Target date funds offer many benefits to potential investors, but there are caveats that should be observed when picking the appropriate fund to use. Target-date funds allocate assets based on the date by which investors want to be able to actually spend their money.
Bankrate.com reports that one benefit of these funds is that they simplify investment decisions that will be made over a long time horizon – for example 30 years – according to Ronald J. Rough, who is a chartered financial analyst and director of portfolio management at Financial Services Advisory in Rockville, Maryland.
The funds generally begin with most of their assets invested in equities and then shift larger and larger fractions to cash. This can provide the benefit of strong appreciation in the beginning followed by less volatility as the fund reaches its target year.
One perfect application of these financial instruments is retirement. A person looking to retire in 30 years can generate strong returns in the beginning and obtain less and less volatility as the fund matures. However, StreetAuthority advises that a person needs to be sure to pick the right year when utilizing a target-date fund to plan for retirement. Otherwise, people can be over invested in either stocks or bonds.