It is surprising that Indian mutual funds have not yet launched Target Date funds. It is a big money gatherer in the USA (remember Mutual funds are in the money gathering business not in the money managing business).

What is a Target Date Fund and how does it work?

Since we are in 2015 let me assume that the earliest retirement person is looking at 2045 to retire. So as a fund house I create a fund called “Target date 2045 fund”. This is meant to create a corpus for you by 2045 – and you need not bother too much about asset allocation etc. and exactly in 2045 you should have your corpus ready for retirement.

So as a fund manager I would go with say 90% in equity and 10% in 30 year G-sec (the duration risk is nil because I am going to hold it to maturity). Ideally I should be investing the 10% in zcb (zero coupon bonds) but it may not be available in India. As time goes on I will reduce say 1% every year from equity and buy zcb maturing in 2045.  The advantage for the fund manager is that he knows what he is supposed to do. For example he knows that interest rates are going to decline he can buy more longer maturity bonds and sell them when interest rates actually go down. Such strategies are very difficult for a regular income fund manager to do.

Strategically speaking each fund manager could take a different view even on the equity portfolio. Some could take a view that since they have a 30 year view they could invest in a high risk start up. Another fund could take a view that he would invest in say MSCI world index, Sensex, and the a part in one of the US indices. So each fund manager could have a different strategies. One fund could take the view that the debt portion will act as a margin to take FnO calls and thus improving the returns. One fund could get busy in the area of writing options based on a good portfolio that they are building.

The advantage for the client is he could start with say Rs. 5ooo per month (come on a 25 year old is not going to be able to invest more!!) and increase the contribution by Rs. 500 every year. HERE he need not worry about asset allocation as that worry is being handled by the fund manager.

This is good for the distributor also as the client remains focused on 2045 and not on the yearly returns. To give an example – my wife has a SIP in Templeton India Pension Plan and it is now about 15 years old and it has given her about 12% CAGR. I would have preferred a Hdfc Prudence kinda fund because she is still about 10 years away from retirement…