Monthly Archives: April 2011

What is a Target Date Fund?

There are a ton of investment vehicles on the market, most mutual fund companies now offer what is called a “Target Dated Fund”. Investors looking for a fund where they can invest for retirement and don’t have to worry about asset allocation will find target dated funds a perfect fit.
Target Date Funds
Target dated funds are mutual funds that are actively managed with a long term goal in mind. For example: The investor has a retirement date in mind, lets say 20 years from now. All they have to do is find a mutual fund with a target date that fits their criteria, make the investment into the fund and that’s it.

When Should You Use These Types Of Funds?

Investing in these types of mutual funds are for people who want to invest and forget. Lets use the example above: An investor has a retirement date which is 20 years from now. The risk profile for a person this far from retirement is still in the high risk category. This means the mutual fund manger will allocate the assets of this fund in investments that focus on higher capital returns, not capital preservation.

So, the fund will be invested more in stocks and less in bonds. The goal, since there is a long time frame for the investment, is to be aggressive, accumulate more capital. Then, as the fund matures the fund manager will make shifts in the asset allocation moving toward a more conservative mix of stocks and bonds.

Ultimately, as the fund closes in on the target date the asset allocation will be mostly in investments focused on capital preservation. So, for the investor who has a long term time frame for retirement and wants a passive investment, this can be the perfect investment vehicle.

Pros

Mutual funds are always diversified, this investment is no different. Target dated funds are generally comprised of a mixture of other funds. So, this means you have diversification within diversification, this lowers the investors downside risk.

The other advantage, which was already touched on, is an investment where the investor is pretty much hands off. The mutual fund manager is navigating the asset allocation in these funds. The investor is only choosing the target date, that’s all.

Cons

The downside of these target dated funds are fees. Since these funds are actively managed the fees can be much higher compared to other mutual funds. The other term that designates fees in a mutual fund is call “expense ratio”.

The last thing that can be a negative factor with these types of funds is the investments themselves. As mentioned, the fund manger chooses the blend of investments in the fund. Some target dated funds only invest within their own fund family. For example: A fidelity targeted fund will only invest in other fidelity mutual funds (this is only an example, fidelity may not do this,) in this case the investor can lose some of the safety factors that come with diversifying among a variety of mutual fund companies.

Overall, target dated funds can be the perfect investment vehicle for someone with a long term investment timeline who doesn’t want to worry about market fluctuations.