SEBI Approves Continuation of Retirement and Children's Funds, Amid Uncertainty Over Future Growth

Mutual Fund Categorisation Update: SEBI Allows Continuance of Retirement and Children's Funds

On March 20, the Securities and Exchange Board of India (SEBI) released a Master Circular allowing mutual funds to continue offering retirement and children's funds. This move provides regulatory stability to the category, which has been under scrutiny since SEBI's February 28 overhaul of Mutual Fund Categorisation.

Key Features of the Circular

• An Asset Management Company (AMC) choosing to continue a children's fund cannot launch a 20-year life cycle fund.
• An AMC retaining a retirement fund cannot introduce a 30-year life cycle fund.
• If an AMC opts to continue both retirement and children's funds, it can only launch life cycle funds with tenures of 5, 10, 15, and 25 years.
• AMCs that discontinue both legacy categories can launch the full set of six life cycle funds.

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Challenges Facing the Category

Despite the conceptual appeal of solution-oriented funds, the category remains modest, comprising roughly 40 schemes with total assets under management (AUM) of around Rs 70,000 crore. The main challenges facing the category include lock-ins, which restrict liquidity and reduce investor comfort. Equity-oriented retirement funds deliver long-term returns of 12-14%, while debt-oriented retirement funds show 6-8% returns, and children's hybrid funds generate three-year returns of 10-15%.

Competition from Insurance Products

The category is also facing competition from insurance products, which are better packaged, more visible, and widely adopted. Scripbox's Sachin Jain noted that the portfolio construct of solution-oriented funds is largely similar to existing categories like flexi-cap or diversified funds, offering no clear advantage.

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Fund House Perspective

Fund houses maintain that the category is not lagging and is slowly gaining traction. Shradha Thakker, Lead - Strategic Product Development at ICICI Prudential AMC, believes that the category is slowly gaining relevance and that awareness over the last two-and-a-half years has improved, helping traction.