Explainer: How Life Cycle Funds Work And Why They Replaced Solution-Oriented Schemes

India is increasingly financialising household savings through mutual funds. Data released by the Association of Mutual Funds in India (Amfi) for the month of July 2026 showed that the total assets under management (AUM) of domestic mutual funds reached a record high of Rs 85.76 lakh crore.

The data shows that Indians are increasingly using mutual funds to achieve their life goals. Life cycle funds are one such way to invest money to plan and meet your financial goals.

What Are Life Cycle Funds

Life cycle funds are a type of mutual fund schemes introduced by the Securities and Exchange Board of India (Sebi) on February 26, 2026. According to Sebi, life cycle funds are a new category of open-ended mutual fund schemes designed around a fixed target maturity date.

Life cycle funds are also called target date funds as these schemes are designed to align with an investor’s future goals. Thus, such schemes have to mandatorily add their target year directly into the fund’s name, such as “Life Cycle Fund 2050”. Such funds provide a diversified portfolio that shifts its asset allocation over time.

Why Were Solution-Oriented Schemes Reclassified

Prior to the introduction of ‘life cycle funds’, mutual fund schemes with a similar design were classified as ‘solution-oriented schemes’. These types of schemes typically included children’s funds and retirement funds.

The reclassification of ‘solution-oriented schemes’ into ‘life cycle funds’ was led by Sebi’s observation that schemes lacked a mandatory ‘glide path’ and relied on static allocations.  As a result, the portfolios of such schemes would look identical to regular equity or hybrid funds.

Highlighting the rationale for this reclassification in its consultation paper, Sebi stated that “there was a significant overlap of portfolios” across the industry. The regulator said “it was therefore felt necessary to introduce clear limits to the industry to avoid schemes with similar portfolios”. 

By discontinuing fresh subscriptions to those older schemes and mandating a strict timeline based framework for the new life cycle funds, Sebi sought to ensure that investors get a true to label, goal driven product for long term wealth creation.

How Do Life Cycle Funds Work

A standard equity fund or hybrid fund maintains a consistently high allocation to equity indefinitely. If an investor retains their holding in such a fund up to their retirement, a sudden stock market crash could potentially wipe out a portion of their savings. Alternatively, index funds would require the investor to manually sell off equity and buy debt as their goal approaches.

However, life cycle funds remove the task of switching allocations, as lifestyle needs change with age. Life cycle funds operate on a predefined regulatory rule called a ‘glide path’, which mechanically adjusts the fund’s exposure to various asset classes based on the number of years remaining till maturity.

Such funds are launched with specific target tenures in multiples of five years. In the early stage of the investment, the fund manager allocates a high percentage of the corpus to equities to maximise growth when risk tolerance is highest. As the maturity date nears, the fund transitions into a conservative portfolio to preserve the wealth.

What Investors Need to Know

Investors must understand that the rigid nature of the glide path which life cycle funds have reduces equity exposure based on the calendar year rather than market conditions. Since the fund shifts to debt regardless of whether the stock market is booming or crashing, an investor might miss out on returns if a market rally occurs.

Additionally, investors need to know that these funds also come with graded exit loads. Redemptions made within the first three years attract exit penalties ranging from one to three per cent.