Individuals planning to invest in mutual funds for long-term goals such as retirement or children’s education will soon be able to select life cycle funds. The automatic transition feature in these funds ensures portfolio risk gradually aligns with the investor’s time horizon without requiring manual rebalancing.
These funds will follow a predefined glide path where equity allocation is higher when the goal is far away and reduces as the target date approaches, with a corresponding increase in debt and other relatively stable assets. The market regulator has proposed six types of life cycle funds, with maturity ranging from five to 30 years.
Most investors struggle not with selecting funds, but with maintaining the right allocation as their goals approach. These funds will solve that structurally through an automatic glide path. The de-risking process is gradual, predictable, and independent of market views. This reduces sequence-of-returns risk, which is particularly damaging in the final few years before a goal such as retirement or higher education.
The real value lies in behavioural discipline. Investors often fail to rebalance during bull markets and panic during corrections. A predefined glide path removes timing decisions and embeds de-risking into the product design. Even savvy investors who follow a glide path often face an Internal Rate of Return drag because periodic rebalancing triggers taxable events. Nirav Karkera, head, Research, Fisdom, says under the mutual fund structure, this internal churn typically does not create immediate tax liability for the investor, allowing gains to continue compounding until redemption. “This improves portfolio efficiency while keeping the focus on long-term outcomes.”
Retirement planning, children’s education
Sonam Srivastava, founder, Wright Research PMS, says such funds are structurally suitable for retirement planning. “Retirement is a long-term goal where asset allocation discipline matters more than product selection. A systematic glide path reduces equity risk as the investor ages, aligning portfolio volatility with declining risk tolerance and withdrawal needs.”
In a life cycle fund with maturity of 30 years, the equity exposure would be 65-90% when more than 15 years remain and then gradually fall to 5-20% by the time when one year remains. Investment in gold or silver exchange traded funds remains up to 10% throughout.
For children’s education, the suitability depends on how clearly the timeline is defined. Choosing a life cycle fund with maturity of 10 or 15 years would be ideal.
Early exit penalties
In order to inculcate financial discipline in life cycle funds, an exit load of 3% would be charged within one year of investment, 2% within the first two years of investment and 1% in the first three years of investment.
Aditya Agrawal, chief investment officer, Avisa Wealth Creators, says higher exit loads in the initial years discourage premature withdrawals and impulsive decisions. “The reducing structure rewards investors who stay invested longer,” he adds.
The structure thus reinforces long-term commitment, reduces impulsive exits during market volatility, and improves the probability of investors reaching their intended goals. If cost structures are competitive and the glide path design is sensible, life cycle funds can emerge as a preferred vehicle for long-term defined goals.