The formal definition of life cycle funds is, “An open-ended fund with attributes of predetermined maturity and glide path for goal-based investing”. The equity allocation of these funds will decrease as the fund’s maturity date nears. Such a feature is already in place in the NPS.
Salient points about these funds from the circular.
They will invest across a diversified mix of asset classes, specifically Equity, Debt, InvITs, Exchange Traded Commodity Derivatives (ETCDs), Gold ETFs, and Silver ETFs. Exposure to ETCDs is strictly limited to Gold and Silver.
These funds must have a minimum tenure of 5 years and a maximum tenure of 30 years. They can only be launched for tenures that are exact multiples of 5 years (e.g., 5, 10, 15, 20, 25, and 30 years).
A single mutual fund (AMC) is permitted to have a maximum of only six Life Cycle Funds active for subscription at any given point in time.
When a Life Cycle Fund reaches less than one year from its target maturity, the AMC may merge it with the nearest-maturity Life Cycle Fund. However, this action requires obtaining positive consent from the existing unitholders.
The funds must strictly adhere to regulatory asset allocation bands that dynamically adjust based on the years remaining to maturity. Equity exposure is permitted to be higher in the initial years (up to 95% for a 30-year fund) and systematically reduces as the target date approaches, with a corresponding increase in debt allocation. This is an example provided in the circular.
Duration (years)
Equity Allocation %
15 +
65 to 95
10 to 15
65 to 80
5 to 10
50 to 65
3 to 5
35 to 50
1 to 3
20 to 35
< 1
5 to 20
When the fund is within its final three years to maturity, exposure to debt instruments is strictly limited to those with a credit rating of AA or higher. Furthermore, the residual maturity of these specific debt instruments must be less than the target maturity of the overall scheme.
For funds with less than 5 years remaining to maturity, the manager may take up to 50% equity arbitrage exposure. This is permitted provided that the total aggregate investment in equity and equity-related instruments (directional and arbitrage combined) remains within the 65% to 75% range.
To enforce financial discipline and discourage early redemptions, a tiered exit-load structure is applied: a 3% charge for exits within the first year, a 2% charge for exits within two years, and a 1% charge for exits within three years of the initial investment.
The official name of the scheme must explicitly display its target maturity year (for example, “Life Cycle Fund 2045” or “Life Cycle Fund 2055”).
All Life Cycle Funds are mandated to follow the benchmark framework that is prescribed for the Multi-Asset Allocation Fund category.
Does it make sense to invest in life cycle mutual funds?
It is easy to guess what some investors are thinking. If I invest in a life-cycle fund, I will not have to worry about rebalancing, de-risking, taxes, exit loads, etc. Not so fast!
Practically no one is going to invest in just one fund. That would be way too risky.
Even if one decides to “spread the risk” by choosing a few life-cycle funds across AMCs, unless they are passively managed, the fund management risk is too high to assume that one would stay invested in the same funds for the entire goal duration.
Most investors will have additional equity and fixed-income instruments, so they cannot simply ignore or forget portfolio management duties like rebalancing and de-risking.
The asset allocation glide path tabulated above still carries significant risks. An equity allocation of 35 to 50% when the goal is 3-5 years away, and an equity allocation of 20-35% for a 1-3 year goal, is simply imprudent.
It is way too risky to leave the fate of your goal-based investing to SEBI and AMCs! You will have to do that and pay taxes associated with rebalancing or de-risking.
Wonder if SEBI should have given AMCs the freedom to choose their own glide paths instead of trying to police everything. At least that would have given investors some variety in the glide paths as a choice.
Therefore, we see no compelling reason for investors to choose life cycle mutual funds. In fact, it could turn out to be more risky than DIY portfolios.
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Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 13 years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), LinkedIn, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.
Published by CNBC TV18, this book is designed to help you ask the right questions and find the correct answers. Additionally, it comes with nine online calculators, allowing you to create custom solutions tailored to your lifestyle. Get it now.
This book is designed for young earners to get their basics right from the start! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.
This is an in-depth exploration of vacation planning, including finding affordable flights, budget accommodations, and practical travel tips. It also examines the benefits of travelling slowly, both financially and psychologically, with links to relevant web pages and guidance at every step. Get the PDF for Rs 300 (instant download)