Retirement funds offered by mutual funds have recently seen a regulatory shake-up. There are 29 such schemes under the solution-oriented category, managing over ₹33,400 crore.

In February 2026, SEBI announced the discontinuation of solution-oriented schemes, including retirement and children’s funds, and introduced Life Cycle Funds as a new category. In March, however, it revised the framework and allowed fund houses to retain their existing retirement and children’s funds, subject to restrictions on launching Life Cycle Funds of certain tenures.

Consequently, AMCs retaining their retirement funds can launch only four Life Cycle Fund variants, compared with the maximum six otherwise permitted. Following this relaxation, almost all fund houses chose to retain their existing retirement schemes.

Retirement funds are open-ended schemes designed to build long-term wealth for investors after retirement. They allow fund managers to vary equity and debt exposure within specified limits. AMCs can offer up to four variants based on asset allocation, equity, aggressive hybrid, conservative hybrid and pure debt. For instance, HDFC Mutual Fund offers three variants, while ICICI Prudential Mutual Fund offers all four. These schemes generally have a mandatory lock-in period of five years or until the investor turns 60, whichever is earlier.

However, only a handful qualify for tax benefits under Section 80C. This allows eligible investments of up to ₹1.5 lakh a year to be deducted from taxable income under the old tax regime.

Among these schemes, ICICI Prudential Retirement Fund – Hybrid Aggressive Plan has been one of the better performers. Similar to aggressive hybrid funds, it allocates around 80 per cent of its portfolio to equities, with the balance invested in debt. It has outperformed several retirement schemes with similar mandates as well as the aggressive hybrid fund category.

Since its launch in February 2019, the fund has delivered a CAGR of 14 per cent. However, it does not qualify for tax benefits under Section 80C. As of August 2026, the fund managed assets worth ₹1,321 crore.

Asset allocation framework

The fund uses an in-house equity valuation model incorporating P/E, price-to-book value (P/BV) and other valuation parameters to determine its equity exposure.

It raises equity allocation when valuations and market conditions are favourable and turns more cautious when risks rise.

In line with its aggressive hybrid mandate, it maintains equity exposure in the 75-85 per cent range.

Equity strategy

The fund follows a bottom-up, market-cap and sector-agnostic stock selection approach, focusing on companies approaching an earnings turnaround.

It looks for businesses where much of the negative sentiment is already priced in and earnings are expected to improve over the next few quarters. The strategy is to identify such opportunities early and hold the stocks as long as earnings momentum persists.

Stock selection is driven primarily by earnings prospects and revisions. The fund looks for companies whose earnings potential is underappreciated by the market, as well as businesses poised for strong growth on favourable business-cycle trends. Valuations are assessed based on the potential for re-rating or de-rating rather than absolute P/E multiples. As per the latest portfolio, the top 10 equity holdings accounted for about 23 per cent of the fund’s overall assets.

Market-cap allocation is an outcome of stock selection rather than a predetermined target. Over the past five years, the fund has allocated an average 48 per cent of its total assets to large-cap stocks, 16 per cent to mid-caps and 13 per cent to small-caps. Currently, mid- and small-cap exposure stands at 19 per cent and 18 per cent, respectively, reflecting the fund manager’s assessment of better earnings opportunities in these segments. With nearly 80 per cent of its portfolio invested in equities, the fund is exposed to market volatility. Its significant allocation to mid- and small-cap stocks further increases the risk, particularly during market corrections.

The fund is currently overweight on banking, financial services and insurance (BFSI), capital goods, and metals and mining, while underweight on information technology and consumer staples. Banks, retailing and industrial products are its three largest sector exposures. Over the past year, it has increased allocation to banks, insurance and healthcare services, while reducing exposure to transport services, finance, and cement and cement products.

Debt strategy

On the debt side, the fund invests across permissible debt instruments including government securities, corporate debt and money market instruments. Given its aggressive hybrid mandate and the scheme’s lock-in period, the fund is comfortable taking relatively higher duration exposure.

Over the past five years, the fund’s Macaulay duration has ranged from 0.3 to 4.9 years. As of August 2026, it stood at 2.9 years, with a portfolio yield to maturity (YTM) of 6.8 per cent. The portfolio had 4 per cent exposure to government securities, 2.7 per cent to AAA-rated and 3.7 per cent to AA-rated assets. It also held about 1 per cent in REITs and 7 per cent in cash equivalents.

Performance

Over the past seven years, the fund’s five-year rolling returns averaged 18 per cent CAGR, compared with 14 per cent for the average of six other retirement schemes with similar investment mandates. The aggressive hybrid fund category averaged 15 per cent over the same period. The fund’s five-year rolling returns ranged from 12.8 per cent to 24.4 per cent during this period.

On a three-year rolling-return basis, the fund delivered an average CAGR of 19 per cent, compared with 14 per cent for its relevant peers.

The fund’s annualised standard deviation, a measure of volatility, stood at 16.6 per cent, higher than the aggressive hybrid fund category average of 13.5 per cent.

The regular plan has a base expense ratio of 1.85 per cent, lower than the category average of 1.92 per cent. The direct plan’s expense ratio is 0.72 per cent, also below the category average of 0.87 per cent.

Unlike aggressive hybrid funds, retirement funds have a mandatory lock-in, which can help investors maintain discipline and avoid premature withdrawals. However, this comes at the cost of liquidity, and the scheme does not offer Section 80C tax benefits. It is, therefore, more suitable for investors specifically earmarking investments for retirement rather than those seeking flexibility.

Published on October 3, 2026