Target funds

A target fund is a fund of funds that holds a diversified portfolio of individual mutual funds or exchange traded funds (ETFs), or a combination of mutual funds and ETFs. The target fund managers choose the particular combination to create an asset allocation that’s designed to meet a specific long-term investment objective. In most cases, the funds that are included in the fund of funds are part of the sponsor’s family of funds.

The money you invest is divided in proportion to the weight the managers assign to each fund in the portfolio. In a simplified example, if a target fund includes ten individual funds that are equally weighted, each time you invest, 10% of the total goes into each of the individual funds.

Your return, or what you gain or lose on your investment, is determined by the combined results the individual funds achieve, minus fees and expenses.

There are two types of target funds:

Target date funds focus on providing the investment assets you need by a specific future date. The fund managers gradually shift the combination of individual funds from a focus on more volatile growth funds to a more conservative focus on less volatile funds as the target date approaches. The underlying principle is that the more time you have to reach a specific goal, the greater the investment risk it’s generally appropriate to take. As the time to the target date grows shorter, the emphasis shifts to minimizing risk, sometimes providing income, and preserving wealth.

Target risk funds, on the other hand, maintain a consistent asset allocation over time — for example, all equity or all fixed-income funds — rather than gradually shifting their risk profiles. Investors with a specific risk tolerance can purchase shares of a fund with the confidence that the fund’s strategy won’t stray from its investment style. So whether you consider yourself a conservative, moderate, or aggressive investor, you can find target risk funds with a matching focus.