If you are reviewing your 401(k) selection or thinking over your investment choices for retirement planning, you may find an offering of "target dated" mutual funds.
Let's review how these funds may fit into your long term investment goal.
What is a target date mutual fund?
This type of mutual fund is frequently used in retirement or long term investments and offers a balanced approach to investing.
Typically the composition of holdings includes a portion of stocks or stock mutual funds, bonds and cash.
In the early years, the mix is more heavily weighted toward stocks in order to maximize the growth of the portfolio. In the later years, the mix will be adjusted to become more heavily weighted toward bonds and cash, evolving into a more conservative portfolio to take less risk as you get close to retirement needs. Most young investors need to maximize the growth of their investment while still tempering how much risk to take.
Who offers this type of investment?
There are many firms that offer their own version, such as the "Fidelity Freedom Funds", that “invest aggressively when you’re younger and automatically become more conservative as you near retirement.” (fidelity.com)
Vanguard has their version called “Target Retirement Funds” that range from the target years of 2010 to 2050, source:www.vanguard.com.
USAA Investment Management Company also has the "USAA Target Retirement Funds" include Retirement Income Fund to Target Retirement 2040 Fund (source:www.usaa.com).
These mutual funds are ideal for retirement planning, a sort of “set and forget” approach for investors who want to allow the re-balancing of the portfolio to be an automatic feature over the years.
Along with these mutual funds, an investor can still expand their investment by adding other mutual funds or stock holdings as a complement to the target funds. For example if the target fund does not include real estate or gold stocks or international holdings in its underlying portfolio mix, that addition of other holdings may further diversify the portfolio.
Re-balancing and monitoring
Check to see how frequently the mutual fund is rebalanced to meet the funds objectives.
It is still important to review your account, to look at the performance and monitor how this investment is working toward your goals and timeline.
There are risks to all mutual fund investing, so review your goals and questions with a financial adviser.
Be sure to look at the fees and expenses for all investment decisions.
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