Markets regulator Sebi on Thursday proposed a new category of mutual fund scheme called life cycle funds, while scrapping the solution-oriented schemes category and tightening disclosure and portfolio-overlap norms as part of a revamped classification framework.

A life cycle fund is defined as an open-ended scheme with a pre-determined target maturity date. These schemes will invest across a diversified mix of asset classes — including equity, debt, Infrastructure Investment Trusts (InvITs), Exchange Traded Commodity Derivatives (ETCDs), and gold or silver exchange traded funds — to manage risk dynamically over time.

Mutual funds can launch these schemes with tenures ranging from a minimum of five years to a maximum of 30 years, offered in multiples of five. The key feature is the glide path, which determines how asset allocation changes as the scheme approaches maturity. When maturity is 15 to 30 years away, the fund can invest between 65 per cent and 95 per cent of assets in equity to maximise long-term growth.

In the final year before maturity, equity exposure will decline to between 5 per cent and 20 per cent, while debt investments may rise to as much as 65 per cent to protect the accumulated corpus. Investments in gold or silver ETFs, ETCDs and InvITs will be capped at 10 per cent.

To promote long-term investing, Sebi has proposed a tiered exit-load structure — 3 per cent for redemptions within the first year, 2 per cent within two years and 1 per cent within three years of investment.

Each asset management company will be allowed a maximum of six life cycle funds open for subscription at any time. Schemes with less than 12 months to maturity may be merged with the nearest maturity life cycle fund, subject to unitholders’ consent.

Sebi has barred fresh investments into existing children’s and retirement schemes with immediate effect. Analysts expect these schemes to be rebranded or merged into funds with similar risk profiles over the next six months.

“This is a massive step towards ‘True-to-Label’ investing. For years, ‘Children’s Funds’ were often just marketing gimmicks. Now, the name tells you exactly when the fund will mature (e.g., Life Cycle Fund 2050). It removes the emotion and replaces it with a data-driven schedule (the glide path) that protects the investor’s corpus exactly when they need it,” said Anindya Paulchaudhuri, co-founder and group CEO, Wealthapp Group.

Average net assets under management in retirement and children’s funds stood at ₹57,274.17 crore as of January 31, 2026. Paulchaudhuri said existing investors may soon receive notices, and their investments could be moved into life cycle funds with comparable maturity timelines. Including life cycle and sectoral debt schemes, the number of categories will rise to 40 from 36.

Portfolio overlap

Another key change announced by Sebi is the introduction of mandatory disclosures on category-wise portfolio overlap across mutual fund schemes. The regulator said these disclosures must be published monthly on asset management company websites to improve investor transparency.

Sebi has also permitted fund houses to offer both value and contra strategies, subject to a portfolio overlap cap of 50 per cent.

A similar 50 per cent ceiling has been prescribed for sectoral and thematic equity schemes. Existing schemes in these categories will have three years to comply, failing which they will be required to merge with other schemes under applicable norms.

“Portfolio overlap is a masterstroke, though operationally demanding, as portfolios will need to align more closely with their stated category,” said Nitin Agrawal, CEO – mutual funds, InCred Money.

Gold, silver exposure

The revised framework allows equity schemes to allocate their residual portion to permitted gold and silver instruments, while hybrid schemes can invest in gold and silver ETFs. The residual portion refers to assets remaining after meeting core allocation requirements.