Life cycle funds explained

In today’s episode on 3rd March, we explain SEBI’s circular on life cycle funds replacing ‘solution oriented schemes’. ⁠Book a FREE call with Ditto⁠ https://ditto.sh/vx51ji https://ditto.sh/vx51ji

• 0:00Speaker 00

  Hello folks, you're tuned in different shots daily. In today's episode, we explain semi-circular on lifecycle funds replacing solution-oriented schemes.

• 0:12Speaker 00

  Before we begin, here's a quick word from team Ditto. Life has a way of surprising us and not always in a good way. Sometimes it's a sudden illness or an unexpected hospital visit that can shake up everything. In India, families still pay about 39% of medical expenses directly from their own pockets and just one hospital's take can wipe out years of savings. The easiest way to protect yourself is by getting a good health insurance plan. It's way cheaper than footing one huge bill. And if you're unaware where to start, book a free call with Ditto. No spam, just honest, jargon-free guidance. Trusted by over 8 lakh people for their health and term insurance needs. The link is in the description. Now, back to the story. If you've ever invested in a retirement fund or children's fund,

• 0:57Speaker 00

  you probably assumed that as time went by, it would automatically become safer and lower risk. Now that sounds logical, but that wasn't always built into the fund. Because for years, these products sat inside a category called "solution-oriented schemes". Under a 2017 circular, marketing regulator SEBI grouped funds meant for long-term goals like retirement or a child's future under this label. And it included just two types of funds: retirement funds and children's funds. They came with long lock-ins to discourage early withdrawals, but beyond that, the rules were fairly open-ended. SEBI didn't require these funds to follow a fixed asset allocation path or automatically reduce risk as the goal got closer. That decision was left to individual fund houses. So while the goal was clear in the name, how the fund behaved over time could vary widely.

• 1:42Speaker 00

  To put that in perspective, let's give you an example. Let's say you're 35 and investing in a retirement fund, planning to retire at 60. Alright, now you assume the fund will take on more risk today and gradually become safer as you get closer to retirement. After all, you'd want growth when you're younger and stability when you inch closer to the finish line. But under the older rules, that shift in risk wasn't mandatory. A retirement fund could remain heavily invested in equities even as you approach retirement. So two investors, planning for the same Milestone could end up in funds that behaved very differently despite both being called retirement funds. The name suggested a plan but the portfolio didn't always follow one. And that gap between expectation and design is what Sebi aims to address in its latest circular.

• 2:24Speaker 00

  It has reworked how goal-linked mutual funds are classified and introduced a new category. Now they're calling it life cycle funds and the idea behind it is simple. Each fund is tied to a target year and follows a predetermined light path. What's that you ask? Well, it's like a built-in timetable for risk. Early on, when retirement is decades away, the fund can invest heavily in equities. As a target year approaches, it must steadily dial down risk and shift more money into safer assets like debt. So let's say you're thirty-five today, the fund behaves aggressively and by the time you're, let's say, in your fifties, it automatically becomes more conservative. Now you might think, equity is risky but bonds can be risky too, right? So Sebi has accounted for that as well.

• 3:05Speaker 00

  Under the new rules, life cycle funds can invest only in higher quality debt instruments, rated double A and above, and those bonds must mature before the fund itself does. In simple terms, the debt side can't quietly take hidden risks either. This marks an important shift. You no longer have to keep rethinking your portfolio every few years or switching funds as you age. The life cycle fund adjusts risk automatically as time passes. This simply means that de-risking isn't optional anymore but simply built into the structure. The focus also shifts from what a fund promises in its name to how the portfolio must behave over time. Sebi has drawn a clear line on naming. Fund houses can no longer use return emphasizing words like wealth creators or high growth in these schemes. The name must reflect the category, not hint at performance. In other words, it has to be true to label.

• 3:50Speaker 00

  Sebi has also laid down structural guardrails. Each life cycle fund must have a fixed time horizon ranging from a minimum of five years to a max of thirty years. Investors know exactly what timeline they're signing up for. And AMC can launch only up to six such funds at any given time. But then, here's the thing. As these funds near their target year, there's another practical issue that can come up. Investors don't all exit at the same time. Some withdraw early, others stay longer, and new inflows typically slow down. To prevent a fund from becoming too small towards the end of its life, SEBI allows it to be merged with the nearest maturity lifecycle fund if it has less than one year to go, provided the investors agree to it. There is also a behavioral notch built in. If you exit within the first year, you could pay an exit fee.

• 4:33Speaker 00

  You could pay an exit load, which is a fee if you want to sell your units before the designated time of up to 3%. In a second year, that falls to 2%. In the third year, it's 1%. After that, there is no exit load. This tells you that the glide path works best when investors stay the course. So, yes, with this, the old solution-oriented category is being discontinued. Retirement and children's funds under this label must stop accepting fresh subscriptions. Fund houses will have to transition these schemes or reposition them under other categories. In the end, this isn't just about introducing a new fund type, it's about aligning structure with expectation. Earlier, discipline was implied, now it's mandated. Risk has to follow a timetable and long-term investing is written directly into the rulebook. All right, folks, I'll see you in the next one.

• 5:17Speaker 00

  Thank you for listening to today's episode. And if you want to share your feedback or suggestions, do drop us an email to [email protected]. Until next time.