Life Cycle Funds: Zerodha Fund House CEO shares 5 things investors should know

Life Cycle Funds are designed to align a portfolio with an investor’s target year, gradually reducing equity exposure as the investment horizon shortens. The category is drawing interest from investors looking to plan for long-term financial goals as well as those seeking an investment option that adjusts asset allocation automatically.

Zerodha Fund House’s Life Cycle Funds had garnered ₹38 crore in net assets under management (AUM) as of August, according to data cited from the Association of Mutual Funds in India (AMFI), said Vishal Jain, CEO of Zerodha Fund House.

Jain said investors are considering the funds for goals such as retirement, children’s education and buying a home. He added that the category could also appeal to investors looking for a predefined approach to managing asset allocation over time.

Here are five things investors should know about Life Cycle Funds.

The target year should match your financial goal

Life Cycle Funds allow investors to select a target year, with the portfolio’s asset allocation designed to evolve as that year approaches. The target date should broadly correspond with the time when the investor expects to need the money.

Jain said the category combines goal-based investing with asset allocation. While the goal provides a defined time horizon, the fund’s allocation strategy is designed to change with the time remaining.

Investors should therefore assess whether the target year is appropriate for their financial goal rather than choosing a fund solely on the basis of its recent returns.

Equity exposure reduces as the target year approaches

Life Cycle Funds follow a predetermined glide path, under which equity exposure gradually declines as the target year approaches. The portfolio is generally more growth-oriented in the earlier years and becomes more conservative over time.

The underlying principle is that investors with longer investment horizons have more time to absorb market volatility. As the goal gets closer, the time available to recover from a market downturn becomes shorter.

Jain said short-term market movements would not, by themselves, be a reason to change the glide path.

“A period of market volatility or a strong run in equities, by itself, would not be a reason to change the framework,” he said.

Investors should examine how quickly equity exposure is expected to decline and what the portfolio may hold as the target date gets closer.

The funds offer an alternative to managing equity and debt separately

Investors can build their own portfolios using equity and debt investments and rebalance them periodically. However, this requires regular reviews of asset allocation, risk exposure and the tax implications of switching between investments.

Life Cycle Funds offer an alternative in which the asset allocation follows a predefined path within the fund.

“The investor makes one important decision at the outset, which is choosing the target year closest to the financial goal. From there, the fund follows a predefined asset allocation path as the target year approaches,” Jain said.

He added that Life Cycle Funds were not intended to replace independently managed portfolios but offered another option for investors who wanted their allocation to evolve automatically with their investment horizon.

Check the underlying investments and costs

The investment strategy and expenses are important considerations when evaluating Life Cycle Funds, beyond their returns since launch.

In Zerodha Life Cycle Funds, the equity allocation aims to track the Nifty LargeMidcap 250 Index. The debt component invests in Indian government securities across different durations, alongside select exposure to commodities such as gold and silver and arbitrage, Jain said.

Investors should examine the underlying equity exposure, the debt instruments used, the role of other asset classes and the fund’s costs. They should also understand how the allocation across these investments is expected to change over time.

The structure and investment strategy may differ across fund houses, making it important to read the scheme information documents before investing.

Understand the tax treatment and do not judge the fund only by initial returns

Life Cycle Funds are intended to be evaluated over the investment journey rather than over a short period after launch. Initial returns alone may not indicate how well a fund’s allocation strategy aligns with an investor’s long-term goal.

Jain said that because allocation changes and rebalancing take place within the fund, investors do not have to sell and switch between separate equity and debt investments themselves whenever the portfolio is rebalanced. This can avoid investor-level tax events associated with those transactions.

However, the tax treatment depends on the fund’s actual asset allocation and the applicable tax rules. Investors should check the scheme’s tax classification rather than assume that all Life Cycle Funds qualify for equity-oriented taxation.

The target year, glide path, underlying investments, costs and tax treatment should therefore be assessed together before an investor chooses a scheme.