Life Cycle Fund
An open-ended scheme with a target maturity date between 5 and 30 years, which follows a glide path across equity, debt and other assets — shifting away from equity as maturity approaches.
In plain language
Most people's risk capacity changes over time. Someone saving for a goal 25 years away can ride out equity's swings; the same person two years from the goal cannot afford a crash. A life cycle fund builds that change into one scheme.
It is an open-ended fund with a target date of maturity, following a glide path — a pre-set plan for how the mix of asset classes shifts as that date approaches. The workbook's Chapter 4 sample question confirms the direction: as the fund moves towards maturity, the equity component moves down and the debt component goes up.
The investor picks the fund whose maturity matches their goal and stays. There is no need to rebalance from equity to debt personally as the goal nears; the fund does it.
V-B treats life cycle funds in Chapter 4, the chapter on products for the new cadre of distributors — though, as the traps below note, the new cadre's own product list does not name them.
How it works
The rules as the workbook states them:
| Feature | Rule |
|---|---|
| Structure | Open-ended, with a target maturity date |
| Tenure | Minimum 5 years, maximum 30 years |
| Launch | Tenures in multiples of 5 years |
| Active funds | A maximum of 6 funds by a mutual fund can be active for subscription at any point in time |
| Glide path | Equity moves down, debt moves up as maturity approaches |
| Exit load (Chapter 4) | Graded: 3% for exit in the first year, 2% within two years, 1% within three years; nil beyond three years |
The permitted asset mix is described slightly differently in two places. Chapter 2 lists Equity, Debt, InvITs, ETCDs, Gold and Silver ETFs. Chapter 4 lists Equity, Debt, Gold ETFs, etc. The Chapter 2 list is the fuller one.
Why "multiples of 5 years, maximum 6 active"? Tenures of 5, 10, 15, 20, 25 and 30 years give exactly six possible funds — one per five-year maturity bucket — so an investor can match a goal to within five years without a fund house proliferating near-identical schemes.
Returns, as the workbook puts it, depend on how the money is allocated between equity and debt — which, in a life cycle fund, is precisely what the glide path decides.
A worked example
Kiran, 35, is saving for retirement at 60 and chooses a life cycle fund with a 25-year tenure. She invests Rs 5,00,000. The glide path and returns below are illustrative; the workbook specifies the direction, not the percentages.
| Years to maturity | Equity | Debt and others |
|---|---|---|
| 25 | 80% | 20% |
| 15 | 65% | 35% |
| 5 | 40% | 60% |
| 1 | 20% | 80% |
Suppose equity falls 30 per cent in a single year. Compare the impact at two points on the glide path, on a holding of Rs 20 lakh, assuming the debt portion is unchanged:
| Stage | Equity held | Loss from 30% fall | Loss as % of holding |
|---|---|---|---|
| 15 years to go (65% equity) | Rs 13.0 lakh | Rs 3.90 lakh | 19.5% |
| 1 year to go (20% equity) | Rs 4.0 lakh | Rs 1.20 lakh | 6.0% |
The glide path is what keeps a late crash from wrecking the goal.
Now the exit load. If Kiran instead redeemed Rs 5,00,000 after 18 months, the Chapter 4 graded structure applies a 2 per cent load — Rs 10,000. After three years, nil.
Why NISM asks about it
Chapter 2, section 2.2 (scheme categorisation, "Life Cycle Funds"), gives the 5–30 year tenure, multiples of 5 and the six-fund cap; Chapter 4, section 4.5, repeats them with the graded exit load, and Chapter 4's sample question tests the glide-path direction. Expect those recall points: tenure range, launch multiples, maximum active funds, and what happens to equity as maturity nears.
Common exam traps
- Equity goes down and debt goes up as maturity approaches — not the reverse, and not a gold shift.
- Tenure: 5 to 30 years, in multiples of 5.
- Maximum 6 funds active for subscription per mutual fund at any time.
- It is open-ended, despite having a target maturity date.
- Graded exit load in Chapter 4: 3%, 2%, 1% over the first three years, nil after.
- Asset mix wording differs — Chapter 2: equity, debt, InvITs, ETCDs, gold and silver ETFs; Chapter 4: equity, debt, gold ETFs, etc.
- Do not confuse with a Target Maturity Fund, which is a debt fund holding bonds maturing near its target date.
- Chapter 4 is titled for new cadre products, but its list of what the new cadre may sell — liquid/money market, index, diversified equity, retirement benefit schemes having tax benefits, and FMPs — does not include life cycle funds, and its learning objectives say "Retirement Benefit Schemes" where section 4.5 covers life cycle funds. Do not assume a new cadre distributor may sell them.
Where this is taught
- Series V-D · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series XVII · Chapter 2: Financial Markets & Investment Productsintroduced here
- Series V-B · Chapter 4: Mutual fund products for the new cadre of distributorsintroduced here
- Series X-A · Chapter 11: Mutual Fundintroduced here
Related terms
- Exit loadA charge levied when an investor redeems units, calculated as a percentage of NAV and deducted from it, usually only if the units are sold within a stated holding period.
- Index fundsA passive open ended scheme that replicates or tracks a specific index, investing at least 95 percent of total assets in that index's securities, bought and redeemed from the fund rather than on an exchange.
- Mutual fundA trust registered with SEBI that pools money from many investors and invests it in securities on their behalf — not a different product from shares and bonds, but a different way of owning them.
- Asset classA grouping of investments with similar characteristics. The workbook names four broad asset classes — real estate, commodities, equity and fixed income — each with its own sub-categories.
- Target Maturity FundA debt mutual fund designed to mature on a specific date, holding bonds that mature around the same time — minimising reinvestment risk and giving a more predictable return to a defined horizon.
- Auto ChoiceThe NPS investment option in which your contributions go into a lifecycle fund that automatically cuts equity and raises corporate bonds and government securities as you grow older.
- New cadre of distributorsA limited class of mutual fund distributors SEBI allowed from 2012 — postal agents and retired government or bank officers among them — who may sell only five kinds of simple and performing schemes.