Lifecycle funds

Lifecycle funds

A lifecycle fund is a comprehensive investing choice that provides a diversified portfolio with an asset allocation tailored to the year you anticipate retiring. Lifecycle funds can be a good option for investors who want a hands-off approach to investing.  

They can also be a good choice for investors unsure how to allocate their assets, as the fund managers will do this for them. However, it is important to note that lifecycle funds come with fees, which can eat into returns over time. 

What is a lifecycle fund? 

Lifecycle funds are investment funds that aim to provide investors with a diversified portfolio appropriate for their life stage. The portfolio is rebalanced periodically to reflect the investor’s changing needs as they age.  

 For example, a 20-year-old investor would be allocated more of their investment to growth assets such as shares. In comparison, a 60-year-old investor would be allocated a greater percentage to defensive assets such as cash and bonds.  

 The rebalancing of the portfolio is designed to provide the investor with an optimal mix of growth and income as their needs change over time. Lifecycle funds can be a helpful way for investors to achieve their long-term financial goals. 

How does a lifecycle fund work? 

The concept of the investing lifecycle is tied to your age and stage in life. Your capacity and tolerance for risk are more while you’re single than when you’re a family person, and they shrink as your children get older and the gap to retirement gets closer. 

 When the client approaches retirement, a lifecycle fund instantly modifies its asset allocation to fit risk tolerance. Reducing risk as you get closer to retirement helps keep your money safe and guards you against an unforeseen loss just before or after you stop working. 

Benefits of lifecycle funds 

• Lifecycle funds are convenient for investors with a specific demand for capital at a specified time. Lifecycle fund investors may easily set their investing activity on autopilot with only one fund. Investors may expect to receive the ideal balanced portfolio each year thanks to the lifecycle funds’ fixed asset allocations.  
• Through their fixed asset allocations, lifecycle funds provide investors with the perfect diversified portfolio yearly. 
• A lifecycle fund could be suitable for investors who want to take a fairly passive approach to retirement. 
• A predetermined route’s additional clarity makes investors trust the fund more. 

Criticisms of lifecycle funds 

Lifecycle funds have several detractors who claim that their age-based strategy is incorrect. For instance, the bull market’s age might be more significant than the investor’s age. Benjamin Graham, a renowned investor, recommended altering stock and bond investments depending on market values instead of your age. 

 A more active strategy could be preferred by investors as well. To achieve their investment objectives, such investors should speak with a financial counsellor or use alternative funding sources. 

Example of a lifecycle fund 

Let’s use an example to understand better how the lifecycle fund functions. Think about investing in a lifecycle fund in 2023 with a goal date of sometime in 2063. The fund will allocate assets aggressively throughout the initial years. 

 It may invest as much as 80% in stock and the remaining debt. As time passes, less money will be allocated to equity investments, and more money market products, including bonds, will take their place. 

 Your fund will have at least 60% of assets allocated to bonds and 40% to equities by the time you reach the year 2043 when you will be midway down your life cycle, and it will stay that way until your retirement in the year 2063. 

Frequently Asked Questions