SEBI Launches New Life Cycle Fund, Sectoral Debt Fund Categories: What the Latest Changes Mean for Investors

Mutual fund investors in India now have a wider range of schemes to choose from. The Securities and Exchange Board of India, in a circular issued on February 26, 2026, introduced two new mutual fund categories and made some vital changes in existing ones. Taken together, these changes point to an evolution in the country’s mutual fund landscape as it recognises and caters to emerging investor needs.

One of the key takeaways of the circular is the introduction of Life Cycle Funds – a distinct mutual fund category designed to align investments with long-term financial goals. These schemes will follow a glide path strategy based investing approach – where exposure to different asset classes changes over time – and come with a pre-determined maturity date. This fund represents structured way of implementing goal-based investing.

SEBI has also introduced a new debt fund category – sectoral debt funds – which can invest in fixed-income assets of a particular sector.

Table of contents

• Life Cycle Funds – Encouraging goal-based investing
• What SEBI has defined
• The glide path model: How risk reduces over time
• In detail: Asset allocation glide path
• Exit load and discipline
• Sectoral Debt Funds: Targeted fixed income exposure
• Greater choice within existing strategies
• The bigger picture: Standardisation with flexibility

Life Cycle Funds – Encouraging goal-based investing

One major announcement in the circular is the introduction of Life Cycle Funds as a distinct category. These funds are designed around a simple principle: different financial goals require different levels of risk at different points in time.

Many investors already think in terms of goals — retirement in 2055, a child’s education in 2040, or wealth creation over 20 years. Life Cycle Funds institutionalise this approach by combining:

• A pre-determined maturity year
• A glide path-based asset allocation strategy
• Exposure across multiple asset classes

In practical terms, this means the fund automatically adjusts its asset allocation as it approaches maturity. Equity exposure is higher when the goal is distant and gradually reduces as the target year nears. This reduces the need for investors to manually rebalance portfolios over time.

What SEBI has defined

SEBI has categorised Life Cycle Funds as open-ended schemes with:

• Minimum tenure: 5 years
• Maximum tenure: 30 years
• Tenures in multiples of 5 years (5, 10, 15, 20, 25, 30 years)
• Mandatory inclusion of the maturity year in the scheme name (e.g., Life Cycle Fund 2045)

For investors, the naming convention itself improves clarity. The maturity year is not just a label — it becomes a structural feature of the scheme.

The glide path model: How risk reduces over time

SEBI has laid down a structured asset allocation framework depending on years remaining to maturity. While the detailed allocation bands vary by tenure, the broad pattern remains consistent:

• When the goal is distant, equity allocation can be higher.
• As maturity approaches, equity exposure reduces in stages.
• In the final year, equity may be limited to 5–20%, with higher allocation to debt.

The funds can invest across:

• Equity
• Debt
• Gold and Silver ETFs
• ETCDs (restricted to gold/silver)
• InvITs

For investors, this glide path offers three potential benefits:

1. Automatic risk moderation as the goal approaches
2. Reduced behavioural decision-making, particularly during volatile markets
3. Alignment between time horizon and asset allocation

At the same time, returns remain market-linked and subject to volatility, especially in earlier years when equity exposure is higher.

In detail: Asset allocation glide path

SEBI has specified how the asset allocation pattern should evolve over the tenure of the fund. It has detailed category-wise glide paths. Generally, the longer a scheme’s maturity, the higher the permitted equity allocation. Here’s an in-depth look:

A. For 30-Year, 25-Year and 20-Year Maturity Funds

B. For 15-Year Maturity Funds

C. For 10-Year Maturity Funds

D. For 5-Year Maturity Funds

Exit load and discipline

To reinforce long-term commitment, SEBI has mandated a staggered exit load:

• 3% if redeemed within 1 year of investment
• 2% if redeemed within 2 years of investment
• 1% if redeemed within 3 years of investment

This structure signals that Life Cycle Funds are intended for long-term participation rather than short-term tactical allocation. For investors, it underlines the importance of choosing a maturity aligned with genuine financial goals.

Sectoral Debt Funds: Targeted fixed income exposure

Another addition is the Sectoral Debt Fund category. These schemes will invest predominantly in debt instruments issued by entities within a specific sector — such as infrastructure, financial services, etc.

For investors, this introduces a new way to express a view within fixed income. Instead of broad-based debt exposure, one can opt for sector-specific allocation.

However, concentration also brings additional risks:

• Sector-linked regulatory changes
• Credit risk tied to sector conditions
• Cyclical economic exposure

These funds may be more suitable for investors who understand fixed income risks and are comfortable with targeted allocation within a broader portfolio.

Greater choice within existing strategies

The circular also relaxes a previous restriction: earlier, an AMC could offer either a Value Fund or a Contra Fund. Now, fund houses can launch and manage both, subject to the condition that the scheme portfolio overlap between the two schemes shall not be more than 50%.

To recap:

• Value Funds focus on stocks that appear undervalued based on fundamentals.
• Contra Funds invest in companies or sectors that may be temporarily out of favour.

While these strategies may seem similar in some regards, their execution can differ meaningfully. Allowing both provides greater strategic choice without altering their core definitions.

A similar flexibility has been introduced in the hybrid category. Previously, AMCs had to choose between offering a Balanced Hybrid Fund or an Aggressive Hybrid Fund. That restriction has now been removed.

The distinction remains:

• Balanced Hybrid Funds typically maintain equity exposure in the 40–60% range.
• Aggressive Hybrid Funds typically maintain equity exposure in the 65–80% range.

For investors, the change enhances choice within a single AMC while preserving clarity in asset allocation bands. It also makes it easier to align product selection with individual risk tolerance.

The bigger picture: Standardisation with flexibility

Taken together, these changes reflect two broad things:

1. Standardisation and clarity — through defined allocation ranges, glide paths, and naming conventions
2. Product flexibility — by allowing AMCs to offer more differentiated strategies

For investors, the key implications include:

• More structured goal-based options
• Clearer differentiation across categories
• Expanded strategy selection within fund houses
• Continued emphasis on true-to-label investing

At the same time, suitability remains central. Market-linked returns are not guaranteed, and allocation frameworks do not eliminate volatility. Investors may benefit from evaluating their financial goals, time horizon, and risk appetite before selecting any scheme.

Investors planning towards a specific long-term objective may also use Bajaj Finserv AMC’s range of goal-planning calculators for assistance. We have a retirement calculator, child education calculator, car calculator and dream home calculator. Bear in mind, however, that the calculator’s outputs are based on your estimates and actual returns will depend on market conditions.

The calculator is an aid, not a prediction tool. It may provide only an indicative picture.