What Is A Target Date Fund?
A target date fund is a mutual fund designed for retirement that automatically rebalances the fund's assets as the investors in the fund draw closer to retirement age. In the years prior to retirement, the fund is more aggressive and heavily invested in growth stocks, but as the holders near retirement the fund becomes more conservative. At this point, its allocation shifts to include a greater proportion of less risky and fixed-income securities.
Target date funds are often offered by employer retirement plans as an investment option to their members. However, investors can also buy them from mutual fund and investment companies.
Example Of Target Date Funds
Most target date funds are labeled by the year in which the investor expects to retire, such as "Target 2050" or something similar. In this example, with the investor expected to retire in 30 years or so, the vast majority of the fund's assets would be invested in growth stocks.
Gradually, about once a year, the fund's manager reallocates the fund's assets to include more bonds and fewer stocks, so that by 2050 a substantial portion, possibly more than 50%, of the portfolio would be held in bonds. After 2050, once the investor has presumably retired, even more of the portfolio will be held in income-producing assets.
A "Target 2030," by contrast, would be more conservative and invest in less risky assets, as the investor plans to retire in 10 years.
Advantages Of Target Date funds
Target date funds are designed mainly for people who prefer having their retirement money managed by a professional portfolio manager, who takes the responsibility for investing and reallocating the fund's assets over time.
These funds often own shares of several other funds, including both stocks and bonds, which means they're also generally well diversified. This then reduces their risk, which is another positive.
Disadvantages Of Target Date funds
Because target date funds basically put the investor's money on autopilot, they are a one-size-fits-all product, which may not be suitable for every investor in the fund. Every person's goals and needs are different, and target date funds aren't able to take those into consideration.
Likewise, people's needs change over time. For example, the person may need to retire sooner than they previously expected. As a result, the target fund they own may still be in an aggressive investment mode at the time the person is ready to retire. Conversely, the owner may elect to keep working well past their original intention. This would mean that the fund they bought was too conservative and may not be able to grow enough to meet the person's needs by the time they do retire.
Some target date funds can be expensive because they own shares in several other funds. Each individual fund charges its own fee, as does the target date fund itself, which can reduce its return. Investors considering a target date fund should therefore carefully examine the fund's fees.
Investors can often outperform target date funds by investing in other funds or securities on their own. However, that requires the investors themselves to know what the right mix of investments is and how they should be reallocated over time, a job many people are happy to leave to a professional.
Target date funds are mutual funds designed for retirement that automatically rebalance the fund's assets to be more aggressive at the outset and more conservative over time as the fund's owner approaches retirement. These funds are designed for people who want someone else (like a fund manager) to manage their retirement money so they don't have to worry about asset allocation and diversification. Most target date funds are labeled by the year in which the investor expects to retire, such as "Target 2050."
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…