Sebi Revamps Mutual Fund Structure with New Life-Cycle Funds
Major Changes in Mutual Fund Categorization
The Securities and Exchange Board of India (Sebi) has implemented significant reforms in mutual fund categorization, introducing life-cycle funds while eliminating the solution-oriented scheme category effective immediately. As part of this initiative, existing solution-oriented schemes will cease to accept new subscriptions, aiming to streamline product structures and enhance investor clarity.
Understanding Life-Cycle Funds
Life-cycle funds are open-ended investment schemes tailored for goal-oriented investing, featuring a set maturity date and a gradual asset allocation strategy. These funds progressively adjust their asset mix, typically transitioning from a higher equity allocation in the initial years to more secure debt instruments as the target date nears. They can invest in various asset classes, including equity, debt, InvITs, exchange-traded commodity derivatives (ETCDs), and ETFs for gold and silver.
Experts believe this structure simplifies the investment process. Sridharan Sundaram, a Sebi-registered investment advisor and CEO of Wallet Wealth, emphasized that life-cycle funds enable investors to select allocations that correspond with their age, investment timeline, and risk tolerance. Longer-term funds will maintain a higher equity exposure, while shorter-term options may function similarly to hybrid funds.
Preeti Zende, founder of Apna Dhan Financial Services, mentioned that the gradual transition from equity to debt aids in risk management and minimizes emotionally driven investment choices, especially for objectives like retirement.
Key Regulatory Updates
1. Discontinuation of Solution-Oriented Funds
Sebi has completely phased out this category, with current schemes stopping new inflows.
2. Expansion of Fund of Funds Framework
Asset management companies (AMCs) are now permitted to introduce fund-of-funds across six major categories: equity, debt, hybrid (domestic), commodity-based (domestic), overseas, and mixed domestic-overseas. These can be designed as active, passive, or hybrid strategies. The regulator has specified that FOFs should focus on broad asset categories rather than narrow themes like volatility.
3. Combined Value and Contra Funds
Mutual funds can now incorporate both value and contra strategies, provided that the portfolio overlap between the two does not exceed 50%.
4. Capping Sectoral and Thematic Overlap
For sectoral and thematic equity schemes, the overlap with other equity schemes will be restricted to 50%, excluding large-cap funds.
Implications for Your Investment Portfolio
These changes reflect Sebi’s commitment to promoting clearer, goal-oriented investment products while minimizing redundancy across schemes. Life-cycle funds are anticipated to attract long-term investors looking for automated asset allocation, while stricter overlap regulations may alleviate confusion and enhance diversification within portfolios. Overall, this overhaul aims to simplify investment choices, bolster risk management, and make mutual fund structures more comprehensible and user-friendly for investors.