Target date funds: buying your first home
You can use target date funds for age-based investing or goals-based investing. The former is when you select an age at which you might require your investment to mature – usually at retirement, for instance. Whereas goals-based investing is when you use a target date fund to save for a specific goal you have in mind - such as buying your first home or helping a child or other family member buy their first home.
Different target date funds mature on different target dates in the future - so if you're hoping to fund a home purchase in, say 2030, you would pick a 2030 target date fund.
As you move closer to that goal, a target date fund will gradually move your money into less risky assets, such as bonds and property, to ensure your capital is at increasingly less risk of a collapse at the exact moment you need the money to buy the home.
Thus, target date funds could give individual savers a default investment option that ensures their money is invested with the same regard to time horizons that an independent financial adviser would advocate.
Over time, they offer exposure to a diversified range of assets including domestic and international stockmarkets, bonds and property, as well as more exotic options in some cases, with the proportion of the fund allocated to each of these assets set appropriately on the basis of investors' age and when they need the money.
All the funds currently available in the UK are run on a 'dynamic asset allocation' basis. That is, while the investment manager works within certain parameters so that the direction of travel from a higher risk and return profile towards less risky assets over time is clear, they also have some discretion about exactly when to make portfolio switches. If they think the gilts market, say, is poised to take a plunge, they're able to steer clear for a period.
Investors have flexibility too. While you will be working towards a target date, some vehicles will let you take money out at any time or switch to a new target date fund should your priorities change – just check whether there are any fees for doing so.
Nevertheless, choosing the time frame you wish to invest for is crucial, not only for knowing when you might need the money but also for helping you decide how much risk you wish to take on.
So think carefully about how long you wish to invest for and when you might need the money. If you are investing in order to buy a property in 2030, but might need the money in three years' time, you may well not be in the best situation to start a target date fund.
But if you can work diligently towards your savings goal, a target date fund could work. If in any doubt, speak to an independent financial adviser.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.