What are Target Risk Funds?
Target risk funds are a type of mutual fund or exchange-traded fund (ETF) designed to achieve a specific level of risk over a period of time. These funds allocate assets across various investment classes, such as equities, fixed income, and cash, based on the targeted risk level—typically categorized as conservative, moderate, or aggressive.
How They Work
Investors select target risk funds that match their risk tolerance. A conservative fund might hold a higher percentage of bonds, while an aggressive fund would focus more on stocks. The fund managers will periodically rebalance the portfolio to maintain the designated risk level, adapting to market changes.
Benefits
- Diversification: Target risk funds provide exposure to a mix of asset classes, reducing risk through diversification.
- Professional Management: These funds are managed by investment professionals who make decisions aimed at minimizing risk.
- Simplicity: Investors can select a fund based on their risk profile without the need for extensive financial knowledge.
Considerations
While target risk funds simplify investing, it's important for investors to review the fund's objectives and performance history. Not all funds labeled as "target risk" are the same, so understanding their underlying strategies and risks is essential.