The unique feature of life cycle funds is that the allocation automatically changes over time. This means that the investor is not responsible for transferring funds from equity to debt. Life cycle funds use a concept called the “glide path.”
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Retirement Planning: Retirement planning isn’t as easy as it seems. This is because investors need to constantly balance their portfolio as they approach retirement. When an investor is younger, their portfolio typically includes a higher share of equities. As they age, the share of risk-free assets in their portfolio decreases. The share of debt assets increases. This is done to ensure the safety of the fund.
Life Cycle Funds: A New Mutual Fund Category
Many individuals find this adjustment difficult. Life Cycle Funds offer a solution to this problem. This is a new category of mutual funds that recently received SEBI approval. Life Cycle Funds aim to simplify long-term investing, specifically, creating a large corpus for retirement.
Allocation Changes Automatically Over Time
The unique feature of life cycle funds is that their allocation changes automatically over time. This means that the investor is not responsible for transferring funds from equity to debt. Life cycle funds use a concept called the “Glide Path,” which allows the fund’s asset allocation to change automatically over time.
More Investments in Equities in the Early Years
In the initial years, the fund invests more in equities because the investor has a longer investment horizon. This reduces the impact of stock market fluctuations on their investments. This increases the fund’s growth potential over the long term. As the target date approaches, investments in equities decrease and investments in debt increase, increasing the fund’s safety.
Life cycle funds have a tenure ranging from 5 to 30 years
Under the SEBI framework, life cycle funds have a tenure ranging from five to 30 years. This fund is ideal for new investors because they don’t need to constantly rebalance their portfolio. Many people initially maintain a healthy mix of equity and debt, but later forget to adjust their allocation. This significantly increases the risk to their portfolio, especially as they approach retirement.
Care must be taken when selecting funds.
Experts say that if you want to use life cycle funds for retirement, you need to carefully select funds with the right duration. For example, if you are 30+, you should choose a fund with a longer duration. If an investor is nearing retirement, they should choose a fund with a shorter duration.
