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Sebi Life-Cycle Funds: The Securities and Exchange Board of India, or Sebi, announced new rules for mutual fund schemes on Thursday. One of the main changes is the introduction of life-cycle funds. At the same time, solution-oriented funds will no longer be allowed and have been stopped immediately. Sebi also said that Asset Management Companies, or AMCs, can now launch both contra and value funds. However, the overlap between the assets of these two types of funds must be less than 50%.
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Sebi has made similar updates before, including on 6 October 2017 and 6 November 2020.
Life-cycle funds are open-ended funds that follow a predetermined plan based on your goals, according to Sebi’s circular. These funds invest in different types of assets such as equity, debt, InvITs, ETCDs, and gold or silver ETFs. Sridharan Sundaram, a Sebi-registered investment advisor and founder of Wealth Ladder LLP, said the changes give investors “greater clarity.”
He explained, “These will include long-term funds with more allocation to equity and less to debt, whereas life-cycle funds (with a five-year lock-in) would be just like hybrid funds. With greater clarity, investors can decide based on their age and risk appetite.” Preeti Zende, founder of Apna Dhan Financial Services, said life-cycle funds “offer a significant advancement in simplifying the investment process while addressing key concerns around risk management and emotional decision-making.” She added, “These funds gradually shift from higher-risk equities to safer debt instruments as the target date (e.g., retirement) approaches, helping to protect capital.”
“For easy identification by investors, in order to bring uniformity in names of schemes for a particular category across mutual funds and to ensure that schemes remain ‘true to-label’, the scheme name shall be the same as the scheme category,” Sebi said.
Nikunj Saraf, CEO at Choice Wealth said that Sebi’s new classification rules are a meaningful step towards simplifying an industry that had become increasingly complex for retail investors.
“By clearly defining categories across equity, debt, hybrid and solution-oriented funds and setting uniform asset allocation boundaries, the regulator is ensuring that schemes truly reflect what they claim to be. This reduces overlap, improves comparability and brings much-needed transparency to product positioning,” he added.
Sebi also updated rules for other types of mutual funds. AMCs can now launch a fund of funds, or FOF, which invests in multiple underlying funds. FOFs are divided into six broad categories and 15 subcategories. The broad categories include equity-oriented FOF, debt-oriented FOF, hybrid FOF (domestic), commodity-based FOF (domestic), overseas FOF, and domestic & overseas FOF. These can be launched as active, passive, or a mix of both. Sridharan Sundaram said, “Now the fund of funds can only be based on broad asset categorisation and not on different themes such as volatility.”
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For value and contra funds, AMCs are allowed to offer both types, but the portfolio overlap between the two cannot be more than 50%. Similarly, for sectoral and thematic equity funds, no more than 50% of the scheme’s portfolio can overlap with other equity schemes in the same category, except for large-cap schemes.
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