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Target Date Fund

A target date fund is a type of mutual fund or exchange-traded fund (ETF) that automatically adjusts its asset allocation as the target retirement date approaches. These funds are designed for investors planning to retire or reach a financial goal by a specific date, with the portfolio becoming more conservative (shifting from stocks to bonds) as the target date nears. Target date funds are popular in retirement accounts like 401(k)s due to their hands-off, gradual adjustment strategy.

Example

An investor planning to retire in 2045 invests in a target date fund with that year as the target date. The fund starts with a higher allocation to stocks and gradually shifts toward bonds as 2045 approaches.

Key points

• A mutual fund or ETF that adjusts asset allocation over time.

• Designed for retirement or financial goals by a specific date.

• Becomes more conservative as the target date approaches.

Quick Answers to Curious Questions

It gradually reduces exposure to risky assets like stocks and increases exposure to bonds or other conservative investments as the target date nears.

They offer a hands-off investment approach with automatic adjustments to match an investor’s changing risk tolerance as they approach retirement.

If market conditions change drastically near the target date, the fund’s conservative shift might limit potential gains or expose the investor to unexpected losses.