Life cycle funds: A new category, but do they fit your portfolio needs?

Check the maturity date, glide path, costs, tax treatment and exit load before investing

Zerodha Mutual Fund has launched two life cycle funds maturing in 2036 and 2041, the first such launches after the Securities and Exchange Board of India (Sebi) introduced this category in February 2026. ICICI Prudential Asset Management Company (AMC) has also filed with Sebi for the launch of three life cycle funds maturing in 2031, 2036 and 2041. 

What are life cycle funds? 

Life cycle funds are designed around a specific target year. They help investors work towards long-term financial goals within a defined time horizon. “They invest across multiple asset classes, including equity, debt and commodities such as gold and silver,” says Vishal Jain, chief executive officer (CEO), Zerodha Fund House. 

A predefined glide path lies at the heart of these funds. “In the earlier years, the fund keeps the allocation more growth-oriented. As the target year approaches, it shifts the portfolio systematically towards a more conservative allocation,” says Jain. The transition happens automatically and does not require any action from the investor. 

Investors can use these funds for any financial goal, depending on the investment horizon. Life cycle funds come with multiple maturities, allowing investors to choose according to their goal tenure. 

Unlike the life cycle funds in the National Pension System (NPS), these funds are not linked to the investor’s age or to a specific goal. 

They are open-ended. An investor can enter a fund at any point, depending on the remaining maturity of the fund and how well it matches the financial goal. For instance, an investor can invest in a life cycle fund maturing in 2041 today with a 15-year horizon for retirement. Another can invest in the same fund 10 years later for a five-year goal such as a home-loan downpayment or buying a car. 

What investor problems do they solve? 

For most investors, the challenge is not only building the right asset allocation. The larger challenge is keeping the portfolio aligned with the goal and time horizon over many years. 

Life cycle funds are built around a clear finish line. Investors can choose a fund based on the year in which they expect to need the money. The portfolio then evolves over time through a predefined asset-allocation path. As investors move closer to the target year, the portfolio gradually becomes more conservative. “This shift towards safer assets aims to control downside risk closer to the goal,” says Vishal Dhawan, founder and CEO, Plan Ahead Wealth Advisors. 

These funds also help investors avoid common behavioural mistakes. “Investors may invest merely because an asset class looks attractive at that moment. They may avoid an asset class because it looks unattractive,” says Dhawan. 

Many investors may not book profits in an asset class that has done well because they fear missing out on short-term gains. “As a result, they may remain in aggressive asset classes for too long, even when they need the money soon,” says Dhawan. They may also hesitate to change the portfolio because of tax concerns. 

Others may use defensive asset classes even for long-term goals because aggressive assets appear overpriced, volatile or exposed to macroeconomic risk. 

“Life cycle funds can reduce the impact of such psychological and behavioural biases,” says Dhawan. 

Tax treatment is another advantage. “Asset-allocation rebalancing happens at the fund level and does not create capital gains tax implications for investors,” says Sadiya Khan, head product management, Mirae Asset Sharekhan. 

At maturity, the investor is taxed as equity even though the equity allocation reduces significantly. “The fund retains allocation to arbitrage to maintain equity taxation,” says Khan. 

Know the risks 

Life cycle funds may not match the exact time frame of every investor’s goal. This mismatch can occur because fund tenures have to be in five-year in intervals. 

The fund’s portfolio construction may also differ from what the investor actually requires based on their wealth and risk tolerance. 

Risk appetite can create another type of mismatch. “Long-tenure investors with a very high equity risk appetite may get equity allocation only up to 80 per cent,” says Khan.

 

These funds could carry a steep regulatory exit load of up to 3 per cent if the investor exits within the first three years. 

These are managed solutions, so investors do not control the equity investment strategy. “The funds may have a largecap-biased portfolio even when the investor prefers a midcap-biased portfolio in the initial phase,” says Khan. 

Investors should also watch out for concentration risk. Putting the entire investment meant for a financial goal in a single fund may increase underperformance risk. 

The rigid, time-based glide path may not consider the investor’s cash-flow needs. 

“These funds remain subject to equity volatility in the early years and interest-rate fluctuations in the later years,” says Abhishek Kumar, Sebi registered investment advisor and founder, SahajMoney.com. 

Who should consider them? 

Life cycle funds may suit people who are starting their investing journey. New investors tend to make basic mistakes, such as investing in the asset class that looks most attractive at that time. “A life cycle fund reduces the need to decide which asset class to pick at each stage,” says Dhawan. 

These funds may also suit investors who prefer buying a single instrument or a small number of instruments. They may suit those who do not want to monitor their investments frequently. 

Busy professionals, beginners and delegators, who lack the time, information or interest to manage asset allocation actively, may find these funds useful. 

Investors who find rebalancing and asset-allocation decisions difficult may also go for them. These funds may also be useful to investors who do not have a financial advisor. 

How to choose the right fund 

Start with the maturity date. The fund’s target year should match the year in which the investor expects to need the money. 

Next, examine the glide path. Check how the fund plans to reduce or shift allocations from riskier asset classes. “Assess whether that glide path matches your goal, time horizon and comfort with risk,” says Dhawan. 

Investors should also check the expense structure and the exit load before investing. 

Study the fund’s portfolio. “Examine risk on both the equity and debt side,” says Dhawan. Remember that even the debt component can be riskier than what the investor is comfortable with. 

Liquidity is equally important. “Investors should check whether they may need the money before the three-year exit-load period ends,” says Kumar. Short-term money should not go into a product that comes with steep early-redemption penalties.

 

Do's and Don'ts 

•    Monitor performance since life cycle funds do not yet have a track record 

•    Align allocation with existing assets linked to the same goal, such as EPF and NPS for retirement 

•    Avoid using these funds for short-term or emergency money