- SEBI introduced Life Cycle Funds with a glide-path shifting from equity to debt by maturity
- Fund of Funds now follow standardised categories with minimum 95% assets in underlying schemes
- Existing schemes must align with new rules within six months of the February 26 circular
Securities and Exchange Board of India (SEBI), has unveiled a sweeping overhaul of mutual fund categorisation, introducing Life Cycle Funds as a new category and rolling out a detailed framework for Fund of Funds (FoFs) with multiple underlying schemes.
In a February 26 circular, SEBI superseded earlier provisions on scheme classification and consolidated a revised structure aimed at ensuring funds remain “true-to-label,” while accommodating new asset classes and strategies.
The revised framework takes effect immediately, with existing schemes required to align within six months.
Life Cycle Funds: Glide Path With Target Maturity
Life Cycle Funds will be open-ended schemes with a predefined maturity date and a glide-path asset allocation that shifts gradually from equity to debt as the fund approaches maturity, as detailed in the circular.
These funds can have tenures ranging from 5 to 30 years, in multiples of five. Equity allocation will be higher in early years - for instance, up to 65-95% for funds with long maturity - and taper progressively as the target date nears. Exposure to gold, silver ETFs, InvITs and ETCDs is capped within defined bands.
To encourage long-term investing, exit loads of up to 3% in the first year, reducing over three years, have been prescribed. The scheme name must include the maturity year - for example, "Life Cycle Fund 2045".
FoFs Standardised, Caps Introduced
SEBI has also standardised the structure and nomenclature for Fund of Funds with multiple underlying schemes. FoFs may now be launched under clearly defined buckets such as equity-oriented, debt-oriented, hybrid, commodity-based, overseas, and domestic-plus-overseas categories.
Minimum investment in underlying schemes has been set at 95% of total assets. The regulator has capped the number of FoFs an AMC can launch per sub-category and provided specific naming conventions to avoid product proliferation and confusion. Existing schemes exceeding limits may be grandfathered but no new launches beyond caps will be allowed.
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Core Scheme Buckets Retained
Beyond the two headline changes, SEBI has retained five broad scheme groups: Equity, Debt, Hybrid, Life Cycle Funds, and Other Schemes such as Index Funds, ETFs and FoFs.
Within equity schemes, minimum allocation thresholds have been reaffirmed. For example, multi-cap funds must invest at least 75% in equities with 25% each across large-, mid- and small-cap stocks, while large-cap funds require 80% allocation to large caps.
Debt funds continue to be classified by Macaulay duration bands - from overnight and liquid funds to long-duration and dynamic bond funds - with detailed allocation norms. Hybrid funds retain categories such as conservative, balanced, aggressive, dynamic asset allocation, and multi-asset allocation schemes.
Naming, Overlap and Compliance Tightened
To improve comparability, SEBI has mandated that scheme names match their category and avoid return-focused phrases. The "type of scheme" description must adhere to uniform wording.
Sectoral and thematic equity schemes will face portfolio overlap caps of 50% with other equity schemes, computed quarterly using a defined methodology. Existing schemes have a three-year glide path to comply.
Importantly, the "solution-oriented" category has been discontinued. Existing schemes under this label must stop fresh subscriptions and merge with similar schemes after regulatory approval.
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