Funds

How a Target-Date Fund Works

A “target-date” fund is a mutual fund consisting of typical assets such as stocks, bonds, cash or cash equivalents. The percentage mix of assets is reshuffled automatically by the fund to meet the objective of the investor by a certain future date, such as retirement.

The main advantages to a target-date fund are: low minimum investment which provides for greater diversification of outside investments, the fund is managed by a professional fund manager, and there is low investor maintenance or monitoring once the initial investment has been made.

As the preselected date approaches, a target-date fund will shift assets towards more conservative investments to avoid or attempt to mitigate any downturns in the economy. This re-allocation is done with no direction or input of the investor but by the mechanics of the fund itself.

When selecting a target-date fund, it is important to examine the initial composition of the fund assets. All funds typically have different percentage allocations based in equities or stocks, bonds, and cash. The difference between the funds rests in the make up of the allocations. One fund may be made up strictly of domestic equities and treasury bonds, while another fund may have a portion of the equities and bonds based internationally. There can be other differences among funds, such as what type of equities are in the asset mix, whether they are large, small or mid-cap stocks, or if the equities are from emerging markets, or the type of bonds and cash equivalents that make up a portion of the fund.

A disadvantage of a target-date fund is that they are not independent. The target-date fund is usually a compilation fund made from the offering company’s other funds. This compilation of other funds can lead to higher expense fees depending upon how a fund company computes their charges, the fee for managing the target-date fund may include all or part of the fees charged for the component funds. Hence the investor in the target-date fund is paying a fee for the cost of managing the component fund as well as the target-date fund.

Whether an investor should or should not invest in target-date funds depends upon how much the investor wants to be actively involved in the management of his or her retirement fund. If the investor wants to be an active participant continuously until retirement, then a target-date fund is not the best investment choice. Conversely, if an investor does not want to be involved in the direction or management then a target-date fund offers that convenience, however, the more passive investor will need to investigate, compare, and analyze the target-date fund before committing to invest in the fund in order to assure that the retirement goals will be met.

An investor must perform due diligence with any fund. With a target-date fund the diligence and investigation must be in depth and up front. With a more traditional self-directed fund the investor must continually monitor during the entire investment in the fund.

Investing in Bonds

Have you ever thought of making some extra money with the money that you already have? If it could take no work at all and the interest rate on your money is insane. You really can earn money for simply investing and it will be easy and is a great option for anyone. The most common bought bond and the one you will most likely want to purchase are individual bonds.

Individual bonds are usually sold in $5,000 dollar parts and they are considered OTC bonds. OTC simply means over-the-counter. You don’t have to get anything special to buy these bonds except the initial cash investment. Bonds are not quoted at the $5,000 ratio, most are quoted as if they were sold in $100 increments. They are rated based upon this. According to the ratings if your bond was quoted at 98 it would be $98 per $100. In the $5,000 bond this means you payed $4,900 for your bond or 2% less than it is worth for selling. Now this is a good thing because you can essentially buy bonds for a cheap price and wait a while to sell them for a profit.

Bonds are not a short term money maker, they require quite a bit of long term investment and good choices. You always want to try and buy bonds in an area that you feel knowledgeable and comfortable. This greatly increases your chances of knowing what you are investing in and making some money off of your bond.

Next, there are some bonds that are called bond funds. This is essentially the same as a stock fund in that a professional manages a bond fund for you and gives advice on things such as reinvesting bond interest and where to place your next bond. Bond funds are initially a service provided to you so they do require a management fee. This fee can be either an initials start up fee or a periodical management fee. When investing this fee should come into account as it will lower the overall money you are making from your bonds.

In some cases however this professional advice is worth the amount out of bond profit. Options like the bond funds are great for beginning bond investors who are still assessing the market and aren’t very experienced with investing in bonds for a profit. Thirdly there are market bonds. These are the quick cash bonds that are high risk. They require an initial investment of anywhere from $1,000 to $10,000 on fast moving bonds. The investor can withdraw at any time and these usually offer the highest profit per time period.

Lastly there are Bond unit investment trusts. These are by far the most stable bonds as the investor knows exactly how much they will make because the portfolio of bond profit is a constant rate. These trusts are good for large investments or investors who want security with their bond.

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.