Mutual funds are cautious about newly introduced life-cycle funds, despite the Securities and Exchange Board of India (Sebi) pitching them as simple, goal-based investment vehicles that automatically reduce risk as investors near their financial milestones.
“Life-cycle funds have some potential in the long term. However, there is not much excitement about it since this is not a good environment for an NFO (new fund offer). This may not be the right time to start a new scheme,” said a senior executive at a fund house on the condition of anonymity.
A life-cycle fund follows a predetermined “glide path”, gradually shifting investments from growth-oriented assets such as equities towards debt as it approaches maturity.
Such funds can invest across equity, debt, gold and silver exchange-traded funds, infrastructure investment trusts, and exchange-traded commodity derivatives, with tenures ranging from 5 to 30 years.
But market volatility stemming from the US-Iran war has made fund houses wary of new launches. Sebi introduced the category on 26 February, allowing each fund house to have a maximum of six active life-cycle funds at any given time, just two days before the US and Israel launched airstrikes on Iran.
The Indian stock market has been bearing the brunt of the US-Iran war, with benchmark indices seeing reduced trading activity. The Nifty 50 cash market turnover has fallen 40% to ₹24,577.43 crore as of 10 July, while BSE Sensex turnover has more than halved to ₹1,105.61 crore since the start of the war on 28 February. The Sensex trading volume has also dropped by 60% over the same period.
Investor demand
Fund houses are currently unsure whether Indian investors are ready for a product that requires them to remain invested for decades while the fund automatically adjusts its asset allocation.
“We are closely watching the demand for life-cycle funds before launching them. While the life-cycle approach is appealing, as of now, there is already an independent way of planning for different life stages or retirement through individual funds,” said Madhu Nair, chief executive officer (CEO) at Union Mutual Funds.
Another asset management company executive said the product's success would depend less on returns than on investor behaviour.
“The success of life-cycle funds cannot be based on market performance. It will be based on the attitudinal shift of the investor. If the investor does not change their attitude, the product is unlikely to gain traction,” the executive said on the condition of anonymity, adding it may take three to four years for this product to properly take off.
So far, only a handful of asset managers have moved to launch life-cycle funds. Zerodha Fund House became the first to launch two life-cycle funds on 19 June with maturity in 2036 and 2041. Mirae Asset Investment Managers has filed draft papers for a 2056-maturity fund, while ICICI Prudential Mutual Fund has proposed funds maturing in 2031, 2036, and 2041.
“Life-cycle funds simplify asset allocation, portfolio rebalancing, and financial discipline for investors in a single, structured product," said Vishal Jain, CEO at Zerodha Fund House.
“The fund automatically shifts allocations over time using mechanisms such as arbitrage, making it a ‘fill it and forget it’ product designed to keep investors disciplined and invested for the long term,” said Vaibhav Shah, head of products, business strategy and international business, Mirae Asset Mutual Fund.
Taxation
However, mutual funds are still working out how to structure these funds to avoid them being classified as pure fixed-income products, which would attract higher taxes.
Equity mutual funds attract a lower long-term capital gains tax than debt funds, whose gains are taxed at the investor's applicable income tax slab. Short-term capital gains are taxed at 20%, while long-term capital gains above ₹1.25 lakh in a fiscal year are taxed at 12.5%.
Fund houses are evaluating whether arbitrage strategies could retain equity-oriented tax status. Zerodha's life-cycle fund uses equity-cash arbitrage in its final five years, when equity allocation under the glide path falls below 65%.
By buying stocks in the cash market and selling futures on the same securities, the arbitrage positions qualify as equity exposure for tax purposes, allowing the scheme to retain its equity fund status throughout its life cycle.
This is not the first time the industry has experimented with goal-oriented investing. Solution-oriented funds, which cater to retirement and children's education goals, have been around for several years but remain the smallest mutual fund category.
The segment managed ₹59,680 crore in assets in June, up 6.3% from a year ago, according to data from the Association of Mutual Funds in India (Amfi). That is a fraction of the mutual fund industry's ₹82 trillion assets, underscoring the challenge of scaling goal-based investment products in India.
Globally, life-cycle, or target-date, funds have become one of the most widely used retirement investment products, particularly in the US, where they serve as the default investment option in many employer-sponsored retirement plans. The category manages more than $4 trillion in assets worldwide, according to Zerodha.