Introduction
A life-cycle fund is a mutual fund in which the risk involved automatically reduces when the retirement approaches; this is predefined. When the risk level of the fund decreases, the investment is then made predominantly towards the bonds and other similar money market instruments that are capable of providing fixed returns. Life-cycle funds are also referred to as retirement funds, target-date funds, and age-based funds.
Who Should Invest in Life-cycle Funds?
Young investors planning their retirement, which is thirty to forty years away, can choose to invest in life-cycle funds. But investors in their late fifties or approaching their retirement should stay away from these funds as they don't have the time on their side to accumulate enough money in a safer manner. These funds are exposed to higher risk in the initial few years, and they may not be able to regularly invest when they retire.
Hence, these funds are apt for young investors who have an investment horizon of at least 25 years on their side. Also, investors having a targeted requirement of money at a predefined date can consider investing in life-cycle funds as they offer the benefit of convenience.
How Does a Life-cycle Fund Work?
Let's understand the working of a life-cycle fund with an example. Consider that you invest in a life-cycle fund having a target date sometime in the year 2050 in 2020. In the initial years, the fund will be aggressive in its asset allocation.
It may invest up to 80% in equity and the rest in debt. As the years pass by, the allocation towards equity investments will reduce and will be replaced by money market instruments, such as bonds.
By the time you hit the year 2035, you will be halfway through your life-cycle and your fund will have allocated at least 60% in bonds and 40% in stocks and will remain the same till the time you retire in the year 2050.
