What is the difference between a target-date fund and a target-risk fund?

A target-date fund and a target-risk fund are both types of mutual funds that are designed to cater to specific investment objectives and risk tolerance levels of investors. However, there are key differences between the two.

1. Investment Objective:
- Target-Date Fund: A target-date fund is designed to align with a specific retirement date or investment horizon. The fund's asset allocation is adjusted over time, becoming more conservative as the target date approaches. This means that the fund automatically shifts its allocation towards lower-risk investments, such as bonds and cash, as the investor gets closer to their retirement date.
- Target-Risk Fund: A target-risk fund, on the other hand, focuses on maintaining a consistent level of risk throughout the investment period. The fund's asset allocation remains fixed and does not change based on the investor's time horizon. Investors can choose a target-risk fund based on their risk tolerance, such as conservative, moderate, or aggressive.

2. Asset Allocation:
- Target-Date Fund: The asset allocation of a target-date fund is based on the investor's retirement date or investment horizon. Initially, the fund may have a higher allocation to equities, which are considered higher risk but have the potential for higher returns. As the target date approaches, the fund gradually shifts its allocation towards more conservative investments, such as bonds and cash, to reduce the risk.
- Target-Risk Fund: The asset allocation of a target-risk fund is based on the investor's risk tolerance. The fund maintains a fixed allocation of assets, typically across different asset classes like stocks, bonds, and cash. The allocation remains constant regardless of the investor's time horizon.

3. Risk and Return:
- Target-Date Fund: The risk and return profile of a target-date fund changes over time. Initially, when the investor has a longer time horizon, the fund may have a higher allocation to equities, which can provide higher returns but also higher volatility. As the target date approaches, the fund becomes more conservative, reducing the potential for higher returns but also lowering the risk.
- Target-Risk Fund: The risk and return profile of a target-risk fund remains constant throughout the investment period. Investors can choose a target-risk fund based on their risk tolerance and investment goals. Conservative target-risk funds have lower potential returns but also lower volatility, while aggressive target-risk funds have higher potential returns but also higher volatility.

In summary, the main difference between a target-date fund and a target-risk fund lies in their investment objectives and asset allocation strategies. A target-date fund adjusts its asset allocation based on the investor's retirement date or investment horizon, gradually becoming more conservative. In contrast, a target-risk fund maintains a fixed asset allocation based on the investor's risk tolerance, regardless of the time horizon.