Life cycle funds: A simple guide to SEBI's new fund category

Summary: SEBI has created a brand-new mutual fund category replacing the old retirement/children’s funds bucket. There are many things that make them different. They come with a maturity year, a glide path and exit-load rules. Find all the details below. 

Market regulator SEBI has introduced a new mutual fund category called life cycle funds. These funds are meant to replace the earlier solution-oriented bucket (retirement and children’s funds), which SEBI has now discontinued.

The key difference between them is structure. Life cycle funds are built with a stated maturity year and will follow a defined glide path under which the equity-debt mix will change automatically as the maturity year gets closer. Solution-oriented funds in contrast were goal-labelled schemes but did not follow a maturity-linked allocation path.

The core idea: a glide path tied to the target year

Life cycle funds will have a fixed maturity, and the maturity year has to form part of the scheme’s name, meant to make the intended time horizon easy to identify. Schemes can be in tenures of five to 30 years, in multiples of five years.

The asset allocation will shift based on the number of years left to maturity. When maturity is far away, the scheme can hold more equity. As maturity nears, the permitted equity allocation will reduce and the allocation to debt will increase.

These allocation limits are prescribed in bands. For example, in a longer-tenure life cycle fund with a maturity of 30 years, equity exposure in the early years can range between 65 and 95 per cent and debt can range between 5 and 25 per cent.

As the scheme moves closer to maturity, the permitted equity allocation will be reduced to 35–50 per cent while debt exposure can be higher between 25 and 50 per cent. The table below shows SEBI’s glide path for a 30-year fund.

These funds can also have up to 10 per cent exposure across gold and silver-linked instruments, InvITs, and exchange-traded commodity derivatives (ETCDs).

Because the glide path is defined as a range, two funds with the same maturity year can still have different allocations at a given time. SEBI sets the boundaries, while fund managers will choose where to position the portfolio within those limits.

Liquidity and exit load

These funds are open-ended with no mandatory lock-in. Investors can redeem whenever they choose. However, an exit load will apply if units are redeemed within the first three years of investing:

• An exit load of 3 per cent if redeemed within one year
• 2 per cent within two years
• 1 per cent within three years.

So the structure offers liquidity while making early redemption costly.

Points to track once schemes are launched

Since this is a new category, life cycle funds will not have a long performance record initially. Over time, their behaviour across market phases will become clearer.

For any specific scheme, outcomes will depend on factors such as:

• expense ratio, which will affect net returns over long holding periods
• portfolio construction within the permitted bands, which can vary by fund manager
• how closely the scheme’s design and maturity year align with an investor’s time horizon

While the glide path can reduce the need for manual rebalancing, redemption decisions will remain with investors.

To sum up

Life cycle funds are a maturity-linked product where asset allocation will change along a pre-defined path as the target year approaches. As with any category, evaluating individual offerings will depend on their stated glide path, costs, portfolio choices and fit with an investor’s time horizon.

Asset allocation is the real work behind any long-term plan, and it matters as much as picking the right fund. At Value Research Fund Advisor, we help you arrive at the right mix for your risk appetite, goals and time horizon, and also suggest a suitable way to build your allocation and keep it on track.

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