Definition: A lifecycle fund is a long-term investment option providing the feature of automatic adjustment of the asset class and composition to reduce the risk appetite while moving closer to the maturity date of the plan. In the beginning years the plan includes more aggressive stocks however, the ending years foresee more of secured bonds and fewer high-risk securities.
This age-based fund is most suitable for young investors since they have a longer holding period i.e., around 30-40 years which is necessary for this fund to provide phenomenal results.
Content: Lifecycle Fund
Factors to Consider Before Investing in a Lifecycle Fund
There are multiple elements constraining the investor’s decision of sorting to a lifecycle fund. We bring to you the significant ones out of these below:
Investment Goal: While planning your investment strategy, the first thing to contemplate is the ultimate objective behind investing the sum. If it is a long-term goal attainable at a certain maturity date after the retirement of the investor, then a lifecycle fund can be chosen.
Time Horizon: Again a key element moulding your investing decision is the period for which you are willing to keep your funds engaged in a specific plan. If you are aiming to invest for a long period, say till your retirement, then it is preferable to go for a lifecycle fund.
Investment Expertise: If the investor has the basic know-how of the various lifecycle plans, it is a plus. Since these funds do not require aggressive management, an investor can conveniently select a suitable plan and maturity date to proceed with such investment.
Expenses Involved: While opting for a lifecycle fund, analyze the various expenses to be incurred on the purchase, management and withdrawal of the investment. An investor has to pay off the It may also include certain hidden costs or fees, so beware.
Need for Professionals: Another crucial factor is whether the investor should hire a professional say a portfolio manager to handle his/her investment affair. If an investor is a novice or if there are multiple other investments made along with a lifecycle fund, then taking professional service is advisable.
Investor’s Age: Yes, the biggest concern with regards to a lifecycle fund is the age of the investor. For young investors aged between 25-35 years, proceeding with such a plan can yield impressive returns after-retirement. However, the same may not be the case with a middle-aged investor, as the fund doesn’t get the required time to perform efficiently.
Types of Lifecycle Fund
Most of the investors take lifecycle funds to be date funds, while there is one more addition to this investment option, i.e., risk fund. Lets have a purview of both these forms:
A date fund as the name suggests, the investor provides a certain date of retirement which tends to be the maturity date of this fund. Thus, on moving closer to the maturity date, an automatic adjustment of the stock composition takes place to gradually lower the risk involved in this fund.
Coming to the risk funds, it takes into consideration the investor’s vulnerability towards the risk involved in a plan. It has three forms i.e., low or conservative risk appetite, average or moderate risk appetite and high or aggressive risk appetite. In such a fund the investor can change his/her risk appetite at any point in time.
How Lifecycle Funds Work?
The functioning of a lifecycle fund can be understood with the help of the following example:
Mr A aged 25 years plan to invest in a lifecycle fund in the year 2020 to buy farmland after retirement. He will retire from his job on a certain date in the year 2060.
Thus, he opted for a lifecycle fund which matures in the year 2060. In the initial years, the fund had a composition of 80% stocks and 20% bonds. While in the year 2035, it reallocated to have 50% stocks and 50% bonds.
Finally in the year 2050 till the year 2060, the fund comprises of 20% stocks and 80% bonds. After the ascertained date in the year 2060, the investor can withdraw the sum for purchasing the farmland.
Benefits of Lifecycle Fund
What makes a lifecycle fund to be a superior investment option for young investors?
Let’s unfold the multiple advantages of opting for a lifecycle fund:
- Focuses on Specific Goal: Every investor has a definite aim planned to be accomplished in the long-term. A lifecycle fund is a means of actualizing similar after-retirement objectives.
- Requires Least Management: Due to the self-adjustment function of these funds, there is a negligible need for availing the services of a portfolio manager or any other professional.
- Ease of Use: Investing in a lifecycle fund is a simple process. The investor just has to pick up an appropriate investment plan and determine a maturity date according to his/her investment objective.
- Transparency: Going for lifecycle funds which have a preset glide path can be an efficient strategy to understand the journey of your assets and the diminishing risk over the period in a clear manner.
- Low Risk: Since the target funds are selected as per the target retirement date, also they have a long period to perform, these are considered to be low-risk funds for young investors.
- Automatic Adjustment: It has a feature of automatically modifying the asset allocation on reaching nearby to retirement. Thus, the reallocating the assets in more conservative securities.
Criticisms of Lifecycle Fund
While many have considered a lifecycle fund to be immensely useful for better after-retirement life, some refrain from accepting it to be a good investment option, due to its following limitations:
- Requires Fund Know-how: Every investor opting a lifecycle fund is desired to have at least the basic information about the securities intact in the plan, its preset glide path and the alternatives available.
- One-dimensional Investment: Such a fund pitches the after-retirement needs of an investor, thus having a uni-dimensional approach. The short-term requirements and objectives are therefore ignored in this fund.
- One Size Fits All Philosophy: With an immensely diverse investor base, it becomes essential to customize the investment options to match the requirements of each individual. However, a lifecycle fund applies the same strategy for all kinds of investors.
- Conservative Approach: This fund is even considered to be inapt by some investors due to its conservative aspect. Due to the automatic adjustments, sometimes the investor’s money is underinvested (by maximum sum pooled in secured assets) when the money market is performing at its best.
Investing in a lifecycle fund is a thoughtful process since it blocks the funds for a longer period which may even extend up to 40 years. Although, if one is looking for fair returns with minimal risk involvement, it is indeed a great option.