What is a target date investment fund?

Written by Cathy on May 26, 2014

A target date investment fund is a mutual fund with a specific end date in mind. That date is frequently a year in which one intends to retire, or in which the beneficiary will be attending college. The investments held by the fund are normally a mix that includes stocks, bonds, and cash equivalents. The ratio of the different types of investments changes over time, becoming more conservative as the target date approaches. Thus, target date funds invest more heavily in stocks in the early years of the fund (because you have time to ride out the volatility of the stock market), and gradually allocate more assets to bonds and cash equivalents as the target date draws near.

Target date investment funds have become extremely popular in the last few years, and are offered as an option seemingly by every major investing company. The benefit of a target date investment fund is that you don't have to be an active investor to benefit from active investing, or worry about asset allocation.

To get a rough estimate of your recommended asset allocation, you can subtract your age from between 100 to 120, depending on how many years you expect to live. The difference is the percentage you should have invested in stocks. For example, if you are 35 years old, conventional wisdom says you should invest 65% to 85% of your portfolio in stocks, and the remainder in bonds and other conservative investment vehicles. Or, you could use an online asset allocation calculator to determine how you should allocate your investments. Once you've determined the appropriate asset allocation strategy for your current age, you would need to find investments that you want to put money into, and do so according your asset allocation strategy. In the years to come, you would need to monitor your allocations, and adjust them as necessary as your portfolio value changes, and as your asset allocation needs change due to your increasing age.

By contrast, if you opted to invest in a target date investment fund, all you would need to do is select one fund, invest your money, and monitor the fund periodically to make sure it is staying on target. In other words, the process of selecting a target date investment fund is much like selecting any mutual fund, and the target date fund will theoretically save you from having to invest lots of time and effort into allocating your assets according to your age and goals.

When selecting a target date investment fund, be sure to take into consideration your own tolerance for risk, and select a fund that fits with your risk tolerance. Some funds begin the shift to conservative investments earlier, while others start later, and the rate at which they convert to conservative investments varies. You should also consider fees, and that the most actively managed funds are not necessarily the ones that perform the best. As with all investments, you will need to weigh the risks and benefits, and may benefit from a consultation with a reputable financial advisor.


May26

A target date investment fund is a mutual fund with a specific end date in mind. That date is frequently a year in which one intends to retire, or in which the beneficiary will be attending college. The investments held by the fund are normally a mix that includes stocks, bonds, and cash equivalents. The ratio of the different types of investments changes over time, becoming more conservative as the target date approaches. Thus, target date funds invest more heavily in stocks in the early years of the fund (because you have time to ride out the volatility of the stock market), and gradually allocate more assets to bonds and cash equivalents as the target date draws near.

Target date investment funds have become extremely popular in the last few years, and are offered as an option seemingly by every major investing company. The benefit of a target date investment fund is that you don't have to be an active investor to benefit from active investing, or worry about asset allocation.

To get a rough estimate of your recommended asset allocation, you can subtract your age from between 100 to 120, depending on how many years you expect to live. The difference is the percentage you should have invested in stocks. For example, if you are 35 years old, conventional wisdom says you should invest 65% to 85% of your portfolio in stocks, and the remainder in bonds and other conservative investment vehicles. Or, you could use an online asset allocation calculator to determine how you should allocate your investments. Once you've determined the appropriate asset allocation strategy for your current age, you would need to find investments that you want to put money into, and do so according your asset allocation strategy. In the years to come, you would need to monitor your allocations, and adjust them as necessary as your portfolio value changes, and as your asset allocation needs change due to your increasing age.

By contrast, if you opted to invest in a target date investment fund, all you would need to do is select one fund, invest your money, and monitor the fund periodically to make sure it is staying on target. In other words, the process of selecting a target date investment fund is much like selecting any mutual fund, and the target date fund will theoretically save you from having to invest lots of time and effort into allocating your assets according to your age and goals.

When selecting a target date investment fund, be sure to take into consideration your own tolerance for risk, and select a fund that fits with your risk tolerance. Some funds begin the shift to conservative investments earlier, while others start later, and the rate at which they convert to conservative investments varies. You should also consider fees, and that the most actively managed funds are not necessarily the ones that perform the best. As with all investments, you will need to weigh the risks and benefits, and may benefit from a consultation with a reputable financial advisor.

About Cathy
Cathy is the founder of Chief Family Officer, where you can get daily updates on the hottest deals, and tips to achieve financial freedom and family bliss.