From solution-oriented to lifecycle funds: How Sebi's proposal may reshape your mutual fund portfolio?
With market regulator Securities and Exchange Board of India ( Sebi) announcing the discontinuation of solution-oriented funds and the introduction of a new category — life cycle funds — investors are assessing what the shift means for their mutual fund portfolios and long-term financial goals.
Life cycle funds will follow a glide-path strategy, dynamically allocating investments across asset classes such as equity, debt, InvITs, ETCDs, and gold and silver ETFs. These schemes will be launched with target maturities of 30, 25, 20, 15, 10 and 5 years.
In contrast, solution-oriented funds — typically labelled as retirement or children’s funds — carried a mandatory lock-in of at least five years and followed a relatively fixed asset allocation strategy.
Also Read | Sebi introduces life cycle funds. Here is what investors need to know
An alternative to solution-oriented funds?
A key question among investors is whether life cycle funds will serve as a replacement for solution-oriented schemes such as retirement and children’s funds — and what the transition means for existing investors.
Experts say the new structure makes life cycle funds more dynamic, aligning asset allocation with an investor’s changing risk profile over time. This contrasts with traditional solution-oriented funds, which typically follow a relatively static allocation strategy.
Pallav Agarwal, Certified Financial Planner at Bhava Services LLP, told ETMutualFunds that as per the Securities and Exchange Board of India (SEBI) circular, life cycle funds appear to replace solution-oriented schemes. Existing funds in the category will stop fresh subscriptions with immediate effect and will be merged with schemes having similar asset allocation and risk profiles. This restructuring could have an impact on investor returns, depending on the characteristics of the merged scheme.
Offering a different perspective, Sagar Shinde, VP–Research at Fisdom, said life cycle funds are not a direct continuation of solution-oriented schemes but rather a new framework introduced by SEBI for goal-based investing.
Shinde clarified that current solution-oriented schemes will not automatically convert into life cycle funds. Instead, they will be merged with other schemes that have comparable asset allocation and risk profiles, subject to regulatory approval. For existing investors, this means their investments will continue under the merged scheme, with the standard exit option available if they choose not to remain invested.
Niranjan Avasthi, Senior Vice President at Edelweiss Mutual Fund, believes the new life cycle fund category effectively replaces solution-oriented funds. He noted that the move addresses the issue of static allocation in older retirement schemes, better aligns risk with life stages, reduces emotionally driven asset allocation decisions, and mitigates taxation challenges faced when investors switch funds to adjust allocation.
In a post on X, Avasthi wrote, “SEBI introduces Life Cycle Funds. A new Life Cycle Fund category replaces existing Solution Oriented Funds (Retirement & Children’s Funds).”
https://x.com/avasthiniranjan/status/2026908848565661741?s=20
Shift to life cycle funds and suitability
Another major concern is whether the existing investments in retirement or children’s funds be automatically shifted into life cycle funds, and are these funds suitable for everyone?
Market experts point out that existing investments will not be automatically moved unless the fund house clearly communicates a merger or transition plan to the investor.
Shinde said that there will be no automatic migration of existing investments into life cycle funds; investors who currently hold retirement or children’s funds will be moved only into a comparable scheme through a merger, not into a life cycle fund, and if they want exposure to a life cycle strategy, they will need to invest in it separately.
The structure of life cycle funds makes them suitable for long-term, goal-based investors who prefer automatic asset allocation, but they may not be ideal for investors who want tactical flexibility, frequent withdrawals, or have changing risk profiles, Shinde further said.
Agarwal said that the current investments won’t be shifted into a Life Cycle fund automatically; they would be merged into an existing scheme with similar asset allocation and risk profile.
While highlighting that life cycle funds won't be suitable for aggressive investors due to reduction in equity exposure as the target date approaches, Agarwal further said that if investment in Life cycle funds is done and managed properly, they would be suitable for all the investors who follow goal-based investing
Also Read | Sebi discontinues children’s and retirement fund category; revamps categorisation, rationalisation rules
Taxation impact
Taxation is another area where investors are seeking clarity. Will shifting from solution-oriented funds to life cycle funds trigger a tax liability? According to experts, any switch, redemption, or merger that leads to a change in scheme structure could have tax implications depending on how it is executed.
Agarwal said AMCs would be launching life cycle funds in due course of time. Currently, the solution-based funds would be merged into an existing scheme, which won’t trigger any tax liability, and if in the future, an investor chooses to switch into a life cycle fund from the merged fund, it will attract tax liability.
With respect to taxation, Shinde said that if the change happens through an AMC-led scheme merger as part of SEBI’s reclassification, it is treated as a scheme merger and does not trigger capital gains tax. However, if an investor voluntarily redeems units from the merged scheme and invests the proceeds into a life cycle fund, that transaction will be treated as a redemption and fresh purchase, and capital gains tax will apply as per the holding period and the tax rules of the underlying scheme.
Investors are advised to wait for detailed guidelines from fund houses and consult advisors before making changes.
Portfolio diversification and overlapping in portfolio
According to the Sebi circular, the Life Cycle Funds shall follow benchmark framework as prescribed for Multi Asset Allocation Fund.
From a portfolio construction perspective, investors are also wondering how life cycle funds will affect diversification. Since these funds invest across equity, debt, and possibly other asset classes, can they improve diversification within a single product?
Experts say this can simplify portfolio management, especially for investors who find it difficult to rebalance across multiple funds on their own. That said, it remains important to look at overall exposure to avoid duplication with existing equity or debt funds.
Shinde said that life cycle funds provide built-in diversification because they invest across multiple asset classes, the allocation is not static; it follows a glide path that automatically shifts from higher equity exposure in the early years to higher debt exposure as the target date approaches and this structure reduces the need for manual rebalancing and helps manage risk over time, although it also limits the investor’s ability to actively change asset allocation based on market views
Agarwal said that as life cycle funds are similar to multi-asset allocation funds, they can invest into a mix of asset classes, including Equity, Debt, InvITs, ETCDs and Gold & Silver ETFs, and such an asset allocation with a reduction in equity allocation with time will suit investors with a moderate risk profile.
However, the investors who like to manage their asset allocation on their own, Life cycle funds would be too rigid for them as they won’t have any control on the asset allocation, Agarwal said.
Also Read | Radhika Gupta backs life cycle funds, says they’re simple, effective, practical for long-term planning
Single fund for different goals?
Finally, many investors are asking whether life cycle funds can replace multiple funds meant for different goals as the mutual fund investors invest in different funds which fulfill their different financial goals.
Experts believe they can, to an extent. For long-term, clearly defined goals like retirement or education, life cycle funds may reduce the need to hold and manage several separate schemes. However, for investors with varied goals and timelines, a combination of funds may still be required.
Agarwal said as different financial goals have different time horizons, a single life cycle fund cannot replace multiple funds meant for different goals and the investors need to choose a life cycle fund goal-wise, matching the duration of the life cycle fund with the goal.
To this, Shinde said that a life cycle fund can replace multiple funds used for a single long-term goal because it combines equity, debt and other asset classes within one structure and follows a predefined glide path that gradually reduces equity and increases debt as the goal approaches and this eliminates the need for investors to manually rebalance their portfolio over time.
“However, the effectiveness of a life cycle fund is not driven by asset allocation alone; fund management and security selection within each asset class also play a critical role. While the glide path determines the allocation across equity, debt and other assets, the quality of portfolio construction within those buckets will ultimately influence returns.”
Therefore, life cycle funds simplify allocation, but performance will still depend on how efficiently the fund is managed within the allowed ranges and additionally, for investors with multiple goals and different time horizons, separate life cycle funds aligned to each specific maturity would be required, Shinde further said.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
If you have any mutual fund queries, message on ET Mutual Funds on Facebook/Twitter. We will get it answered by our panel of experts. Do share your questions on ETMFqueries@timesinternet.in alongwith your age, risk profile, and twitter handle
Life cycle funds will follow a glide-path strategy, dynamically allocating investments across asset classes such as equity, debt, InvITs, ETCDs, and gold and silver ETFs. These schemes will be launched with target maturities of 30, 25, 20, 15, 10 and 5 years.
In contrast, solution-oriented funds — typically labelled as retirement or children’s funds — carried a mandatory lock-in of at least five years and followed a relatively fixed asset allocation strategy.
Also Read | Sebi introduces life cycle funds. Here is what investors need to know
An alternative to solution-oriented funds?
A key question among investors is whether life cycle funds will serve as a replacement for solution-oriented schemes such as retirement and children’s funds — and what the transition means for existing investors.
Experts say the new structure makes life cycle funds more dynamic, aligning asset allocation with an investor’s changing risk profile over time. This contrasts with traditional solution-oriented funds, which typically follow a relatively static allocation strategy.
Pallav Agarwal, Certified Financial Planner at Bhava Services LLP, told ETMutualFunds that as per the Securities and Exchange Board of India (SEBI) circular, life cycle funds appear to replace solution-oriented schemes. Existing funds in the category will stop fresh subscriptions with immediate effect and will be merged with schemes having similar asset allocation and risk profiles. This restructuring could have an impact on investor returns, depending on the characteristics of the merged scheme.
Offering a different perspective, Sagar Shinde, VP–Research at Fisdom, said life cycle funds are not a direct continuation of solution-oriented schemes but rather a new framework introduced by SEBI for goal-based investing.
Shinde clarified that current solution-oriented schemes will not automatically convert into life cycle funds. Instead, they will be merged with other schemes that have comparable asset allocation and risk profiles, subject to regulatory approval. For existing investors, this means their investments will continue under the merged scheme, with the standard exit option available if they choose not to remain invested.
Niranjan Avasthi, Senior Vice President at Edelweiss Mutual Fund, believes the new life cycle fund category effectively replaces solution-oriented funds. He noted that the move addresses the issue of static allocation in older retirement schemes, better aligns risk with life stages, reduces emotionally driven asset allocation decisions, and mitigates taxation challenges faced when investors switch funds to adjust allocation.
In a post on X, Avasthi wrote, “SEBI introduces Life Cycle Funds. A new Life Cycle Fund category replaces existing Solution Oriented Funds (Retirement & Children’s Funds).”
https://x.com/avasthiniranjan/status/2026908848565661741?s=20
Shift to life cycle funds and suitability
Another major concern is whether the existing investments in retirement or children’s funds be automatically shifted into life cycle funds, and are these funds suitable for everyone?
Market experts point out that existing investments will not be automatically moved unless the fund house clearly communicates a merger or transition plan to the investor.
Shinde said that there will be no automatic migration of existing investments into life cycle funds; investors who currently hold retirement or children’s funds will be moved only into a comparable scheme through a merger, not into a life cycle fund, and if they want exposure to a life cycle strategy, they will need to invest in it separately.
The structure of life cycle funds makes them suitable for long-term, goal-based investors who prefer automatic asset allocation, but they may not be ideal for investors who want tactical flexibility, frequent withdrawals, or have changing risk profiles, Shinde further said.
Agarwal said that the current investments won’t be shifted into a Life Cycle fund automatically; they would be merged into an existing scheme with similar asset allocation and risk profile.
While highlighting that life cycle funds won't be suitable for aggressive investors due to reduction in equity exposure as the target date approaches, Agarwal further said that if investment in Life cycle funds is done and managed properly, they would be suitable for all the investors who follow goal-based investing
Also Read | Sebi discontinues children’s and retirement fund category; revamps categorisation, rationalisation rules
Taxation impact
Taxation is another area where investors are seeking clarity. Will shifting from solution-oriented funds to life cycle funds trigger a tax liability? According to experts, any switch, redemption, or merger that leads to a change in scheme structure could have tax implications depending on how it is executed.
Agarwal said AMCs would be launching life cycle funds in due course of time. Currently, the solution-based funds would be merged into an existing scheme, which won’t trigger any tax liability, and if in the future, an investor chooses to switch into a life cycle fund from the merged fund, it will attract tax liability.
With respect to taxation, Shinde said that if the change happens through an AMC-led scheme merger as part of SEBI’s reclassification, it is treated as a scheme merger and does not trigger capital gains tax. However, if an investor voluntarily redeems units from the merged scheme and invests the proceeds into a life cycle fund, that transaction will be treated as a redemption and fresh purchase, and capital gains tax will apply as per the holding period and the tax rules of the underlying scheme.
Investors are advised to wait for detailed guidelines from fund houses and consult advisors before making changes.
Portfolio diversification and overlapping in portfolio
According to the Sebi circular, the Life Cycle Funds shall follow benchmark framework as prescribed for Multi Asset Allocation Fund.
From a portfolio construction perspective, investors are also wondering how life cycle funds will affect diversification. Since these funds invest across equity, debt, and possibly other asset classes, can they improve diversification within a single product?
Experts say this can simplify portfolio management, especially for investors who find it difficult to rebalance across multiple funds on their own. That said, it remains important to look at overall exposure to avoid duplication with existing equity or debt funds.
Shinde said that life cycle funds provide built-in diversification because they invest across multiple asset classes, the allocation is not static; it follows a glide path that automatically shifts from higher equity exposure in the early years to higher debt exposure as the target date approaches and this structure reduces the need for manual rebalancing and helps manage risk over time, although it also limits the investor’s ability to actively change asset allocation based on market views
Agarwal said that as life cycle funds are similar to multi-asset allocation funds, they can invest into a mix of asset classes, including Equity, Debt, InvITs, ETCDs and Gold & Silver ETFs, and such an asset allocation with a reduction in equity allocation with time will suit investors with a moderate risk profile.
However, the investors who like to manage their asset allocation on their own, Life cycle funds would be too rigid for them as they won’t have any control on the asset allocation, Agarwal said.
Also Read | Radhika Gupta backs life cycle funds, says they’re simple, effective, practical for long-term planning
Single fund for different goals?
Finally, many investors are asking whether life cycle funds can replace multiple funds meant for different goals as the mutual fund investors invest in different funds which fulfill their different financial goals.
Experts believe they can, to an extent. For long-term, clearly defined goals like retirement or education, life cycle funds may reduce the need to hold and manage several separate schemes. However, for investors with varied goals and timelines, a combination of funds may still be required.
Agarwal said as different financial goals have different time horizons, a single life cycle fund cannot replace multiple funds meant for different goals and the investors need to choose a life cycle fund goal-wise, matching the duration of the life cycle fund with the goal.
To this, Shinde said that a life cycle fund can replace multiple funds used for a single long-term goal because it combines equity, debt and other asset classes within one structure and follows a predefined glide path that gradually reduces equity and increases debt as the goal approaches and this eliminates the need for investors to manually rebalance their portfolio over time.
“However, the effectiveness of a life cycle fund is not driven by asset allocation alone; fund management and security selection within each asset class also play a critical role. While the glide path determines the allocation across equity, debt and other assets, the quality of portfolio construction within those buckets will ultimately influence returns.”
Therefore, life cycle funds simplify allocation, but performance will still depend on how efficiently the fund is managed within the allowed ranges and additionally, for investors with multiple goals and different time horizons, separate life cycle funds aligned to each specific maturity would be required, Shinde further said.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
If you have any mutual fund queries, message on ET Mutual Funds on Facebook/Twitter. We will get it answered by our panel of experts. Do share your questions on ETMFqueries@timesinternet.in alongwith your age, risk profile, and twitter handle
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