The capital market regulator, the Securities and Exchange Board of India (SEBI), in the last week of February 2026 overhauled mutual fund categorisation and rationalisation norms.
This comes over eight years after the regulator first introduced mutual fund categorisation and rationalisation norms to help investors identify mutual funds by asset class, market capitalisation and investment style, and to ensure schemes remain true to label.
Among the changes, a key one is the discontinuation of Solution-Oriented Funds offered as children's funds and retirement funds.
The regulator directed existing Solution-Oriented Funds to stop all subscriptions with immediate effect and merge with another scheme with a similar asset allocation and risk profile, subject to prior approval from SEBI.
The discontinuation of Solution-Oriented Funds may stem from the fact that many of these schemes did not remain true to label.
Instead, the regulator introduced a new category called Life Cycle Funds.
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What are Life Cycle Funds?
These are open-ended funds with attributes of predetermined maturity and a glide path for goal-based investing.
They must invest across asset classes — equity, debt, InvITs — infrastructure investment trusts, Exchange Traded Commodity Derivatives (ETCDs) — exchange-traded contracts linked to commodities — and gold and silver ETFs.
Fund houses can launch Life Cycle Funds with a minimum tenure of five years and a maximum tenure of 30 years.
A Life Cycle Fund can be launched for tenures in multiples of five years, and a fund house can have up to six such funds open for subscription at any given time.
Depending on when a Life Cycle Fund is launched, the scheme name will include the maturity year, such as Life Cycle Fund 2055 or Life Cycle Fund 2045.
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The Glide Path for Asset Allocation
From an asset allocation perspective, as a fund approaches maturity, allocation to equities reduces and shifts towards debt instruments.
For example, Life Cycle Funds with maturities of 30, 25 and 20 years are expected to follow this asset allocation path.
For Life Cycle Funds with maturities of 15, 10 and five years, the maximum allocation to equities declines further as maturity approaches, while allocation to debt instruments rises.
When the years to maturity fall below five years, the regulator allows Life Cycle Funds to take equity arbitrage exposure — a strategy that seeks to capture price differences between markets — of up to 50% in addition to the specified equity allocation range. At the same time, total investment in equity and equity-related instruments must remain within 65%–75% in such schemes.
When the fund reaches less than one year to maturity, the regulator permits it to merge with the nearest maturity Life Cycle Fund with positive consent from unitholders.
In other words, these funds are structured like multi-asset funds, except they follow a glide path strategy for asset allocation.
For benchmarking performance, Life Cycle Funds can use the same benchmarks used by Multi Asset Allocation Funds.
Can Life Cycle Funds Help Achieve Financial Goals?
The glide path approach to asset allocation provides a framework to plan financial goals such as children's future needs and retirement, provided investors remain aware of their risk profile, the time horizon for those goals and maintain financial discipline.
To encourage financial discipline, the regulator allows Life Cycle Funds to levy an exit load as follows:
- 3% if the investor exits within one year of investment
- 2% if the investor exits within the first two years of investment
- 1% if the investor exits within the first three years of investment
To benefit from compounding — the process where returns generate further returns — investors may need to stay invested for the long term after making a choice aligned with their financial goals.
Indian equities have shown wealth creation over long periods. Over the past 30 years, the BSE Sensex recorded a CAGR — compound annual growth rate, the average yearly return over a period — of about 13.2% as of 27 February 2026. Gold and silver delivered a CAGR of around 12.2% and 12.8% over the same period. These precious metals rose during the super cycle seen in the past few years, particularly after the COVID-19 pandemic.
Despite events such as the dot-com bubble of 2000 and the global financial crisis of 2008, equities have performed well and have outpaced gold and silver. Debt instruments, in comparison, have provided stability.
What About Taxation of Life Cycle Funds?
Taxation of Life Cycle Funds remains unclear due to their hybrid allocation across asset classes and the glide path approach.
This is a concern raised by the Indian mutual fund industry because equities currently receive more favourable tax treatment than debt instruments.
Uncertainty also remains on how the merger of Solution-Oriented Funds will be taxed if they merge with Life Cycle Funds.
Because a Life Cycle Fund follows a glide path asset allocation strategy and gradually increases allocation to debt, taxation as a debt-oriented mutual fund could discourage investors.
While Life Cycle Funds mark a policy shift, market participants are seeking clarification from the regulator on taxation.
The coming months may see mutual funds realign existing schemes to comply with SEBI's revised framework.
If you are considering Life Cycle Funds, assess your risk profile, investment objective, financial goals and the time available to achieve them.
Happy investing.
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