Many human resource departments and investment advisors tend to direct employees to “target funds” for retirement....

Many human resource departments and investment advisors tend to direct employees to “target funds” for retirement. For example, if you will be 65 in 2030, you might be directed to place your monies in the “target fund for 2030” if you don’t have other ideas for your 401-k plan. What are the pros and cons of targeted funds? In 200 words or more, please give us your answer.

Expert Solution

Target funds for investment are generally associated with investing for a certain period and redeeming it on certain period so this will be having various pros and cons.

Advantages of target fund strategy-

A. Simplicity- this is a very simple investment and investor will just need to determine the date of reduction of the fund and he will be investing into the Funds so it is a very simple investment and it does not required high skill in order to select funds for investment.

B. Diversification- this target funds are also offering with the diversification benefits as they are investing into various asset classes and these are offering the investors with the customised choices to achieve his goal within a particular period of time so this will be offering with the diversification.

C. Asset allocation- target funds will be allocating the Asset based upon the particular age and need of the investor and they will be determining it on their behalf so they will be allocating in in order to diversify the risk.

Disadvantages related to target fund investment-

A. This target funds may not be suitable for all of the investors as they are having different age and goals

B. This target funds are often significantly underperforming The Other funds.

C. This target funds are also having a very high amount of fees for management

D. there is greater income volatility and retirement age may go up due to investment into target fund.

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