A fast-growing fund niche gets three new categories of its own.
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Morningstar has introduced three new categories to handle the phenomenon of target-retirement funds.
Fidelity rolled out one of the first series of these funds in 1996, but its Freedom funds faced little competition until T. Rowe Price entered the fray in late 2002; since then, many of the fund industry's bigger players have joined the party.
These funds, which previously tended to reside in the moderate-allocation, conservative-allocation, and large-blend categories, have very different mandates than their former peers. They're designed to serve as one-stop-shopping options for investors with a specific time horizon in mind. If an investor expects to retire in 29 years, for example, she might choose a fund with a target date of 2035.
The funds, which typically hold other offerings from within their fund family, become more conservative over time; to provide more stability as retirement approaches, the advisor reduces a fund's equity weighting in favor of bonds as the target date draws near. Although most of these funds are designed for investors' retirement assets, we think they can also be a good place to stash college savings, too.
To provide better comparisons, we've split the funds into three groups: target-date 2000-2014, target-date 2015-2029, and target-date 2030+.
What to Look For
When sorting through these new categories, investors should keep in mind that competing funds with similar time horizons can have markedly different asset allocations. That's particularly true in regard to the funds' balance between stocks and bonds.