New Delhi, February 26 – The Securities and Exchange Board of India (SEBI)'s decision to introduce a new category of mutual funds – Life Cycle Funds – with a tenure ranging from 5 to 30 years is a significant step for goal-based investing, experts said on Thursday.
In its circular, SEBI stated that the Life Cycle Fund is an open-ended fund with a target maturity date. The scheme will follow a glide-path asset allocation model, investing in a mix of asset classes such as equity, debt, Infrastructure Investment Trusts (InvITs), Exchange Traded Commodity Derivatives (ETCDs), Gold and Silver ETFs (Exchange Traded Funds).
"Mutual funds may launch Life Cycle Funds with a minimum tenure of 5 years and a maximum tenure of 30 years. Such funds can be launched for tenures in multiples of 5 years," SEBI said.
Furthermore, Life Cycle Funds will follow a pre-determined glide path asset allocation, automatically reducing equity exposure as the maturity date approaches and increasing allocation to debt and safer instruments over time.
Radhika Gupta, Managing Director and CEO of Edelweiss Asset Management, said, "The introduction of Life Cycle Funds under the new scheme categorization framework is a significant step for goal-based investing."
In the new fund, asset allocation automatically aligns with an investor's time horizon, gradually moving from equity to lower-risk assets as the goal nears. This reduces the need for constant decision-making, keeps investors disciplined, and operates within a tax-efficient structure, she added.
Echoing similar views, Nitin Agrawal, CEO, Mutual Funds, InCred Money, said, "Life Cycle Fund is a welcome move in promoting investor behavior towards goal-based funds as it follows a glide path towards end-maturity, perfectly aligning the time horizon and risk profile."
The new fund removes the static allocation problem of older retirement funds, aligns risk with the investor's life stage, reduces emotional asset allocation decisions, and eliminates the taxation issues present in existing solution-oriented funds when investors switch funds to change asset allocation, Niranjan Avasthi, Senior Vice President and Head of Product, Marketing, and Digital at Edelweiss Mutual Fund, posted on X.
Additionally, the regulator has discontinued the Solution-Oriented Scheme with immediate effect.
"Solution-oriented funds are facing difficulties. We believe that most of the funds were not true to their label as the portfolio construction was mainly in line with other funds, not providing a more true-to-label solution to the issue," Agrawal said.
Overall, SEBI has revamped the framework for classifying mutual fund schemes, tightening disclosure and overlap norms to enhance uniformity and investor protection.
In the equity category schemes, SEBI said that mutual funds may invest the remaining portion in equity, money market instruments, other liquid instruments, gold and silver instruments, and InvITs. This is subject to the ceilings laid out in MF regulations for each respective asset class.
For any scheme offering in the sectoral/thematic equity category, SEBI said that mutual funds must ensure that no more than 50 per cent of the scheme's portfolio overlaps with other equity schemes in the sectoral/thematic category and other equity scheme categories, except for large-cap schemes.
