SEBI to Permit Continued Offerings of Retirement and Children's Funds by Mutual Funds

SEBI Amends Life Cycle Fund Framework, Allows Continued Offerings of Retirement and Children's Schemes

On March 20, the Securities and Exchange Board of India (SEBI) released a Master Circular that permits mutual funds to continue offering retirement and children's schemes, subject to certain restrictions on the rollout of newly introduced life cycle funds. This decision comes after concerns were raised about the discontinuation of Solution-Oriented Funds as per the February 26 Categorization and Rationalization of Mutual Fund Schemes circular.

Key Restrictions

An Asset Management Company (AMC) choosing to continue a children's fund cannot launch a 20-year life cycle fund. Similarly, 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 will be barred from launching both the 20-year and 30-year life cycle funds, restricting it to only four tenures: 5, 10, 15, and 25 years.

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Life Cycle Fund Framework

SEBI has specified that life cycle funds will be open-ended schemes with defined maturity dates of 5, 10, 15, 20, 25, and 30 years, investing across equity, debt, gold, and silver ETFs, InvITs, and ETCDs, and following a strict glide path in asset allocation.

Glide Path Structure

The glide path structure applies proportionately to all life cycle funds, with higher equity bands applicable in earlier years and progressively shifting toward debt as maturity nears. For a 30-year fund, equity exposure ranges from 65-95% when the scheme has 15-30 years to maturity, moderating to 65-80% at 10-15 years, and further decreasing to 5-20% in the last year. Debt allocation correspondingly rises, ranging from 5-25% in early years to as high as 25-65% closer to maturity.

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Investment Guidelines

Debt investments must be in AA-rated and above instruments with residual maturity aligned to the scheme's target date. ETCD exposure is restricted to gold and silver only. For funds with less than 10 years to maturity, equity arbitrage exposure of up to 50% is permitted, provided total equity and equity-related exposure remains within 65-75%.

Exit Load and Benchmarking

To enforce long-term investing discipline, SEBI has mandated an exit load of 3% if investors redeem within one year, 2% within two years, and 1% within three years. Life cycle funds must follow benchmarking norms applicable to multi-asset allocation funds and include the maturity year in their names, such as "Life Cycle Fund 2045."