What is the purpose of a "target-date fund"?

A target-date fund is specifically designed to automatically adjust its asset allocation based on a predetermined retirement date. As the target date approaches, the fund systematically reallocates its investments from a higher proportion of growth-oriented assets, such as stocks, to a more conservative mix, which typically includes a higher percentage of bonds and fixed income securities. This gradual shift is intended to reduce risk as the investor nears retirement, aligning the fund's strategy with the goal of providing adequate income and preserving capital when funds are needed.

This approach allows investors to invest in a diversified portfolio without needing to actively manage their asset allocation over time. They can simply choose a fund with a target date that corresponds to their expected retirement year, making it an accessible choice for individuals looking for a straightforward investment strategy.

Other options do not accurately reflect the essence of a target-date fund. For example, aiming to maximize returns regardless of retirement timing deviates from the fund's primary purpose, which is risk management as the target date nears. Similarly, investing exclusively in bonds or maintaining a constant asset allocation does not capture the dynamic rebalancing approach of a target-date fund, which is central to its objective of adapting to an investor's changing risk profile as retirement approaches.