What are Lifecycle Funds and Why You Should Invest in Them

Lifecycle funds are a simple method of investment. They are suitable for young investors who want to plan for investment. Lifecycle funds are advantageous for people who have a particular requirement for capital for a specific point in time. In this article we will discuss what lifecycle funds are and who should invest in them. We will also be talking about how a lifecycle fund works and why to invest in them. We have also included some key terms related to lifecycle funds. A recap of the main points is also provided at the end.

What are Lifecycle Funds and Why You Should Invest in Them
What are Lifecycle Funds and Why You Should Invest in Them. image from iStock.

What is a Lifecycle Fund?

A lifecycle fund is a mutual fund that gradually moves towards a more conservative mix of investments as a certain point in the future comes closer. The lifecycle fund investor selects a fund with the appropriate target date on the basis of the desired investment objectives. The fund managers then decide on parameters such as asset allocation, diversification, and rebalancing 

A lifecycle fund matches the risk tolerance of the investor as it varies with time. It tends to reduce risk as one approaches retirement. Lifecycle funds automate components of portfolio management. They are ideal for investors that are not comfortable with actively managing their portfolios. 

Who Should Invest in a Lifecycle Fund?

Young investors can choose a target date that is 30 to 40 years away from retirement. As an investor moves closer to retirement, the time till the target date should naturally decrease. Lifecycle funds are created with the belief that young investors can handle more risk. This may not always be the case.

How does a Lifecycle Fund work?

Lifecycle funds are designed for investors who require capital at particular points in life. These funds are largely used as a vehicle for retirement investing. They can, however, be used by anyone who requires capital at a certain point in the future. 

Lifecycle funds are more aggressive in their asset allocation at first. 

Why Invest in a Lifecycle Fund?

Lifecycle funds give access to diversification and rebalancing in one single fund. This strategy is most useful for those looking for a passive investment strategy. Lifecycle funds are a more convenient option for investors with the need for capital at a particular time. Investors can efficiently set their investments on autopilot. Investors also gain clarity on the timeline and developments of their investments beforehand through this method. The gradual decrease in risk is optimal for investors.

Related Terms 

Targeted Date – Investment funds are intended to grow consistently for a predetermined period of time, typically until retirement.

Declining Risk – As your target date draws closer, investment funds switch from riskier growth-oriented options to more cautious income-producing options. This is known as the fund’s glide path according to the Investment Company Institute. The target date fund follows the glide path when allocating assets so that it gradually becomes more conservative.

Adaptive Changes – Periodically, investment funds automatically rebalance to account for changes in the market.

Individual Risk Tolerance – Does not take a person’s comfort level with risk into account. The rate at which your risk profile changes could differ from the glide path of the fund.

Inconsistent Glide Paths – Depending on the calculations and assumptions used by various fund providers, paths can change.

Recap

  • Diversified mutual funds called “life-cycle funds” change their asset allocation over time to become more conservative.
  • Life-cycle funds can reduce some of the uncertainty involved in selecting the right asset allocation, but they may perform poorly.
  • When selecting a life-cycle fund, investors must take performance, risk profile, asset allocation, and management costs into account.
  • Asset-allocation funds called life-cycle funds automatically reduce the share of each asset type as the planned retirement date gets closer.
  • Investors with specific objectives who need money at particular times might consider life-cycle funds.
  • A life-cycle fund might be suitable for investors who want to take a fairly passive approach to retirement.
  • According to renowned investor Benjamin Graham, you should change your stock and bond assets depending on market prices rather than your age.
  • Life-cycle funds are founded on the premise that youthful investors can tolerate greater risk, but this isn’t always the case.

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FAQs

What are lifecyle funds?

A lifecycle fund is a mutual fund that gradually moves towards a more conservative mix of investments as a certain point in the future comes closer.

Is a lifecycle fund a mutual fund?

Yes. It is.

Are lifecycle funds more aggressive in their asset allocation initially?

Yes. They are.

What kind of strategy are lifecycle funds most beneficial for?

Lifecycle funds are most useful for a passive investment strategy.

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