Understanding Life Cycle Funds
Life-cycle funds or target-date funds are a special category of mutual funds that are meant for those looking to invest specifically for their retirement. These funds tie the asset allocation scheme of the portfolio to the time horizon. Richard Cayne of Meyer International Thailand, a leading financial consultancy in Southeast Asia, explains that such age-based funds start off with a higher risk position and then keep on decreasing the risk factor as and when the individual keeps nearing his/her retirement age. While some favor target-date funds saying that they are a great way to put your investments on autopilot until retirement day, others tend to criticize their “one size fits all” approach.
Richard Cayne of Meyer International Thailand explains that there are two types of life-cycle funds: target date and target risk. The target date funds assume that the individual will retire by a certain year. The portfolio of the fund is then adjusted accordingly as the retirement year keeps coming closer. Richard Cayne of Meyer International Thailand explains that on the other hand, target-risk funds have three risk categories to choose from. The categories are divided into conservative, moderate and aggressive. Individuals have the liberty to switch to a different risk level as they reach their retirement age.
Richard Cayne of Meyer International Thailand further adds that such life-cycle funds can find their place in every investor’s portfolio. However, the burden of research, analysis and planning rests with the investor alone, as in the case of most investments. One of the biggest advantages of a target fund is that it offers you the liberty to choose your management style. You can go ahead to actively manage your fund or opt for a passive style. You can also choose the exposure level as well as asset allocation mix for your fund.
Richard Cayne of Meyer International Thailand warns that one of the downsides of investing in a life cycle fund is that markets are highly unpredictable, which means that if a fund that shifts into a conservative strategy since it’s nearing the retirement due date hits a bear market, the results won’t be enough to fund a financially secure retirement. Last, but not the least, Richard Cayne of Meyer International Thailand comments that target retirement funds work best for those who can afford to apportion a certain percentage of their investment and forget about it for perhaps the next 35 years.