In the evolving landscape of personal finance, mutual funds have emerged as a versatile and accessible investment vehicle for a wide range of investors. As a mutual fund investor, you might be familiar with the various types available, like equity, debt, and hybrid funds. But, have you encountered solution-oriented mutual funds yet? If not, this blog is tailored just for you.

In India, Securities Exchange Board of India (SEBI) has categorized mutual funds into 5 primary classifications - equity funds, debt, hybrid schemes, solution-oriented funds, and others.

Solution Oriented funds, as the name suggests, are meant to serve specific purposes and hence provide ‘solution’ to specific requirements. Solution based schemes are particularly helpful for those investors who wish to build a corpus for their retirement or children’s future through mutual funds but lack the expertise to make decisions on fund selection, asset allocation, and portfolio rebalancing. They provide investors with the benefit of selecting customized portfolios based on their risk preferences and the specific objective of their investment.

The types of solution-oriented mutual funds that are available to the investors in India are:

1. Retirement Fund:

This fund is designed to help investors build a corpus for their post-retirement life. It has a lock-in period of 5 years or until retirement age, whichever is earlier.

2. Children’s Fund:

This fund focuses on long-term wealth creation to meet your child's future expenses like education, marriage, etc. It has a lock-in period of at least 5 years or until the child reaches the age of majority (whichever is earlier).

Retirement and children’s education or marriage are long-term goals that have a high emotional appeal. This seems to set these funds apart from the rest.

Moreover, the inherent asset allocation of these funds is an added advantage. By investing in these funds, you likely won't need to worry about allocating your corpus between equity and debt, nor will you need to concern yourself with periodic rebalancing. The mandatory lock-in period of these funds can also prevent impulsive withdrawals during market corrections, which can be especially beneficial for investors who tend to panic when the markets fluctuate.

The longer investment horizon allows the fund to take advantage of market fluctuations and potentially generate higher returns compared to more conservative options.

Last but not least, some investors might find it psychologically more appealing to invest in these funds, preferring that the money remains locked in until it is needed. Such investors can also consider these funds.

When you choose to invest in solution-oriented schemes, it’s like selecting a path specifically designed to meet your needs. However, every path has its challenges, and it's essential to be aware of these before beginning your journey. Here’s a simplified overview of what you might encounter with solution-oriented mutual funds.

1. Missed Opportunities: Since these funds typically invest in large cap companies, you might miss the opportunity to invest in other categories such as small and mid caps that have the potential for significant growth.

2. Five-Year Lock-in: Often, when you invest in solution-oriented mutual funds, your money is tied up for five years. This is because these funds typically don’t allow you to take your money out before this period is up. If the performance of a scheme lags, the investor cannot switch to another scheme in between the investment period.

3. Market Sensitivity: The value of your investment can go up and down due to market trends, something you need to be prepared for when investing in solution-oriented schemes.

When selecting a retirement fund or children’s fund, consider which variant aligns with your requirements. In the case of retirement funds, if you're in the accumulation phase, the equity or aggressive hybrid variant may be more suitable. However, if retirement is imminent in the next few years, the more conservative debt-tilted variant would likely be a better choice.

Conclusion:

Solution-oriented funds provide a strategic way to achieve specific financial needs through disciplined investing and professional management. They offer a structured approach to saving for retirement, children’s education, or marriage, making them an attractive option for need based investing. However, like any investment, they require careful consideration of one’s financial situation, needs, and risk tolerance to ensure they align with the investor's overall financial plan.

Everyone wants to invest in the best-performing asset class every year. But, the thing is, it is nearly impossible to choose the best asset class consistently. That’s why diversification is key. 

Harry Markowitz rightly said that “diversification is the only free lunch in investing”. This is the notion that holding a broader range of assets can result in reducing the overall risk and increase the likelihood of achieving more stable and consistent returns over time.

Diversification is a vital concept widely accepted by many investors across borders. It is an important tool to help investors achieve the proper balance between return and risk for their situation. Crafting a diversified portfolio requires a blend of asset classes tailored on the basis of one’s risk profile, financial goals, and investment horizon. This is where asset allocation comes in. 

Asset allocation is a strategy that involves distributing the portfolio’s investment into different asset classes, such as equity, debt, cash, real estate, etc. Let’s look at the important factors for the right asset allocation mix:

• Investment Objective - The choice of asset allocation is heavily influenced by the particular financial objective that an investor seeks to fulfil. Aspirations can be very different, ranging from short-term goals like saving for a down payment on a home to long-term ones like building wealth for retirement. Different investment strategies and asset allocations are needed to achieve different goals. For instance, you might devote a bigger percentage of your portfolio to equity if your main goal is to create wealth in the long run.

• Risk profile - Before choosing the asset allocation, determining the risk profile is of utmost importance. An investor should define his risk tolerance, i.e. his willingness to withstand market volatility and the level of risk he can comfortably bear. The investor must then define his risk capacity, i.e. the capacity to absorb potential losses. By identifying the risk tolerance and the risk capacity, an investor can form his risk profile based on which he can allocate his investment to different asset classes. 

• Taxation - Different asset classes have different tax implications. Understanding the tax efficiency of different asset classes can have an impact on the post-tax return. For instance, dividends and capital gains of different asset classes can be taxed differently. By understanding the tax implications, an investor can efficiently plan and manage his investments. 

• Goal maturity - The time horizon remaining for different financial goals must be considered before making any asset allocation decision. When you are a few years away from your financial goal, your portfolio is considered to be in the transition stage. Most experts suggest you should move towards an asset allocation that is weighted more heavily towards low risk assets like bonds than stocks.

• Age - Typically, younger investors with a longer investment horizon may have the capacity to withstand short-term fluctuations and may opt for a more aggressive asset allocation that includes a higher proportion of equities. However, as an investor approaches retirement age, it would be wiser to follow a more conservative asset allocation. 

Now, let us look at the performance of different asset classes.

Source: Property: https://residex.nhbonline.org.in/ (Composite HPI for 50 Cities), Bonds: CRISIL Composite Bond Index, T- Bills: CRISIL 1 Year T-Bill Index, Gold and Silver: RBI Monthly Average Price of Gold and Silver in Mumbai, Sensex TRI: Ace MF

To judge the performance of an asset class, any investor’s go-to would be to look at its return on investment. However, data shows that every year, the winner amongst asset classes varies since the market is at the confluence of multiple variables. In the year Sep 2022-23, silver was the best performing asset, however, in the years Sep 2021-22 and 2020-21, silver has given negative returns. Similarly, different asset classes have performed differently in different market phases. So, investors should create a well-diversified portfolio in which their money is spread across a range of asset classes in accordance with their investment objective and risk profile.

Conclusion:

The quest for an optimal asset allocation must be based on the factors above rather than just picking top performers. Equity can provide long-term growth, and the stability of debt and gold can help safeguard the capital for the long term. Choosing the right asset allocation may seem like a challenging task, and hence, an investor should opt for the guidance of a financial advisor who can help investors make informed decisions.

The equity markets have had an impressive run after the pandemic in India. The Indian economy has shown tremendous resilience and strong fundamentals to back this growth. As of today, India continues to be a bright spot globally, being the fastest-growing large economy. As the rise of India continues and market is scaling new peaks. The last few years have attracted a lot of new investors to the markets and they would likely be sitting on impressive returns. 

However, for new investors and those sitting on the sidelines and on good profits, one might expect a few silent questions in mind. Is it the right to put more money? Should I book profits partially? Would this market trend continue and for how long will it continue? In this article, we will try and lay down the basic principles on which we can find answers to such questions, irrespective of the market level or cycle.

Setting the right approach to investment decisions: 

We do not have control over what the markets will do or have the ability to predict the same over the near term. However, what we know with a reasonable level of confidence is the long-term prospects for the Indian economy, and what we can control are our investment behaviour and our investment decisions. So the focus should be more on what we can control and our own needs. Here is a broad framework to set the right approach to investment decisions…   

1. Focus On Financial Objectives: What matters to you is not the market levels but where you stand today with regard to your financial goals. The focus should always be on your financial and life goals. Thus, one should automatically make investment decisions based on your needs. This will immediately give you answers on the investments required, the investment horizon, and the suitable asset class exposure based on your risk profile. Your exposure to different asset classes, including equity, should be clear once this exercise is done properly. Whatever happens around you and to your portfolio, remember to always keep an eye out for the impact and the status of your financial goals.  

2. Focus on your Asset Allocation: Often people miss the big picture, and focus on pennies, ignoring the pounds. Following the asset allocation approach at the portfolio level or at a more granular, need level, is the ideal thing to do. Simply put, one needs to find the appropriate asset allocation and review the same periodically or after sharp market movements. One may adopt a fixed or a tactical asset allocation approach depending on your understanding and experience. Once this is clear,  it can provide a lot of information, such as when to buy, sell, or rebalance assets. 

3. Diversify your investments: Once your asset allocation is decided, one can explore mutual funds as an ideal vehicle for investments as exposure in these asset classes can be easily managed with mutual funds. Within mutual funds, there is a wide choice of funds that offer different levels/natures of diversification. By diversifying your holdings, you reduce the risks connected to the specific type /nature of investments. Diversification and professional management of your investments are the key benefits that mutual funds offer. 

4. Set Reasonable Expectations & Not Chase Performance: As investors, we should also remember that past performance may or may not be repeated in the future. Markets can be volatile, and behave like a pendulum in the short run, but in the long run, they tend to be more like weight machines. Research studies have also shown that the top-performing funds tend to rotate over different periods. Any decision purely based on performance-based rakings and returns, thus can back-fire. Setting our expectations on such past performance is also not wise. What is more important is the quality and consistency of good returns rather than just returns /performance itself.  

5. Focus on Discipline rather than Market Timing: Numerous studies have shown that the ability to time the market or market timing, often rarely contributes to your long-term performance. What contributes the most is your asset allocation decisions. Further, the time in the market is more important than trying to time the markets. Thus, as investors, this approach is something we should avoid and instead focus on being disciplined in our investments. Regular, systematic investments with SIPs have proven to be the ideal approach to making new investments at any market level. There is an element of rupee-cost-averaging or automatic timing inherent in this approach. Further, for fresh lumpsum investments, just focus on getting the time horizon right, i.e., invest for long-term, for at least 7 to 10 years with reasonable confidence.     

6. Consult an MF Distributor: Even though we have broken down and tried to simplify a lot of things, managing investments by yourself is not easy. Just like we have professional help in every aspect of our lives from doctors to accountants to lawyers and even your home cook, having a dedicated mutual fund distributor can ease a lot of things and help you get the right guidance. The real role of the distributor or an advisor will be to hand-hold you in turbulent times and help you avoid making costly investment mistakes. Your distributor would be like your partner, helping you in every decision-making process and in managing your mutual fund portfolio, during your entire journey. 

Bottom Line

Markets will hopefully continue to see newer highs and some lows and with bright prospects, in the years and decades to come. As investors though, what matters is how we can best take advantage of this lifetime opportunity of the Indian growth story. At the micro level, irrespective of what happens around us, what matters to us is what we do and continue to do in our lifetime. Staying grounded, and going back to basics, even though it may appear boring or less exciting, is what will matter in the long run. A few percentage points up or down today will hardly matter a decade later. The focus, in the end, should always be on identifying, planning, and achieving our life’s goals for ourselves and our beloved family members. That is where your ‘real’ performance in life will be judged.   

Indians are reputed to hold around 9-11% of the total physical gold in the world. It is estimated that more than 75% of Indian households own gold in some form, spanning across geography and income levels. We are amongst the top consumers of gold globally. For most of us, gold is part of our culture, practices and age-old belief in gold being a good asset class for those bad days. For ages, our ancestors have saved and invested in gold long before any formal investment or saving avenues were available. 

Today, gold still continues to be an important asset class for investment. We now have the option to invest in digital gold and not physical gold, saving us from all costs & concerns of security, storage, purity, making charges and so on. Sovereign Gold Bonds (SGBs) and gold ETFs are the available options to buy gold in a digital form. However, SGBs have seen a sharp rise in investors because they are seen as a viable alternative to actual gold and have been actively promoted by the government. In this article, we will dig deeper into this new-age gold investment product called SGB. 

What are SGBs? 

The Government of India introduced the Sovereign Gold Bond (SGB) Scheme in November 2015 to reduce the demand for physical gold and shift a part of domestic savings for gold into financial savings. SGBs are government securities issued to resident Indian entities by the RBI on behalf of the central government and thus are considered safe. Their value is denominated in multiples of grams of gold. This is a long-term form of market instrument traded on the stock exchange. Investors have to pay the issue price in cash and the bonds are redeemed in cash on maturity, meaning that the maturity will not be in physical gold. 

Every year RBI offers SGBs in tranches with new series for limited periods during which time new buyers can buy the SGBs. For instance, Sovereign Gold Bond Schemes 2022-23 - Series IV (tranche), the most recent offering from the government, commenced on March 6 and closed on March 10. This was the final batch of SGBs for the last fiscal year. The issue price for one gram of gold had been set by the RBI at Rs 5,611. Let us now understand some of the fundamentals of SGBs.

Quantity- The Bonds are issued in denominations of one gram of gold and in multiples thereof. Whereas, a maximum limit of subscription for individual and Hindu Undivided Family (HUF) is 4 kg and 20 kg for trusts and similar entities notified by the government from time to time.

Liquidity- The maturity period of SBGs is eight - 8 years. However, the exit in SGBs is possible when the government opens the repurchase window after 5 years. One may sell these SGBs on secondary markets in the event of an early redemption, but doing so would subject him to capital gains tax.

Returns- The returns from these bonds are in the terms of interest and capital appreciation. The returns earned by the price differentiation of gold price is same for physical as well as sovereign gold bonds. However, SGB investors additionally benefit from a fixed interest rate of 2.5% p.a. payable semi-annually in a financial year. Moreover, such gains are over and above the price return of the gold.

Taxation- Both interest income and capital gains are taxed differently. The interest return on these bonds will be added to the total income of an investor. While, in the case of capital appreciation, if a primary issuance bond is redeemed early (post 5 yrs.) or kept until maturity, there will be no capital gains tax to pay. However, the taxation of the SGB bond will be different if the transaction is made on the secondary markets. The tax rate in this case for bonds sold after three years is 20% with an indexation benefit. While, short-term capital gains tax will be assessed on bond sales made before three years, and this tax will be added to the investor's income. TDS is not applicable to SGBs.

Eligibility- Any Indian resident – individuals, Trusts, HUFs, charitable institutions, and universities – can invest in SGB. One can also invest on behalf of a minor. As it is issued in dematerialized form, investors must have a demat account. For investors without a demat account, the government does provide paper certificate choices for investors adhering to the KYC requirements. 

Now, one may be curious about how they can purchase or redeem SGBs. So, let us know it how.

How do I buy and redeem SGBs?

Investors have an option to either buy these gold bonds in physical, digital or dematerialized format. The online and offline purchases are allowed through designated post offices, stock exchanges (NSE or BSE) or scheduled banks. There is a discount of ₹50 per gram for investors applying online where the payment is made online.

The investor will be advised one month before the maturity of 8 years and on the date of maturity, the maturity proceeds will be credited to the bank account as per the details on record. As said, early encashment/redemption of the bond is allowed after the 5th year from the date of issue on coupon payment dates. The bonds are traded on exchanges, if held in demat form. It can also be transferred to any other eligible investor. 

Benefits of SGBs:

To summarise, SGBs in India offer several benefits for investors, including zero quality risks, no storage costs, no making charges, high liquidity, guaranteed interest earnings, tax benefits and convenience. It can also serve as collateral for loans and carries no default risk. Needless to say, if you are looking at gold as an investment avenue for diversification or as an inflation hedge, investing in the SGB scheme seems like a pretty obvious choice. So if you are interested, keep a watch for the announcement for the next tranche. Till then, share this idea of purchasing this digital form of gold with your spouse and friends too.