What is a Target Date Fund?

A target date fund is an investment fund that is designed to reach a specific value by a set date, the "target date" in the name. Such funds are generally designed to work as retirement funds. They are also known as age-based or lifecycle funds because they are structured around the number of years someone has until retirement. A 40-year-old in 2020 who intends to retire at 65, for example, would buy into a target date fund that matures in 2045.

In a target date fund, the fund resets the mix of investments automatically at periodic points, pooling contributions from multiple investors to buy a wide variety of securities. This is designed to slowly shift the investments from high-risk, high-yield investments to more conservative ones. The goal is to generate a comfortable sum for retirement while limiting investment risks close to retirement, under the argument that younger investors can weather a loss or temporary decline in value while older investors cannot.

The target date fund was developed in the 1990s by several financial services companies. Some financial advisors have criticized this type of fund, arguing that it can be too conservative and it is possible for the fund to fall short by the target date. These advisors argue that investors may be better able to diversify and change the mix of their investments on their own than with a one-size-fits-all target date fund.

For people with limited funds to invest, a target date fund can be a good choice. Small stocks of available funds can expose people to risk as they cannot recover from downturns in the value of their investments because they don't have additional funds to do so. Small investors also tend to lack access to some lucrative investment products that are within reach of a target date fund thanks to the pooled assets in the fund. Investors can also consider putting some money in a target date fund and spreading other funds into other investments.

The time between the establishment of the fund and the maturity at the target date is known as the glide path. The fund manager must make periodic adjustments to the investment policies of the fund in order to keep it on track. Fund managers can make mistakes just like everyone else when it comes to predicting and recommending investments, and they must manage their target date funds with special care to avoid falling short when people are ready to retire.