Target Date Fund
What Is a Target Date Fund?
A target date fund is an investment fund designed to automatically adjust its asset allocation over time based on a specific retirement year. These funds typically shift from growth-oriented investments toward more conservative investments as the target retirement date approaches.
Target date funds are commonly used in retirement accounts such as 401(k) plans.
Why It Matters
Target date funds simplify retirement investing by providing a diversified portfolio that automatically becomes more conservative over time. This approach can help investors manage risk as they move closer to retirement.
The funds are often used by investors who prefer a hands-off investment strategy.
How Target Date Funds Work
Target date funds follow a gradual asset allocation strategy.
Early in the investment timeline, the portfolio typically includes:
- higher allocations to stocks
- greater exposure to growth investments
As the target retirement year approaches, the portfolio gradually shifts toward:
- bonds
- income-producing investments
- lower-risk assets
This gradual shift is often called a glide path.
Target Date Fund vs Index Fund
- A target date fund automatically adjusts its asset allocation over time.
- An index fund tracks a specific market index without adjusting allocation based on retirement timelines.
FAQs About Target Date Funds
How do investors choose a target date fund?
The target date is typically based on the expected retirement year.
Are target date funds diversified?
Yes, they generally hold multiple asset classes.
Do they require active management by investors?
No, the asset allocation adjusts automatically.
Related Terms
