Which of the following is true about a target date fund (TDF)?

• A. A TDF invests only in stocks throughout its entire life cycle.
• B. A TDF is designed to provide only short-term capital gains.
• C. A TDF guarantees a specific rate of return by the target date.
• D. A TDF automatically adjusts its asset allocation to become more conservative as the target date approaches.

Answer: (D)

Verified step by step guidance

1. Understand the concept of a Target Date Fund (TDF): A TDF is a type of investment fund designed to help investors save for a specific goal, such as retirement, by a particular target date. It automatically adjusts its asset allocation over time.
2. Clarify the lifecycle of a TDF: Early in its lifecycle, a TDF typically invests more heavily in growth-oriented assets like stocks to maximize returns. As the target date approaches, it shifts towards more conservative investments like bonds and cash equivalents to reduce risk.
3. Evaluate the first statement: 'A TDF invests only in stocks throughout its entire life cycle.' This is incorrect because TDFs adjust their asset allocation over time, moving away from stocks as the target date nears.
4. Evaluate the second statement: 'A TDF is designed to provide only short-term capital gains.' This is incorrect because TDFs are designed for long-term investment goals, not short-term gains.
5. Evaluate the third statement: 'A TDF guarantees a specific rate of return by the target date.' This is incorrect because no investment fund can guarantee a specific rate of return. The correct statement is: 'A TDF automatically adjusts its asset allocation to become more conservative as the target date approaches.'