'Life-Cycle' Funds

Target retirement funds are also known as life-cycle or target maturity funds. The rule is very simple to understand: As an investor approaches retirement, these funds take less risk with stocks and put more money into conservative bonds. In retirement, these funds put most of the money in income-producing bonds. U.S. fund companies like Fidelity Investments, T. Rowe Price Group, the Vanguard Group and Charles Schwab & Co., among others, have launched versions of the life-cycle strategy.

Nowadays the earliest retirement funds mature in 2010, with others offered in 5- or 10-year increments up to 2045. In general these funds have been well-received, even though most of these are not much more than a year old and performance records are short. Not all life-cycle funds are alike. Some funds take more risk than others. The trade-off is straightforward: Stocks can provide a larger retirement nest-egg but are more volatile -- especially smaller-capitalization shares. Bonds are relatively stable and safer but lack stocks' long-term punch.

Vanguard Target Retirement 2025 Fund (VTTVX), for example, emphasizes on growth and income, whereas T. Rowe Price Retirement 2020 Fund (TRRBX) allocates almost 80% in stocks - a more aggressive approach than the Vanguard fund's 60% allocation to stocks. Fidelity Freedom 2025 Fund (FFTWX) invest 64% in domestic and 11% in international equities.