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Mutual funds or exchange-traded funds (ETFs) that have been structured with a target date are called target-date funds. The funds are structured to meet an investor’s capital requirements at a specified date, hence the term “target date.” Thus, a target-date fund falls within the category of lifecycle funds, in which the allocation of the portfolio gets more conservative over time.
Investors would typically choose a target-date fund to contribute to their beginning of retirement. However, investors who are saving for a future expense, like a child’s college tuition, are more likely to utilize target-date funds.
When the target date approaches, the asset allocation of a target-date fund is often planned to progressively move to a more conservative profile in order to reduce risk.
The convenience of placing all of an investor’s investing actions on autopilot in a single vehicle is what attracts investors to target-date funds.
Typically, target-date funds mature every five years, for example, in 2035, 2040, and 2045.
Although target-date funds are still substantially more expensive than other forms of mutual funds, their expense ratios have decreased significantly in recent years.
To achieve the investment return objective, target date funds use a conventional portfolio management methodology to target asset allocation over the fund’s period. Target-date funds are said to as exceptionally long-term investments because they are named after the year the investor intends to start using the assets.
