A target date fund is a type of pooled fund that is created and run with a certain time frame in mind. The “target date” in the name means the end of this time frame.
These funds are a good option if that time frame matches your schedule for using the money you’ve invested into it. This is especially true if you’re investing to acquire a property, to purchase a vehicle or better yet, to retire, because you’ll be able to redeem your investment by the time you stop getting paid by your employer.
Changing strategies according to time
When a target date fund is created, it will focus on growth. At that point, it will typically acquire assets such as equities that have high potential for growth while matching a high tolerance for risk.
As time passes and the target date nears, the fund will normally start shifting its exposure from more aggressive assets to more conservative outlets to protect the capital. By the tail end of its lifespan, it favors a lower risk and reward over income generation, for the benefit of its investors.
This asset reallocation is called the “glide path,” and it reduces the chances of the investment losing value when the target date is reached.
Replacement for income
Retirement means that you’ll no longer be getting income from work. If you don’t have a business or investments that let you earn, you may have only your savings to pull from for your living expenses.
That’s why the glide path of a target date fund is so important. It lets your investment grow in the early stages, when there is enough time to recover from the usual ups and downs of a market cycle, and switches to more predictable assets as the date when you need the money draws near.
That way, you may enjoy both growth and income with just one investment. Of course, this asset reallocation can benefit even those people who aren’t yet investing for retirement. You can also put your money in other products to manage your risk even more.
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