What Is a Target-Risk Fund?

A target-risk fund is a type of investment fund with a portfolio asset allocation that holds a diversified mix of stocks, bonds, and other investments to create a desired risk profile. The fund manager of a target-risk fund is responsible for overseeing all the securities owned within the fund to ensure that the level of risk is not greater or less than the fund's target-risk exposure.

Key Takeaways

  • Target-risk funds seek to establish and maintain a specific level of risk exposure in its portfolio over time.
  • These are often labeled from "conservative" to "aggressive" risk exposure, where an investor can choose the risk profile that best suits them.
  • Unlike target-date funds that reduce risk over time, target-risk funds usually maintain their risk level indefinitely.

Understanding Target-Risk Funds

Target-risk funds typically label themselves as, for instance, "conservative," "moderate risk" or "aggressive" in terms of their risk exposure so that investors can get a handle on the target risk level. Regardless of the label applied, the intent is to offer a relatively constant level of risk exposure to investors.

Target-risk funds allow investors to adjust their level of risk exposure throughout their lives. These funds can have a glide path that changes the target risk exposure over time. Often, investors target more risk or volatility when they are young but seek to reduce their risk exposure as they get older and closer to retirement.

The manager of a target risk fund is responsible for ensuring that the fund's level of risk exposure is on target, and the fees charged for operating the fund (on top of the fees charged by mutual funds owned within the target risk fund) is compensation for the value-added service.

Target-Risk Funds vs. Target-Date Funds

A target-date fund is a fund offered by an investment company that seeks to grow assets over a specified period of time for a targeted goal. Target-date funds are usually named by the year in which the investor plans to begin utilizing the assets. The funds are structured to address a capital need at some date in the future, such as retirement. The asset allocation of a target-date fund is therefore a function of the specified timeframe available to meet the targeted investment objective. A target-date fund’s risk tolerance become more conservative as it approaches its objective target date.

How Target-Risk Funds Work

Target-risk funds also offer individual investors the opportunity to get a well-diversified mix of stocks and bonds in a single mutual fund. Target-risk funds build a mix of stocks and bonds that align to a targeted risk level. An aggressive target-risk fund may put 75 percent to 100 percent of its assets into stocks (with the remaining assets in bonds), while a conservative target-risk fund might have the opposite asset mix. Typically, investors put their money into more aggressive target risk funds early in their investing lifecycles and focus on growing their assets, while older investors tend to move toward more conservative allocations to protect their assets as retirement grows closer.