Should you invest in solution funds while planning for retirement?

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Solution funds are mutual fund schemes that aim to help investors in meeting long-term financial goals like retirement or children's education. Five-year lock-in period has been mandated for such funds by the Securities and Exchange Board of India (SEBI), which is in sync with their goal of long-term disciplined investment.

While for retirement planning, these funds offer a disciplined way of long-term fund accumulation by investing in a mix of debt and equity instruments. The idea is to provide growth and stability depending on the risk profile as well as the investor's age.

Why other professionals would recommend them

The greatest benefit of solution-based retirement funds is convenience. They offer a plug-and-play solution for the investor who lacks the time and knowledge to assemble a portfolio himself. The fund managers will rebalance the asset mix on the investor's life cycle, similar to a target-date or life-cycle fund.

Due to the forced lock-in, these funds promote long-term holding and keep investors invested over market fluctuations. This is particularly significant in retirement planning, where the compounding advantage comes into play.

But they are not for everyone

Though solution funds are good, they are not the best option in every scenario. The lock-in element is a negative for those who require flexibility or must rebalance their portfolio according to changing needs. Not every solution fund in this genre is better than more flexible, less complicated options like hybrid funds or equity mutual funds.

Cost is another consideration. Some solution-based funds have higher cost ratios, and over time, these will deplete returns. Investors must also consider the past track record of the fund manager and the consistency of outcomes over cycles of the market.

Choices to consider

If you are willing to oversee your investments or utilize the services of a financial planner, a diversified retirement portfolio of a mix of equity, debt, and hybrid mutual funds can prove to be more efficient. You can change allocations based on your risk tolerance and horizon without the limitation of a five-year lock-in.

National Pension System (NPS), public provident fund (PPF), and Employees' Provident Fund (EPF) are a few of the tax-efficient retirement schemes in India that can replace or beat solution-based mutual funds in long-run performance.

Bottom line

Solution-based retirement savings might suit investment savers who desire a no-frills, disciplined approach to retirement savings. They are not the best or only option, however. Compare them to other retirement vehicles for flexibility, fees, and returns—and choose what is best for your retirement timeline and financial needs before you invest.

The narrative includes SEBI guideline insights and expert opinions published in Mint and ET Wealth.