Explained: Thinking of investing in life cycle funds? Here's what investors should know

Sebi in February 2026 launched a new category - life cycle funds that automatically adjust their asset allocation as a pre-defined target year approaches. Here is all about life cycle funds one should know, as reported by ET Bureau. Zerodha Mutual Fund and ICICI Prudential Mutual Fund already filing draft scheme documents with SEBI.

These funds follow a glide-path strategy, starting with a higher allocation to growth-oriented assets such as equities and gradually shifting towards relatively safer assets such as debt and money-market instruments. They also aim to reduce portfolio risk as investors move closer to a financial goal, such as retirement or a child’s education.

Known globally as Target Date Funds, these products have been around for more than three decades and are widely used in developed markets such as the US and Europe. Target-date funds have become popular retirement vehicles because they simplify asset allocation

These funds can invest across multiple asset classes, including equities, debt securities, gold and silver ETFs, REITs and InvITs, subject to SEBI-prescribed limits. In the initial years, the portfolio is tilted towards equities to capture long-term growth. As the target year approaches, equity exposure is progressively reduced and debt allocation increased.

These funds are best suited for investors pursuing long-term goals with a defined time horizon, such as retirement, children’s education or wealth accumulation. They may particularly appeal to first time investors and those who lack the time or expertise to actively monitor and rebalance their portfolios.

The pre-defined glide path may not suit every investor’s risk appetite or financial circumstances. Returns can be affected by equity-market volatility in the early years and interest-rate movements in the debt portion later on.

Some experts also argue that a fixed glide path may not be optimal in changing market conditions. Investors should therefore assess whether the fund’s asset-allocation schedule aligns with their investment objectives and risk profile.

Investors should check how the fund gradually shifts from equities to debt as it nears the target year. Investors should also compare these funds with alternatives such as hybrid funds, retirement funds, NPS and self-managed portfolios.

SEBI has prescribed exit loads of up to 3% to discourage early redemptions. An exit load of 3% applies if units are redeemed within one year, 2% within two years and 1% within three years. No exit load applies after three years.