When SEBI recategorized mutual funds, a new category of mutual fund scheme was identified. Schemes, which cover goals, like retirement or child’s education, earlier treated under general equity or balanced schemes, are now classified as solution-oriented schemes.
Now, let us consider some features of the solution-oriented mutual fund schemes. These are open-ended hybrid equity schemes that have a minimum lock-in period of five years. For retirement plans, the lock-in is for a period of five years or up to the age of retirement, whichever is earlier. For a child plan, similarly, the lock-in period is five years or till the time, the child attains the age of maturity or 18 years, whichever is earlier.
The lock-in period ensures that investors have the discipline to stay invested and do not redeem their funds on an impulse. Due to a lock-in period, these funds also offer tax deductions under Section 80C of the Income Tax Act.
These schemes are meant for investors who are looking to create a retirement corpus or to create a corpus to meet the costs of higher education and marriage of their children. For investors who do not have the time, or the expertise to select mutual funds for this purpose, such funds make sense. Solution-oriented schemes of mutual funds have the potential to offer higher returns than similar plans offered by traditional life insurance plans.