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Target-Date Fund

Definition

A target date fund – also known as a lifecycle, dynamic-risk or age-based fund – is a collective investment scheme, often a mutual fund or a collective trust fund, designed to provide a simple investment solution through a portfolio whose asset allocation mix becomes more conservative as the target date approaches.

What is a 'Target-Date Fund'

A target-date fund is a mutual fund in the hybrid category that automatically resets the asset mix of stocks, bonds and cash equivalents in its portfolio according to a selected time frame that is appropriate for a particular investor. A target-date fund is similar to a life-cycle fund except that a target-date fund is structured to address some date in the future, such as retirement. Its returns are not guaranteed, but depend on how the market performs.

Explaining 'Target-Date Fund'

For example, a younger worker hoping to retire in 2050 would choose a target-date 2050 fund, while an older worker hoping to retire in 2025 would choose a target-date 2025 fund. Because it has a longer time horizon, the 2050 fund would likely be weighted heavily toward stocks, with a relatively small percentage of bonds and cash equivalents, while the 2025 fund would hold relatively more bonds and cash equivalents and fewer stocks so it would be less volatile and more likely to contain the assets the investor needs to begin making withdrawals in 2025.


Further Reading


Target-date funds in 401 (k) retirement plans
www.nber.org [PDF]
… of the NBER programs on Aging and Labor Studies and the Household Finance Working Group … and do not necessarily reflect the views of the National Bureau of Economic Research … ARCHITECTURE vector measures aspects associated with how target-date fund funds were …

Target Date Funds and Portfolio Choice in 401 (k) PlansTarget Date Funds and Portfolio Choice in 401 (k) Plans
www.nber.org [PDF]
… of the NBER programs on Aging and Labor Studies and the Household Finance Working Group … and do not necessarily reflect the views of the National Bureau of Economic Research … ARCHITECTURE vector measures aspects associated with how target-date fund funds were …

Remaking retirement investors: behavioural economics and defined-contribution occupational pensionsRemaking retirement investors: behavioural economics and defined-contribution occupational pensions
www.tandfonline.com [PDF]
… of the NBER programs on Aging and Labor Studies and the Household Finance Working Group … and do not necessarily reflect the views of the National Bureau of Economic Research … ARCHITECTURE vector measures aspects associated with how target-date fund funds were …

Agency problems in target-date fundsAgency problems in target-date funds
papers.ssrn.com [PDF]
… of the NBER programs on Aging and Labor Studies and the Household Finance Working Group … and do not necessarily reflect the views of the National Bureau of Economic Research … ARCHITECTURE vector measures aspects associated with how target-date fund funds were …

Target date funds: Characteristics and performanceTarget date funds: Characteristics and performance
academic.oup.com [PDF]
… of the NBER programs on Aging and Labor Studies and the Household Finance Working Group … and do not necessarily reflect the views of the National Bureau of Economic Research … ARCHITECTURE vector measures aspects associated with how target-date fund funds were …

Investor Sophistication and Target-Date Fund InvestingInvestor Sophistication and Target-Date Fund Investing
jor.pm-research.com [PDF]
… of the NBER programs on Aging and Labor Studies and the Household Finance Working Group … and do not necessarily reflect the views of the National Bureau of Economic Research … ARCHITECTURE vector measures aspects associated with how target-date fund funds were …

Target-date and balanced funds: Latest market offerings and risk-return analysis.Target-date and balanced funds: Latest market offerings and risk-return analysis.
search.ebscohost.com [PDF]
… of the NBER programs on Aging and Labor Studies and the Household Finance Working Group … and do not necessarily reflect the views of the National Bureau of Economic Research … ARCHITECTURE vector measures aspects associated with how target-date fund funds were …



Q&A About Target-Date Fund


What are the three categories of assets found in a target-date fund?

Stocks, bonds and cash equivalents.

What is a target-date fund?

A target-date fund is a mutual fund that automatically resets the asset mix of stocks, bonds and cash equivalents in its portfolio according to a selected time frame.

Why is it important for investors to understand how their investments work together as part of an overall strategy?

Understanding how your investments work together as part of an overall strategy can help manage risk while maximizing returns over time."

How do you determine which type of target date fund to invest in?

You choose based on your retirement date. For example, if you want to retire in 25 years, you would choose a 25 year target date fund. If you want to retire in 225 years, then you would choose a 225 year target date fund. The longer the time horizon for your retirement, the more conservatively invested the portfolio will be with fewer stocks and more bonds and cash equivalents. It's important to note that not all funds have this same structure; some may have different dates or different mixes of investments depending on their investment objectives."

What does "hybrid category" mean?

Hybrid category means that it has characteristics of both equity and fixed income funds.

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