Target date funds vs. target risk funds

Like most individual investors, you rely on mutual funds and investment professionals to put your money to work for you. And for an increasing number of investors, this means investing in mutual funds that deliver a mix of stocks and bonds in a single mutual fund.

This approach provides the diversified exposure you need while keeping your investment decision-making straightforward. The two most popular types of solution-based mutual funds are target date and target risk funds. Though the two fund types represent differing investing philosophies, both are designed to get you closer to realizing your investment goals.

Target date funds

Target date funds offer a seemingly straightforward way to diversify your investments. You simply select a mutual fund based on the year you plan to retire and the fund automatically adjusts over time to maintain alignment with investment goals. There’s no need to rebalance or select any underlying funds—the single target date fund provides that service. A dynamically changing mix of assets gradually shifts the risk profile from aggressive to conservative as the target date approaches. While a single investment approach is certainly appealing, a look under the hood reveals some additional complexity that you need to consider when saving for retirement.

Not all target date funds are created equal, even if they share the same target date. A 2035 fund from one mutual fund company may have a much greater percentage of the overall assets invested in stocks, thereby positioning it more aggressively than a mutual fund with the same date from a different mutual fund company. Thus many of these funds have an additional risk focus to consider. Each fund has a unique formula to determine the right mix of stocks and bonds for each target date, the number of years until the target date, and the relative level of risk being assumed.

Target date funds typically become less risky as the target date nears, but as an investor, you still need to evaluate the risk level of the fund compared to your own individual comfort with volatility. The challenge to select the right target date fund is further complicated if your risk tolerance changes as retirement nears. As a result, the individual investor needs to fully understand the strategy behind the fund’s approach before making an investment. Attempting to find the right target date fund that takes into account all of these factors may certainly be a tall order.

While the asset mix is important, how the fund gradually shifts from stocks to bonds, also known as the “glide path,” is equally important. A “to” glide path means that the fund becomes more conservative as the target date approaches (moving to a greater bond-to-stock ratio) and remains static once it gets to the retirement date. A “through” glide path is often used by mutual funds designed for investors who will likely stay invested long after the target date is reached. The glide path continues through the retirement date. The “through” path generally keeps the asset mix more aggressive (more stocks compared to bonds) than the funds that use a “to” path.

It is essential to know which glide path your target date fund is using as you plan for your retirement. This variability in target date funds can benefit you if you’re willing to do the work necessary to understand the fund’s strategy and methods for changing the mix of stocks and bonds. Target date funds are a good solution for some investors but they aren’t quite as “hands-off” as they initially appear and may be too aggressive or conservative for your individual risk tolerance.

Target risk funds

Target risk funds also offer individual investors the opportunity to get a well-diversified mix of stocks and bonds in a single mutual fund. Target risk funds, as the name suggests, build a mix of stocks and bonds that align to a particular targeted risk level. An aggressive target risk fund may put 75-100% of its assets into stocks (with the remaining assets in bonds), while a conservative target risk fund might have the opposite asset mix (nearly all bonds with limited stock holdings). Typically, investors put their money into more aggressive target risk funds early in their investing lifecycles and focus on growing their assets while older investors tend to move toward more conservative allocations to protect their assets as retirement grows closer.

Much like target date funds, target risk funds offer a single, balanced solution for you to diversify their investments and tailor them specifically to your desired risk level. Unlike a target date fund, if you invest in a target risk fund, you only have to select the right risk level and not worry about the additional complexities of glide paths or the significant variations between funds with the same target dates. An aggressive target risk fund gives you an aggressive mix. A more conservative target risk fund offers a conservative investment. Pretty simple. No matter what your planned retirement age (and we all know that plans change frequently), you can get the right investment mix based on your risk profile and can update it as your investing needs evolve. Keep in mind, you will be responsible for adjusting your investments as your risk tolerance changes.

Additionally, and unlike target date funds, target risk funds are built on the assumption that you will probably have more than one investment account as part of your portfolio. This means target risk funds can offer you more flexibility based on your situation. For example, if you’re an older investor with the majority of your assets sitting in bond funds in a 401(k), a small allocation to an aggressive target risk fund in an IRA might be the right choice for you. A target date fund doesn’t offer the same flexibility—the closer the target date, the more conservative the investment mix.  

What Thrivent Mutual Funds offers

At Thrivent Mutual Funds, we offer a complete range of target risk funds in our Asset Allocation and Income Plus funds. Our team of seasoned investment professionals brings deep expertise and thorough proprietary research to actively managing each fund. When you choose to invest with Thrivent Mutual Funds, you’ll benefit from the expertise of our investment professionals and the convenience and choices we provide to make investing easier.