Life-Cycle Fund

DEFINITION of 'Life-Cycle Fund'

Life-cycle funds are a type of asset-allocation mutual fund in which the proportional representation of an asset class in a fund's portfolio is automatically adjusted during the course of the fund's time horizon. The automatic portfolio adjustments run from a position of higher risk to one of lower risk as the investor ages and nears the fund’s utilization date. Life-cycle funds may also be referred to as "age-based funds". 

BREAKING DOWN 'Life-Cycle Fund'

Life-cycle funds are designed to be used by investors with a specific goal, requiring capital at a specific utilization date. Most life-cycle funds are used for retirement investing but generally they can be used for any capital need required at a specific time in the future. Each life-cycle fund defines its time horizon by naming the fund with a target date.

For investors with a targeted need for capital at a specific utilization date, life-cycle funds offer the advantage of convenience. Life-cycle fund investors can easily put their investing activities on autopilot through the use of just one fund. The fixed asset allocations of life-cycle funds over time allow investors to invest in a balanced portfolio of stocks and bonds. Most life-cycle funds are managed to a pre-determined glidepath which gives investors greater transparency and even more confidence in the management of the fund over its full time horizon. A life-cycle fund’s glide path provides for steadily decreasing risk over time by reconstituting asset allocations toward lower risk investments. Investors can also expect a life-cycle fund to manage through the defined utilization date.

Some critics of life-cycle funds say that their "one size fits all" approach is suspect. For investors who seek to take more of a passive approach to their retirement investing, a life-cycle fund may be appropriate. However, investors who seek to more actively manage their retirement investments may rather direct the management to a financial advisor or use other types of funds to meet their long-term investment goals.  

Life-Cycle Fund Investing

The Vanguard Target Retirement 2065 Trusts are one example of life-cycle funds. In July 2017, Vanguard launched its life-cycle offering for 2065, the Vanguard Target Retirement 2065 Trusts. The Fund offers an example of how life-cycle funds transition their allocations for risk management. The asset allocation remains fixed for the first 20 years with approximately 90% in equities and 10% in bonds. For the next 25 years leading to the target date the allocation gradually moves more toward bonds. At the target date of utilization, the asset allocation is approximately 50% in equities, 40% in bonds and 10% in short-term TIPS. The allocation to bonds and short-term TIPS gradually continues to increase in the seven years following the target date. Following that, the allocation is fixed at approximately 30% stocks, 50% bonds and 20% short-term TIPS.