The Purpose of a Lifecycle Fund

by Investing School on May 9, 2012

There are all sorts of ways to invest over the years. For some the prospect of constantly moving things around and deciding where to put one’s money is overwhelming. In such cases a lifecycle fund is a good option.

A lifecycle fund is a portfolio of mutual funds which is managed in such a fashion as to accommodate a specific date of retirement. The fund is set up so that as the investor ages, an increasing number of conservative purchases is made, reducing the risk to the holder. Risk is reduced by shifting funds into stable bonds. For those who know when they plan to retire this can be a real advantage.

Of course, that is the catch. It is difficult to know when you will retire any more. The days of remaining in one company for your whole working life have gone. A person may change jobs repeatedly. It isn’t uncommon to hold a position in 5 or more firms before retirement. The current economic downturn has caused people to put off retirement indefinitely, altering investment plans dramatically. The lifecycle fund depends upon the ability to predict the future to some extent.

Simple Retirement Planning

Since the fund adjusts automatically, the investor can put money in without worrying about a high level of risk as they approach retirement. Older individuals who were still heavily invested in stocks when the market plummeted in 2008 learned a painful lesson which put off retirement for many. Another advantage is the need to only track one fund, and that fund is managed for them.

Lifecycle funds also may be called age based funds, target funds or target-retirement funds. Regardless of the name, the portfolio is maintained with a specific end point in mind. Usually dictated in 5 year increments, the balance of the fund is adjusted, based upon commonly accepted percentages, so as to decrease the risks as retirement age approaches.

One Size Doesn’t Fit All

Opponents say that this kind of investment may not actually suit everyone, since people’s goals and needs vary tremendously. Additionally, circumstances may demand changes to investment goals. The investor has little to no say over how their assets are invested once they place them in the lifecycle fund.

Because of the conservative nature of the lifecycle fund, the investor doesn’t necessarily have the opportunity to take advantage of a sudden upswing in the market. This kind of fund is the plodder’s choice, and it is reliable as it is dull.

The Big Picture is Yours to Draw

In truth, the decision to invest in a lifecycle fund is one that can only be made by the individual. For an investor who wants to let their assets run on ‘autopilot’ these sorts of investments are ideal. They simply deposit their contributions on a schedule and that is the extent of their involvement.

For investors who want to be actively involved in decisions and changes, a lifecycle fund is pointless. Additionally, if circumstances change mid-stream, and you have to make changes in your investment strategy, a lifecycle fund can actually be detrimental as it will start shifting your balance whether you are ready to retire or not.

As always, investments must be carefully considered and monitored. Only you can determine whether placing a portion of your retirement income into a lifecycle fund is appropriate.

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