Each
target date fund
has a clear-cut
investment objective — creating and then preserving wealth to help investors achieve a specific investment goal, usually a financially secure retirement. The fund managers pursue this objective by carefully modifying its
asset allocation
over time from an emphasis on a mix of equity funds designed to generate growth to a greater concentration on income and capital preservation funds.
In fact, an investment company that offers target date funds doesn’t offer just one, but a series of funds pegged to different dates, such as 2015, 2025, 2035, or 2045. The date is always part of the fund’s name — like the XYZ 2040 Fund. When you select a fund, you typically choose the one whose date is closest to the date you expect to start withdrawing money.
A suite of these funds offered by the same company often includes some of the same individual funds, though in different proportions. Not surprisingly, the portfolios of those with the closest and most distant maturity dates are the most dissimilar. You can find the list of funds that make up each portfolio in the fund’s
prospectus.
Rebalancing target date funds
The managers of a target date fund can also fine-tune the programmed balance between
risk
and
return
by adjusting the fund’s holdings in response to changes in the economy. For example, if an unusually strong performance in one fund over a period of time means that it holds a larger percentage of the fund of fund’s assets than the managers planned for, they can rebalance the way new investments are allocated or take other steps to return to the allocation they intended to have.
Many target date funds also keep a relatively small portion of their assets in cash. While the lower returns on cash can limit the fund’s performance, keeping cash on hand allows fund managers to make new investments and redeem shares from investors who want to sell them without liquidating other assets and disrupting the allocation.
A cautionary note
While a built-in time frame helps keep your investment planning on track, it’s important to remember that target date funds are not customized to your individual situation.
