Life cycles funds: How will they help in retirement planning? Explained in 5 points

The schemes under this category will invest across various asset classes like equity, debt, InvITs, exchange-traded commodity derivatives (ETCDs), gold and silver ETFs. The ETCDs will also be based only on gold and silver.

This article explains five reasons why life cycle funds may offer a smarter path to retirement compared to other mutual funds.

1. Goodbye guesswork

For a retirement plan with mutual funds, you need equity schemes for growth, debt funds for stability, gold schemes for hedging, and so on. Given the ever-rising number of mutual funds, finding the right mix of schemes for retirement planning based on one's risk capacity has almost become guesswork. You never know what will work for you and what won't, or what to trust, unless you are guided by a trusted advisor.

However, proper diversification and smart asset allocation across equity, debt, and commodities are non-negotiable for any retirement plan. Life cycle funds could help here by taking the guesswork out of one's retirement path.

Since life cycle funds will invest across asset classes, including gold and silver, they may serve as a one-stop solution for retirement savings, offering better liquidity than NPS and better diversification and asset allocation in one place compared to investing separately in multiple fund categories.

2. Goal-based investing

Life cycle funds will be suitable for goal-based investment planning, including retirement, according to details shared by SEBI in its circular.

Radhika Gupta of Edelweiss Mutual Fund says, a scheme under the new category could be a big step in your goal-based investing journey. "The introduction of Life Cycle Funds under the new scheme categorisation framework is a big step for goal-based investing," Gupta wrote in a post on X.

Deepak Shenoy of Capitalmind Mutual Fund said, "It's here! Cannot be happier about this. India will get target date funds. Retire, or plan for a goal and auto taper it, with maximum tax efficiency!"

While life cycle funds will invest across asset classes, they will also have a target maturity date, reflected in their nomenclature.

"Life Cycle Funds shall include the maturity date in the nomenclature of the scheme, for e.g. Life Cycle Fund 2055, Life Cycle Fund 2045 etc," SEBI said.

The asset allocation for life cycle funds will be in the following manner:

3. Glide path for automated investing

Mutual funds will be allowed to launch life cycle funds with a minimum tenure of five years and a maximum tenure of 30 years. SEBI said, "Such fund may be launched for tenures in multiple of 5 years and a maximum of 6 funds by a Mutual Fund can be active for subscription at any given point in time."

"Additionally, as each fund reaches less than 1 year to maturity, such fund may be merged with nearest maturity Life Cycle Fund with positive consent from the unitholders," it added.

The life cycle funds will follow a glide path for investing, which is basically a strategy that gradually reduces risks to the portfolio as the investor nears a specific goal. This is done by shifting assets from high-growth volatile assets like equity to safer instruments like bonds as the investor nears the goal.

Based on the years to maturity, the scheme will adjust assets among equity, debt, and others.

For instance, if the years to maturity of a 30-year life cycle fund is 15-30 years, then it will invest anywhere between 65% to 95% in equity, 5-25% in debt, and 0-10% in other assets.

However, if the years to maturity of the same scheme is less than a year, then it would invest only 5-20% in equity, 25-65% in debt, and 0-10% in other assets.

4. All-time compounding

While life cycle funds will be open-ended, meaning you can enter and exit any time, they will have a higher exit load of 3% if investments are redeemed within 1 year, 2% if redeemed within the first two years, and 1% if redeemed in the first three years. This will dissuade investors from early redemption, unless it is unavoidable, and enjoy better compounding.

"In order to inculcate financial discipline, in life cycle funds, an exit load of 3% would be chargeable on any exit by an investor within one year of investment; an exit load of 2% within first two years of investment and 1% in the first three years of investment," SEBI said.

Moreover, as these schemes will be investing across asset classes, compounding may never stop. More so because asset classes generally perform in cycles. This means that at any time, one or other part of the portfolio may continue to compound wealth and counter the fall if other assets lag.

Life cycle funds will follow a benchmark framework similar to Multi Asset Allocation Fund. However, due to glide path investing, they will be more suitable for goal-based investing.

5. Potential tax-saving

If you invest on your own across asset classes, there will always be a chance of some tax leakage during portfolio rebalancing. Life cycle funds may solve this as investors would not be liable to tax if the fund managers do portfolio rebalancing across asset classes.

"Asset allocation automatically aligns to an investor’s time horizon, gradually moving from equity to lower-risk assets as the goal nears. That reduces the need for constant decision-making, keeps investors disciplined, and does so within a tax-efficient structure," said Gupta.