Glide path

A Life Cycle Fund is an open-ended scheme with one target date. Investors use it to save for a future goal. Retirement is the classic case.

Most funds leave the equity-debt mix to the investor to rebalance. This one does not. As the target date gets closer, the scheme itself shifts that mix on its own. It follows a fixed, pre-set schedule. That schedule is the glide path.

A Life Cycle Fund can be launched with a target maturity ranging from 5 to 30 years, in multiples of five years, and a single mutual fund may have a maximum of six such funds open for subscription at any point in time.

The glide path governs how the mix of equity, debt and Gold ETFs changes over that life. As the fund moves toward its maturity date, the pattern the workbook tests is: the equity component moves down and the debt component moves up — the classic life-cycle logic of taking more risk when the goal is distant and less risk as it nears.

These schemes also carry a graded exit load: 3% for exit within the first year, 2% for exit within the first two years, 1% for exit within the first three years, and no exit load beyond three years.

Consider a hypothetical 25-year Life Cycle Fund, structured so its equity allocation glides down and its debt allocation glides up as the target date approaches — a young investor 25 years from retirement starts heavily weighted to equity for growth; the same investor, now 5 years from the target date, is weighted mostly to debt for capital protection. Gold ETFs sit alongside both as a smaller diversifying sleeve throughout.

An investor who exits 8 months after investing pays the 3% graded exit load for redemption within the first year. An investor who stays 4 years and then exits pays no exit load at all, since the graded load only applies within the first three years.

Chapter 4, section 4.5 (Life Cycle Funds), one of the five simple, performing scheme types the new cadre of distributors is permitted to sell. Expect a question on the direction of the glide path as maturity nears (equity down, debt up — this is stated as an actual sample question in the workbook), the 5-to-30-year tenure range in multiples of five, and the maximum of six such funds open for subscription at once.

• As maturity nears, equity falls and debt rises — not the reverse. This exact direction is tested as a sample question in the chapter.
• Tenure is 5 to 30 years, in multiples of 5 — a proposed 7-year or 18-year Life Cycle Fund would not fit the structure.
• A maximum of six Life Cycle Funds can be open for subscription from one mutual fund at any time — this caps proliferation of near-identical target-date products.
• The graded exit load (3%/2%/1%) tapers to zero after three years — do not confuse this with an ordinary scheme's flat exit load structure.
• A Life Cycle Fund is a distinct SEBI scheme category (D. Life Cycle Funds, one of the five broad categories); it is not simply a hybrid fund with a target date bolted on.