There are many investment plans in the market, choosing one for the purpose of retirement planning out of all seems to be a difficult job. Here I am introducing one more retirement plan that is gaining popularity since few years i.e Target Date Funds. Target Date Funds (TDF), are basically hybrid mutual funds which offers both safety and growth to the investor. Before moving ahead to explain ‘What Are Target Date Funds?’ lets first understand what are hybrid mutual funds. Hybrid mutual funds are mutual funds which offers a balanced mixture of safety, income and capital appreciation. It works on a strategy of balanced schemes by investing in a combination of equity and debt where equity ensures growth and debt instrument ensures the steady income to the investors.
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What Are Target Date Funds (TDF)?
Target Date Funds (TDFs), are hybrid mutual funds that manages portfolio of an investor according to the selected time frame. In other words, TDFs manages asset allocation for you, in such a way so that risk level of your portfolio will reduce as you approach your retirement age. You can choose TDFs which matches your age and risk tolerance capacity according to your projected retirement age.
TDF’s takes into account the investors current age and retirement age and plans portfolio in such a way that investment becomes more safe as investor approaches his retirement.
For Example, Mr. A bought Target Date Funds (TDFs) at an age of 30 with projected date of retirement as 60 years. So here fund manager will manage his investment funds in such a manner so that risk level of his portfolio will go down as he approaches to his retirement age i.e 60 years. So his portfolio will have high exposure to equity (for growth) in first few years and then gradually his funds will be moved to conservative funds like bonds to maintain security of funds to the investor.
Advantages/Benefits Of Target Date Funds
- Investor do not need to have knowledge to invest under Target Data Funds as fund managers manages funds on behalf on investors.
- It save time as investor just need to convey the approximate year at which he plans to retire to the fund manager and you are done.
Disadvantages/Negatives Of Target Date Funds
- The fee to manage these funds are quite higher than other type of funds.
- This fund is not very tried and tested so it is difficult to say how reliable are these funds for retirement planning.
- Target Date Funds assumes same risk tolerance capacity for every investor and works accordingly.
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