark index. Investors must compare the funds on portfolio structure, consistency in returns and the risk-to-reward ratio.

One of the advantages of these funds, especially for building retirement corpus, is that investors do not have to buy mandatory annuity in pension products of life insurers and in the National Pension System. Investors can opt for a systematic withdrawal plan on retirement, which works much better than annuities as it gives them more flexibility to increase or decrease the monthly withdrawal. The annuity is fixed at the time of investing the vested amount.  The returns from mutual funds can be better than the rate of return on the annuity.

Performance matrix

Solution-oriented funds help in making a disciplined savings habit and the five-year lock-in period should ideally yield higher returns. However, barring a few, returns are not encouraging and are lower than equity-oriented funds over the long-term. Some of them have not even matched the returns from hybrid schemes. For instance, while children’s solution-oriented funds have reported returns of around 12.5% over a 10-year period, aggressive hybrid funds have given around 15% in the same period.

Should you invest in these funds?

Harshad Chetanwala, co-founder, MyWealthGrowth.com, says one can consider investing in open-ended equity diversified funds instead of these solution-oriented funds as the diversified funds give more flexibility to build one’s portfolio for these goals depending on the time horizon and the amount of risk an investor would like to take at any point in time. “Also from a return perspective, since solution-oriented funds are a kind of hybrid funds their returns could be less than equity funds. Considering the time horizon of financial goals like retirement and children’s education, the returns from solution-oriented funds could be lower than equity funds,” he says.

Investors have to invest a smaller amount in equity funds for these goals compared to the solution-oriented funds. Moreover, solution-oriented funds will have the same portfolio for all the investors which may not be the best solution for all.

Brijesh Damodaran, managing partner, BellWether Associates LLP, says solution-oriented funds have been there for over a decade now. However, they have not received the attention as the returns on the upside are limited. “They are more of an asset allocation strategy and instead investors must invest in equity-oriented schemes and hold for long term for higher returns,” he says.

So, investors need to understand exactly why they want to invest, know the return expectation and not just look for a goal-based product for long-term needs.