Sebi Withdraws Solution-Oriented Fund Category: Implications for Existing Schemes and Investor Action Required

Sebi Scraps Solution-Oriented Category, Introduces Life Cycle Funds

Overview

The Securities and Exchange Board of India (Sebi) has abolished the solution-oriented category of mutual fund schemes, effective immediately. This category included retirement and children's funds. In its place, Sebi has introduced Life Cycle Funds, a new class of open-ended mutual fund schemes with a set maturity date and a glide path for investing across various asset classes.

Key Features of Life Cycle Funds

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• Maturity dates: 5-30 years, with a glide path that systematically reduces equity exposure over time.
• Asset allocation: Equities, debt, InvITs, exchange-traded commodity derivatives, and gold and silver ETFs.
• Exit loads: 3% for exits within one year, decreasing to 2% for exits within two years and 1% for exits within three years.
• Alignment: Investments are aligned with specific financial goals by automatically adjusting the portfolio mix over time.

Impact on Existing Schemes

• Merger: Existing solution-oriented schemes will be merged into similar funds within a six-month timeline, subject to Sebi approval.
• Risk level: The strategy and risk level of existing schemes may change once the merger is complete.
• No new inflows: Existing schemes will be closed to new money, with a mandatory merger process ahead.

Transition Timeline

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• August-September 2026 deadline: AMCs have six months to align all schemes with the new categorisation framework and complete the merger process.

Asset Allocation Changes

• Glide paths: Existing schemes' glide paths will not continue as is, as the category itself is being dissolved. Post-merger, the asset allocation will shift to align with the receiving scheme's mandate.
• Risk management: Life Cycle Funds aim to manage risk by following a glide path that systematically reduces equity exposure over time.