SEBI Introduces Life Cycle Funds: What Investors Should Know

The Securities and Exchange Board of India (SEBI) has introduced a new category of mutual fund schemes called life cycle funds, aimed at formalising goal-based investing through predefined maturity periods and automated asset allocation shifts over time.

These will be open-ended schemes with a glide path strategy, under which asset allocation across equity, debt, infrastructure investment trusts (InvITs), exchange-traded commodity derivatives (ETCDs), and gold and silver exchange-traded funds (ETFs) changes as the fund moves closer to maturity.

The framework is designed to align portfolio risk with an investor’s time horizon rather than rely on manual rebalancing.

How Will Life Cycle Funds Work?

Life cycle funds may be launched with target maturities of 5, 10, 15, 20, 25, and 30 years. The manner in which these funds allocate their assets will be on a glide path, whereby in the initial years, it will have a higher allocation to equity, and as maturity nears, the transition will gradually be towards less risky assets.

A fund house is allowed to have only six life cycle funds open for subscription at a time. The maturity year has also been stipulated by SEBI in the scheme name, e.g., Life Cycle Fund 2045, Life Cycle Fund 2055, etc.

For schemes with maturities of less than five years, SEBI has allowed up to 50% of the total equity allocation to be deployed in equity arbitrage strategies while maintaining the overall equity exposure within the 65–75% range required for such schemes. This is intended to manage volatility in the final stage of the investment cycle, but within the regulatory equity borders.

Exit loads have been structured to encourage long-term holding:

• 3% if redeemed within one year

• 2% if redeemed within two years

• 1% if redeemed within three years

Life cycle funds will follow the benchmark framework prescribed for multi-asset allocation funds. If a scheme has less than one year to maturity, it may be merged with the nearest-maturity Life Cycle Fund, subject to the unitholders' consent.

The glide-path structure is viewed by market players as a way to minimise the frequency of portfolio rebalancing. Fund managers believe this may help investors remain disciplined through market cycles because the allocation is not based on emotion but dictated by rules.

What Changes For Existing Retirement And Children’s Funds?

SEBI has discontinued the category solution-oriented scheme, which contains retirement and children's funds. Existing schemes in this category must no longer accept new subscriptions and may be merged with other schemes with similar asset allocation and risk profiles, subject to regulatory permission.

Industry players see this movement as an attempt to move away from static allocation structures that required investors to switch schemes to adjust risk levels. Fund managers say life cycle funds can offer a dynamic alternative where asset allocation adjusts automatically with time.

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Key Investor Takeaway

Life Cycle Funds may simplify long-term investing for those who prefer a predetermined asset-allocation route that adapts automatically over time.

Investors currently involved in solution-oriented schemes should consider how their assets will be migrated and whether the new structure aligns with their financial objectives before making allocation decisions.

Sources:

Economic Times

News18