A solution-oriented mutual fund is intended to assist an investor in achieving composite goals such as marriage, kid education, and retirement preparation. Among various other mutual fund categories such as equity funds, debt funds and hybrid funds, SEBI, the capital market regulator introduced a special category of funds called Solution-Oriented Funds. Solution-oriented mutual funds are of two types Children Funds and Retirement funds.
These Mutual Funds assist investors in achieving long-term objectives such as retirement planning funds, education, marriage, and so on. The future obligation is met by maturing these funds over a set period of time.
These Mutual Funds are designed in such a way that investors can easily meet their future lump sum obligations. The risk factor in these funds are lower as the investment tenure is longer. These mutual fund schemes have unique features and objectives to fulfil investors' needs.
A children's fund is a type of open-ended mutual fund that is available for investment for children. It is a mutual fund for children's specific goals such as covering schooling expenditures, relocating, or other necessary expenses.
These funds invest in both equity and debt securities. Most Mutual Fund schemes offering children funds offer these two different plans. Investors can choose between higher equity or higher debt based on their investment horizon and understanding of risk.
The equity-oriented strategy is perfect for a young child or a child on the way. The equity strategy produces substantial returns and is typically used to achieve long-term financial goals. Debt-based plans, on the other hand, are appropriate for youngsters who have completed their elementary school. As a result, these plans may be chosen with the children's ages in mind.
These funds have a statutory lock-in duration of 5 years or until the kid reaches the age of majority, whichever comes first. In other words, these mutual fund has a minimum term of 5 years and can be extended until the kid reaches the age of majority.
Investors cannot remove money from this fund prematurely, making it a dormant long-term investment. This will also provide the portfolio with enough time to ride market ups and downs and stabilise results. Also, imagine the investment is removed before the minimum lock-in time expires. In that situation, the fund houses may levy an exit load of up to 4%.
In addition, under Section 80C of the Income Tax Act of 1961, parents who invest in their children's mutual fund plans can claim an exemption of up to INR 1.5 lakhs. Furthermore, the interest produced from these accounts is tax-free. The returns, however, are taxed when they reach maturity.
When the child reaches the age of majority or adulthood, they will be able to complete their KYC and have access to the money. They will also have the freedom and authority to spend the funds to advance their careers.
Should You Invest In These funds?
As mentioned above, these Funds are customisable as per the future financial requirement of an investor. These funds are long term income funds. These funds help in building a corpus which further ensures adequate capital for a specific objective or requirements. To allow the fund to expand, the investment period in these funds should be longer.
Those who choose these funds for investments should begin investing as soon as possible for their child's future. Doing this will offer sufficient returns over a longer period of time because the risk associated with these funds is lower with a longer tenure.
As the expense of education in India is increasing by leaps and bounds, it has become very necessary to save for the education of the children.
Thus, strategic planning and taking the essential procedures at the correct moment may aid in overcoming these challenges. These systems operate in accordance with the child's age.