Life cycle Fund

Hi Mr Tan,

Can you explain the concept of a life cycle fund? Who is it suitable for? It it high or low risk profile? How do I select the right fund?

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REPLY:

A life cycle fund has a target maturity date. You normally choose a date when you are expected to retire from work, say when you are around 65. If you are now 30 years old, you can choose a life cycle fund that has a target maturity date in about 35 years time, say 2040.

During the earlier years, the fund is largely invested in equities. This has a higher risk profile, but is expected to give a better return. As the fund approaches its target maturity date, a higher proportion is invested in bonds, to reduce the risk profile of the fund.

I have seen a few life cycle funds, managed by Vanguard and Fidelity in the USA, where the proportion of bonds increase to about 60% (not 100%) on the target maturity date.

I am not sure if the found is liquidated when it reaches its target maturity date. I think that it can still continue beyond that date. There is no need to liquidate it.

Many people like the life cycle fund. It saves them the trouble of managing the porportion to be invested in equities and bonds. They prefer to leave it to the fund manager, knowing that it will reduce the risk profile as the fund approaches the maturity date.