Solution Oriented Funds — The Name, the Lock-In, and the Reality

Under the scheme categorisation, solution oriented funds cover retirement schemes and children schemes. Each fund house may run one of each.

Inside, they hold what any scheme holds: equity, debt, or a mix, according to the stated mandate of that particular scheme. Two schemes with the same goal in their names can be run quite differently, one predominantly in equity and another far more conservative.

So the name tells you the intended purpose and the lock-in. It does not tell you the risk, which is why the riskometer and the holdings matter more here than the label. Our pages on the riskometer and the fact sheet cover both.

This is what separates the category, and it works differently from the one people know from tax-saving schemes.

Money invested is locked for a stated minimum period, or until an event such as the child reaching adulthood or the investor reaching retirement age, whichever the scheme specifies. It is a genuine restriction: the money is not available during it, at any price.

Compare that with the arrangement in an ELSS scheme, where each instalment carries its own fixed period from its own date. The mechanisms are not the same and the periods are not comparable, so read the specific terms rather than assuming.

There is one and it is behavioural rather than financial, which does not make it weak.

The main reason long-horizon money fails to reach the horizon is that it gets spent on something else. A lock-in removes that possibility. For a household that knows itself well enough to admit the money would otherwise have been dipped into, that restriction is doing real work.

The naming helps too, in the same modest way that a folio kept separately for a child goal helps. Money with a purpose attached to it gets touched less than money in a general pile, which our page on SIP for child education discusses.

If you would otherwise have raided it, this is a legitimate reason to choose one.

Three of them, and they deserve as much space.

The restriction cuts both ways. Locked money is unavailable in a genuine emergency as well as a frivolous one. A household without a buffer should build that first, as our page on building an emergency fund sets out, rather than locking money away and hoping.

You can achieve the same thing without it. An ordinary scheme held in a separate folio for the same goal does the same job, and leaves you able to act if circumstances change. The discipline then depends on you, which is the whole trade.

If the scheme disappoints, you are still in it. With any other scheme, a mandate no longer being followed is something you can respond to. Here you may not be able to for years.

Worth saying plainly, because the naming invites an assumption.

A scheme called a retirement scheme does not promise an income, a fixed outcome, or a figure on a date. It is a mutual fund scheme, subject to market movement like any other, and the word in the title changes none of that.

Nor does it automatically adjust as your date approaches. Some schemes offer plans with different levels of equity and some allow a switch between them, but that is a feature of the specific scheme rather than of the category. If you want the equity share to fall as the date nears, check whether the scheme actually does that or whether you are expected to do it yourself, which our page on asset allocation covers.

People expect something to happen on that date. Nothing does, and that is worth knowing in advance.

The units are not redeemed automatically and no money arrives. The holding simply becomes available, and it carries on being an ordinary investment in the same scheme until you decide otherwise. The restriction lifting is not an instruction to sell.

What that means practically is that the decision moves back to you at exactly the point the scheme stops making it. If the goal is still years away, staying invested may well be right. If the goal has arrived, the money needs to come out or move somewhere stable, and the horizon rules apply the same way they would anywhere else.

The one thing worth doing before that date is checking what the equity share is, because a scheme that never reduced it leaves you holding market risk at the moment you need certainty. Our page on portfolio rebalancing covers the adjustment.

Four questions, in this order, and the first two are not about the scheme.

• Is the buffer in place? Locking money away before that is the wrong order.
• Would you actually spend it otherwise? An honest answer here decides most of it.
• What exactly is the lock-in, measured from when, and what releases it?
• What does the scheme hold, and does the risk suit a goal at that distance?

Our own view is that the lock-in is worth it for people who know they would have interfered, and unnecessary for people who have already demonstrated they would not. Both kinds of household exist and neither should pretend to be the other. We are distributors rather than investment advisers and we recommend no schemes, but if you want to work out which you are, get in touch. For the pension comparison specifically, see SIP versus NPS.