In today’s Finshots, we explain SEBI’s circular on life cycle funds replacing ‘solution oriented schemes’.

The Story

If you’ve ever invested in a ‘retirement fund’ or a children’s fund, you probably assumed that as time went by it would automatically become safer and lower risk.

That sounds logical. But that wasn’t always built into the fund.

Because for years, these products sat inside a category called ‘solution-oriented schemes’. Under a 2017 circular, market regulator SEBI, grouped funds meant for long-term goals like retirement or a child’s future under this label.

And it included just two types of funds — retirement funds and children’s funds. They came with long lock-ins to discourage early withdrawals. But beyond that, the rules were fairly open-ended. SEBI didn’t require these funds to follow a fixed asset-allocation path or automatically reduce risk as the goal got closer. That decision was left to individual fund houses. So while the goal was clear in the name, how the fund behaved over time could vary widely.

To put that in perspective, let’s give you an example. Let’s say you’re 35 and investing in a retirement fund, planning to retire at 60. You assume the fund will take on more risk today and gradually become safer as you get closer to retirement. After all, you’d want growth when you’re younger and stability when you inch closer to the finish line.

But under the older rules, that shift in risk wasn’t mandatory. A retirement fund could remain heavily invested in equities even as you approached retirement. So two investors planning for the same milestone could end up in funds that behaved very differently, despite both being called “retirement funds”.

The name suggested a plan. But the portfolio didn’t always follow one.

And that gap between expectation and design is what SEBI aims to address in its latest circular.

It has reworked how goal-linked mutual funds are classified and introduced a new category.

They are calling it ‘Life Cycle Funds’ and the idea behind it is simple. Each fund is tied to a target year and follows a predetermined glide path.

What’s that, you ask?

Well, it’s like a built-in timetable for risk. Early on, when retirement is decades away, the fund can invest heavily in equities. As the target year approaches, it must steadily dial down risk and shift more money into safer assets like debt. So if you’re 35 today, the fund behaves aggressively. And by the time you’re in your 50s, it automatically becomes more conservative.

Now, you might think, “Equity is risky, but bonds can be risky too.” So, SEBI has accounted for that as well. Under the new rules, Life Cycle Funds can invest only in higher-quality debt instruments rated AA and above, and those bonds must mature before the fund itself does. In simple terms, the debt side can’t quietly take hidden risks either.

This marks an important shift. You no longer have to keep rethinking your portfolio every few years or switching funds as you age. The Life Cycle Fund adjusts risk automatically as time passes. This simply means that de-risking isn’t optional anymore, but simply built into the structure.

The focus also shifts from what a fund promises in its name to how the portfolio must behave over time. SEBI has drawn a clear line on naming. Fund houses can no longer use return-emphasising words like “wealth creators” or “high growth” in these schemes. The name must reflect the category, not hint at performance. In other words, it has to be ‘true-to-label’.

SEBI has also laid down structural guardrails.

Each Life Cycle Fund must have a fixed time horizon ranging from a minimum of 5 years to a maximum of 30 years. Investors know exactly what timeline they are signing up for. An AMC can launch only up to six such funds at any given time.

But then here’s the thing. As these funds near their target year, there’s another practical issue that can come up. Investors don’t all exit at the same time. Some withdraw early, others stay longer, and new inflows typically slow down. To prevent a fund from becoming too small toward the end of its life, SEBI allows it to be merged with the nearest maturity Life Cycle Fund if it has less than one year to go, provided the investors agree to it.

There’s also a behavioural nudge built in. If you exit within the first year, you could pay an exit load (a fee if you want to sell your units before the designated time) of up to 3%. In the second year, that falls to 2%. In the third year, 1%. After that, there’s no exit load. This tells you that the glide path works best when investors stay the course.

So yeah, with this, the old “solution-oriented” category is being discontinued. Retirement and children’s funds under this label must stop accepting fresh subscriptions. Fund houses will have to transition these schemes or reposition them under other categories.

In the end, this isn’t just about introducing a new fund type. It’s about aligning structure with expectation. Earlier, discipline was implied. Now it’s mandated. Risk has to follow a timetable. And long-term investing is written directly into the rulebook.

Until then…

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