What is a 'Target-Date Fund'
A target-date fund is a mutual fund in the hybrid category that automatically resets the asset mix of stocks, bonds and cash equivalents in its portfolio according to a selected time frame that is appropriate for a particular investor. A target-date fund is similar to a life-cycle fund except that a target-date fund is structured to address some date in the future, such as retirement. Its returns are not guaranteed, but depend on how the market performs.
BREAKING DOWN 'Target-Date Fund'
For example, a younger worker hoping to retire in 2050 would choose a target-date 2050 fund, while an older worker hoping to retire in 2025 would choose a target-date 2025 fund. Because it has a longer time horizon, the 2050 fund would likely be weighted heavily toward stocks, with a relatively small percentage of bonds and cash equivalents, while the 2025 fund would hold relatively more bonds and cash equivalents and fewer stocks so it would be less volatile and more likely to contain the assets the investor needs to begin making withdrawals in 2025.
Target-date funds are popular with 401(k) plan investors. Instead of having to choose a number of investments to create a portfolio that will help them reach their retirement goals, investors simply choose a single fund designed to help them reach that goal. The fund’s managers then rebalance the fund’s assets each year and keep its investments on track to meet the fund holders’ goal of using that investment to begin paying for their retirement in a particular year.
While proponents cite the convenience to investors of putting their investing activities on autopilot in one fund, critics are wary of these funds' one-size-fits-all approach. They don’t take into account that one investor wanting to retire in 2050 might have a different risk tolerance than another investor wanting to retire in the same year. Also, a fund with the same target date can have varying levels of risk and investment expenses depending on which brokerage is offering it.