Lifestyle Fund

What Is a Lifestyle Fund?

The term lifestyle fund refers to an investment fund that manages a diversified portfolio across assets with varying risk levels. These funds determine the best assets for investors based on their risk tolerance, age, and investment goals. They are generally suited for long-term investing—especially for those who want a savings vehicle that they can cash out by a certain time such as retirement.

How Lifestyle Funds Work

There isn't a one-size-fits-all approach to investing. Investors have different needs and goals, so they should choose investment vehicles tailored to their own needs. Lifestyle funds are typically designed to target an investor's investment style and stage of life. They can be marketed across a range of styles tailored to an investor’s risk tolerance ranging from conservative, moderate, and aggressive, and can be further expanded to include income, growth, or value strategies.

Risk tolerances are typically determined by the investor's age—aggressive funds are suggested for younger investors while conservative funds are aimed at older investors who are closer to retirement.

Lifestyle funds use a mix of assets and asset allocation strategies in their approach, but their goals are primarily focused on providing investors with a vehicle for long-term investing. Lifestyle funds generally follow the traditional concept of modern portfolio theory (MPT), using an optimal mix of equity and debt based on the fund’s risk tolerance. They provide much less risk than traditional funds by offering a broader range of diversification.

Lifestyle funds are an iteration of standard balanced funds. That's why fund managers manage their portfolios similarly to these funds. There is a slight difference, though, since lifestyle funds generally try to provide investors with a vehicle for investing toward a specified goal and withdrawal date.

While retirement is a common goal, investors can use these funds for a number of life events with a specific target date in mind This is why some lifestyle funds are often compared to—and sometimes called—target-date funds. That's because both have the purpose of serving as a vehicle for investing funds toward a specific goal.

Lifestyle funds are slightly different from target-date funds because their asset allocation doesn't shift in a way that follows a glide path over the life of the investment. Instead, they focus on providing either conservative, moderate, or aggressive risk allocations for investors beginning to invest at all different stages of their lives.

Special Considerations

Aggressive funds generally seek more aggressive returns through higher allocations to equity investments. They are also managed for capital preservation through fixed-income allocations. In fund options that are more aggressive, investments may be diversified broadly across all market segments and global regions in order to achieve maximum returns from all market opportunities.

In conservative funds, though, the assets are heavily weighted toward lower-risk investments with greater allocations to fixed-income overall.

Example of Lifestyle Funds

Almost every fund company offers its own lifestyle fund. Vanguard is among the companies with leading market offerings in this category. Vanguard's LifeStrategy portfolio gives investors four lifestyle fund options based on their age and risk tolerance:

• LifeStrategy Income Fund
• LifeStrategy Conservative Growth Fund
• LifeStrategy Moderate Growth Fund
• LifeStrategy Growth Fund

These funds do not follow a glide path. Rather, they focus on an investor’s investing style by using the style focus as a means for managing a nest egg over time.