The term target date fund refers to a portfolio that changes the allocation of assets to a more conservative proportion over time. Target date funds are a subset of asset allocation funds, offering individuals a variety of timelines over which the portfolio rebalances.
Also known as lifecycle funds, target date funds allow individuals to select a future date the fund "matures" from what might be a growth portfolio to one that provides the investor with a reliable source of income. For example, it's possible to find a target date fund that matures in 2060. This type of fund might be attractive to an individual relatively new to the workplace that plans to retire in that timeframe. Initially, the allocation of assets to equities will be relatively high. As the target date approaches, the fund's management team will rebalance the assets, and slowly move to a more conservative portfolio of fixed income securities.
A common misconception is the investor should choose a target date that aligns with the year they plan to retire. From a practical standpoint, the target date should align with the year the investor plans to draw income from the account, which may be several years after they retire.
Generally, a target date fund's risk and volatility will be relatively high, since most of the assets held in the fund will consist of stocks. As the target date draws near, the risk and volatility of the fund will be relatively low, thereby providing the investor with a reasonably reliable source of income.