Target Date Fund

5paisa Research Team Date: 09 Jun, 2023 02:29 PM IST


Want to start your Investment Journey?



Whether you are starting your journey towards sound financial planning or are a disciplined investor Target Date Funds can help you attain the desired allocation of assets based on your target retirement date. 

But what are target date funds, and how do they work? This article will focus on target date funds meaning, advantages and disadvantages, and all the relevant information related to it. So hold your patience till the end to enhance your knowledge about target date funds. 

What Are Target Date Funds?

Target Debt Funds, also called age-based funds or lifecycle funds, are instruments for investment designed to make the process simpler and easier for individuals with specific retirement goals. It is a kind of ETF (exchange-traded fund) or mutual fund that automatically modifies the allocation of assets over time based on a target retirement date. 

How a Target-Date Fund Works?

The central aim of target debt funds is to offer investors an efficiently diversified portfolio that becomes more conservative with the gradual approach of the target date. The fund's asset allocation involves a mixture of bonds and stocks, among several other classes of assets. 

In the initial years, when the retirement date is far away, the fund will allocate more to stocks that entertain higher return potential but simultaneously come with higher volatility. With the gradual approach of the target date, the fund prioritises the increased allocation of conservative investments such as bonds which are more stable but come with lower return potential.

Advantages and Disadvantages of Target-Date Funds

Target Date Funds have several advantages and disadvantages that an investor must consider before investing. All the advantages and disadvantages of TDF are listed below in detail:

Advantages of Target-Date Funds:

●    TDFs instantly offer diversification of the allocated assets, which reduces the risk of loss. It spreads investment across various types of assets and sectors.
●    They offer simplified investment opportunities where the fund manager looks after all the allocation of assets from time to time and balances them accordingly.
●    Automatization of allocation of assets with the gradual approach of the target date. Therefore the investor doesn’t need to regularly inspect and balance the portfolio. Therefore for the investors, it saves their effort as well as time.
●    The management of TDFs is done by expert investment professionals who make decisions strategically to generate higher returns for investors. By navigating the conditions of the market, they make adjustments for the holding of the funds. 
●    TDFs help individuals with achieving their post-retirement goals and financial freedom. 

Disadvantages of Target-Date Funds:

Besides all the advantages TDFs offer, they also come with several disadvantages, which are mentioned below.

●    TDFs entertain limited scope for customization. 
●    The glide paths of various TDFs may differ from one another. Therefore it must be revised beforehand. 
●    Compared to other investment options, TDFs come with higher expense ratios.
●    Investors usually look for more flexibility which TDFs lack.

Example of Target-Date Funds

There are many Target Date Funds available in the market offered by numerous investment firms and mutual fund companies. Some examples of Target Date Funds are as follows:

●    Vanguard Target Retirement Funds
●    Fidelity Freedom Funds
●    BlackRock LifePath Funds
●    Schwab Target Index Funds
●    T. Rowe Price Retirement Funds

Can A Target-Date Fund Be Hold Onto After the Target Date?

Yes, one can continue holding a Target Date Fund even after reaching the target date. In fact, TDFs can be held throughout the retirement years of the investor instead of till the target date. 

However, after the target date, the allocation of assets starts becoming more conservative, with a huge portion of allocation to fixed-income or stable-income investments and a comparatively smaller portion to equity.

Are Target-Date Funds Expensive?

TDF expenses usually depend on the particular TDF and the fund provider. The expense ratio of the fund is competitive with various other mutual funds. TDFs utilizing strategies of the passive index come at a lower expense ratio compared to the ones having strategies of active management. Investors need to conduct deep research and compare the expense ratio, performance of the fund, and history of different TDFs before settling for one. 

Can A Target-Date Fund Be Used In My Individual Retirement Or 401(k) Account?

Yes, a Target Date Fund can be used in both Individual Retirement and 401(k) accounts. Read below to know how you can utilize TDFs in the following retirement accounts:

●    401(k) Plans: Various 401(k) plans that are s; sponsored by employers offer TDF as an investment option, where you can allocate a portion of your total contributions or the remaining balance to TDF. On the basis of the particular plan, the available TDFs may vary.

●    Individual Retirement Accounts (IRAs): TDFs also entertain availability for IRA investments. Whether you have a Roth IRA or conventional IRA, you can open a new account with an investment firm that provides TDF as an option for investment. Then you can contribute to the IRA and allocate such contributions to TDF on the basis of the target date of retirement. 

What Target-Date Fund Should I Pick If I Plan to Retire in a Year Not Ending in -5 or -0?

If you plan to retire in a year that doesn’t end in -5 or -0, but you want to invest in a TDF, you have several options, including:

●    Choose the nearest Target Date Fund: You can select A TDF with the target retirement date closest to your intended year of retirement. It must be kept in mind that the fund's target date might not align with your year of retirement. However, it will still offer you a suitable option on the basis of its glide path and allocation of assets. 
●    Use custom glide path TDF: Some TDF comes with customizable glide paths. This allows investors a more customized approach to the allocation of assets based on their retirement timeline. Therefore you can easily find a TDF that closely matches your retirement year. 

However, while considering any of the above-mentioned options, it is essential to review the glide path, approach for investment, and strategy for allocation of assets of the particular TDF.

How To Invest In Target-Date Funds?

To invest in Target date Funds, one needs to follow some general steps, which are mentioned below:

●    Step1: Determine your investment goal and timeline
●    Step2: Research various options for TDF investment
●    Step 3: Choose a TDF that aligns with all your retirement goals and capability of taking risks.
●    Step 4: Open an account with an investment firm that offers your selected TDF.
●    Step 5: Allocate funds to the newly opened TDF account. You can opt for monthly contributions or allocate a lump sum amount.

How Much Do Target Date Funds Cost?

The TDF fund cost usually depends on the fund provider and the particular type of TDF that the investor has selected. The basic cost that is associated with TDFs is its expense ratio which is the annual fees charged by the fund manager or the company managing the fund. 

This generally ranges from 0.10% to 1.00%, which depends on several factors, like the investment strategy of the fund, allocation of assets, cost of administration, and other expenses related to operations. It is essential to carry out research before selecting a suitable TDF.

Who Should Opt For Target-Date Funds?

Target Date Funds can be opted for by various investors looking for:

●    Retirement savings
●    Starting investing
●    Diversification
●    Professional management
●    Long term investments

How to Pick The Right Target Fund?

To pick the right target date fund, consider the following tips:

●    Determine the target date of your retirement.
●    Assess your capability for taking risks.
●    Compare and contrast glide paths for the allocation of assets.
●    Research about the historical performance.
●    Consider TDF fees and expense ratio.
●    Go through all the information related to the fund as a philosophy of investment and the history of the company track record of TDF management.

Best Target-Date Funds

Some TDFs that have shown an impressive performance throughout are listed below:

●    Vanguard Target Retirement Funds are especially known for offering lower expense ratios
●    Fidelity Freedom Funds entertains the utmost flexibility and strong performance
●    Schwab Target Index Funds offering cost-effective TDFs
●    BlackRock LifePath is especially popular for its strategies concerning asset management and allocation
●    T. Rowe Price Retirement Funds are considered to be the best for an impressive performance in the long run.


To sum up, TDFs offer investors a convenient approach to retirement planning. The main advantage of TDFs is that their asset allocation is automatized, which becomes more conservative with the target date approaches. As TDFs offer a single fund, it is easy for investors to manage them and review them on a regular basis while fostering the creation of wealth at the same time. 

More About Mutual Funds

Open Free Demat Account

Be a part of 5paisa community - The first listed discount broker of India.