Saving money is highly advised and accepted practice all across the globe. People who work and earn money, keep some amount of their hard-earned income to save for their future plans like retirement, marriages, education of their own or of their child.
In India, people save money in banks as fixed deposits (FD) for a fixed maturity period which offers an interest rate of 7-8%. Everyone wishes to get higher returns on their investments with minimal risk.
But people often get confused about where they can invest and save their money with minimal risk? So, what is the solution to this problem?
The solution is "Mutual Fund Schemes".
But how can mutual fund schemes help save money with higher returns and minimal risks?
Click here to understand: Types of Mutual Fund Schemes.
Mutual funds are categorized into various types, but here, we will talk about the objective-based mutual fund schemes. The objective-based mutual fund is further categorized into various sub-categories.
The first type of an objective-based mutual fund scheme aims at achieving various financial goals like retirement, children's marriage, and education. This scheme is called the "Solution-Oriented Mutual Fund Scheme".
Let's briefly discuss the scheme and what this scheme offers to its investors.
Solution-Oriented Mutual Fund Scheme
This fund scheme typically focuses on the future goals of investors which include some common and important life goals like retirement, education, marriages of the children, etc.
To help achieve the financial goals of their investors, maintain expected returns, and their risk tolerance, the fund managers invest in a portfolio that can fulfill all expectations of their investors.
SEBI (Stock Exchange Board of India) introduced 5 types of mutual funds to help achieve the financial goals of various types of investors in India. Those mutual funds are equity funds, debt funds, hybrid funds, solution-oriented funds, and others like gold exchange-traded funds, funds of funds, and offshore funds.
There are two most important types of solution-oriented mutual funds offered by the AMC(Asset Management Company) to their investors according to their financial goals.
Let's walk you through them.
A retirement fund often called a pension fund, offers investors an option to keep some portion of their income to invest in this scheme for their retirement. These funds offer financial help as monthly pension to investors for their monthly expenses until their demise.
Usually, the fund offers the monthly pension in a lump sum amount. In a monthly pension, the fund manager pays a fixed amount of money to the investor with protection from inflation. This fund does not depend on the asset market or returns and offers fixed income to its investors. This fund usually offers 11% returns to their investors.
The fund manager usually invests in low-risk funds like government securities to avoid risk and gain constant returns for their investors.
A retirement fund mainly focuses on providing a steady source of income for its investors after their retirement. In the beginning, investors keep some portion of their income to invest in this scheme so that they can take benefits from it after their retirement.
A retirement fund scheme is more flexible in terms of investment, wherein investors can invest money in a lump sum (investing the whole amount of money at one time), which requires a lot of cash reserves and comes with higher risks.
They can also invest through SIP (Systematic Investment Plan), which means investors can invest in this fund scheme on a monthly basis to avoid higher risk.
Investors of retirement fund schemes get the option to invest in government securities to get steady returns with minimal risks, or they can invest in equity and debt to get higher returns but with higher risks.
This fund majorly focuses on the goals and aims related to children. A children's fund scheme tends to be very beneficial for its investors as the cost of education and other expenses often fluctuates. Usually, this fund invests in both equity and debt funds, or we can say that it invests in the hybrid or balanced fund.
The fund manager invests according to the financial goals and risk tolerance of the investors. The minimum maturity period of a children's fund scheme is 5 years and can be extended as the child becomes an adult till the age of 18, as per their financial requirements like higher education, boarding, relocation, etc.
A children's fund scheme cannot be broken, and the cash cannot be withdrawn before its maturity period. If investors do that, this fund scheme charges a higher expense ratio of around 4%, which makes investors think twice before withdrawing the cash from the fund scheme.
This scheme also protects from market volatility and market cycle and holds the investment for a long time period.
Individuals who wish to meet their future financial goals can choose from the different solution-oriented mutual fund schemes. However, they need to maintain the monthly or lump-sum investments and cannot break the investment before the 5 years of the lock-in period.
If investors withdraw any amount from the scheme before its maturity period, they need to pay a higher expense ratio which can be around 4%.
Solution-oriented fund schemes are beneficial for long term future goals like retirement, education of children, marriages, etc. as they tend to avoid short term fluctuations of the market. Staying invested for a longer period in such investment schemes can avoid short term risks and get higher returns from it.
In conclusion, having prior knowledge of the mutual fund's industry can help the investors to select a good scheme that can fulfill their financial goals and avoid any associated risks, all while getting higher returns from their chosen fund scheme.