Life Style Funds: Worth Your Investment?

Lifestyle funds are investment funds that base their asset allocation on an individual's age, risk tolerance, and investment goals. They are highly customised funds that create personalised investment strategies to help investors achieve their specific needs. These funds are generally suited for long-term investing, especially for those who want a savings vehicle that they can cash out by a certain time, such as retirement.

There are three main types of lifestyle funds: conservative, moderate, and aggressive. Conservative lifestyle funds prioritise capital preservation and income and are suitable for risk-averse investors and retirees. Moderate lifestyle funds balance growth with capital preservation and are suitable for mid-career professionals or those nearing retirement. Aggressive lifestyle funds focus on capital appreciation and are suitable for investors with a longer timeline and a good appetite for risk and growth.

Lifestyle funds are low-maintenance and perfect for those who don't want to build and manage a custom portfolio of individual assets. They are also a good option for those who want to invest in a diversified portfolio of equities and fixed-income securities without having to actively manage their investments.

What are lifestyle funds?

Lifestyle funds are investment funds that base their asset allocation on an individual's age, risk tolerance, and investing goals. They are designed to offer a consistent level of risk that matches the investor's financial goals. These funds are suitable for those who want to build wealth over the long term with a relatively hands-off approach.

Lifestyle funds hold a mix of investments, including both equities (stocks) and fixed-income securities (such as bonds and notes). The funds are tailored to meet the specific needs and age of the investor, providing a simplified solution to help them reach their goals. An investor can choose an initial lifestyle fund allocation and then adjust the risk level up or down based on their preferences. Fund managers periodically review and rebalance the asset allocation to ensure the investor stays on track with their goals.

There are different types of lifestyle funds, including income-focused funds, growth-focused funds, conservative asset allocation funds, moderate asset allocation funds, and aggressive asset allocation funds. Each type of fund offers a different level of risk and return, catering to the investor's appetite for risk and their investment time horizon.

Lifestyle funds are typically purchased through a retirement account or a brokerage account. They are designed to meet the investor's current needs while also considering their future goals. Unlike target-date funds, the level of risk in lifestyle funds does not change significantly over time.

Lifestyle funds offer advantages such as simplicity, broad diversification, lower expense ratios, and encouragement for investors to stay invested through market ups and downs. However, it is important for investors to consider their risk tolerance and capacity when choosing a lifestyle fund and to make adjustments as their risk profile evolves over time.

How do lifestyle funds work?

Lifestyle funds are investment funds that base their asset allocation on an individual's age, risk tolerance, and investing goals. They are designed to meet an investor's current needs while also taking into account their future goals.

Lifestyle funds are typically purchased through a retirement account or a brokerage account. An investor can choose from an initial lifestyle fund allocation and then adjust the risk level up or down based on their preferences. A fund manager reviews the asset allocation and rebalances it periodically to help the investor stay on track with their goals.

The level of risk an investor takes may be influenced by their age and the average age of retirement. For example, a younger investor has more time to invest for the future and may be able to tolerate more risk to achieve their goals. As they get older, their tolerance for risk may decrease, and they may move away from stocks towards fixed-income investments.

Lifestyle funds are designed to target an investor's investment style and stage of life. They can be marketed across a range of styles, including conservative, moderate, and aggressive, and can be further expanded to include income, growth, or value strategies.

Conservative lifestyle funds prioritise capital preservation and income, with low volatility and relatively consistent returns. Moderate lifestyle funds balance growth with capital preservation and have a higher allocation of stocks compared to conservative funds. Aggressive lifestyle funds focus on capital appreciation and are suitable for investors with a longer timeline and a higher risk appetite.

Lifestyle funds may invest in both equities (stocks) and fixed-income securities (such as bonds and notes). They may require fewer decisions by the asset owner, as they adjust automatically through changing lifestyle needs until retirement.

What are the advantages of lifestyle funds?

Lifestyle funds are an attractive investment option for those who want to build wealth over the long term without being too hands-on. Here are some of the advantages of lifestyle funds:

Simplicity

Lifestyle funds are simple to understand and invest in. They are designed to offer a consistent level of risk that aligns with your financial goals, and you can choose a fund that matches your risk tolerance. The fund manager will then handle the investment mix, so you don't need to actively monitor the markets or make day-to-day trading decisions.

Broad Diversification

Lifestyle funds invest in a diversified portfolio of assets, including stocks, bonds, and other securities. This diversification helps to reduce risk and gives you exposure to a variety of assets without having to purchase individual stocks or bonds. By investing in a range of assets with varying risk levels, lifestyle funds can provide a broader range of diversification than traditional funds, leading to less risk.

Automatic Rebalancing

Some lifestyle funds automatically rebalance their portfolios on behalf of investors. This means that you don't need to constantly monitor your asset allocations or make frequent adjustments. The fund manager will periodically review and rebalance the portfolio to ensure it aligns with your specified risk tolerance and investment goals.

Lower Expense Ratios

Compared to other types of mutual funds or exchange-traded funds (ETFs), lifestyle funds often have lower expense ratios. This means that a larger portion of your investment returns stays with you over time. Lower fees can lead to higher overall returns.

Encouraging Long-Term Investing

Lifestyle funds are designed for long-term investing and can help investors stay committed to their financial goals through market ups and downs. By encouraging investors to stay invested, lifestyle funds can help even out losses through dollar-cost averaging. This makes them suitable for those saving for retirement or other long-term goals.

What are the different types of lifestyle funds?

Lifestyle funds are typically divided into three categories based on their risk profile: conservative, moderate, and aggressive. These categories are designed to cater to investors' varying risk appetites, financial goals, and investment horizons. Here is a detailed overview of each type:

• Conservative Lifestyle Funds: The primary objective of conservative lifestyle funds is to preserve capital and generate regular income. These funds are suitable for risk-averse investors or those nearing retirement. They allocate a larger proportion of their assets to bonds and other fixed-income securities, offering consistent returns with low volatility. This type of fund is ideal for individuals who seek capital preservation and stable income generation.
• Moderate Lifestyle Funds: Moderate lifestyle funds aim to strike a balance between growth and capital preservation. They allocate investments more evenly between stocks and bonds, resulting in slightly higher volatility than conservative funds but with a focus on consistent performance relative to the overall market. This type of fund may appeal to mid-career professionals or individuals with a medium risk tolerance and a longer investment horizon.
• Aggressive Lifestyle Funds: Aggressive lifestyle funds prioritize capital appreciation and long-term growth. They allocate a higher proportion of their assets to stocks and other growth-oriented investments. These funds are suitable for investors with a higher risk tolerance, a longer time horizon, and a strong appetite for growth. Aggressive funds are typically recommended for younger investors in their 20s or 30s who can tolerate higher risk and are seeking maximum returns.

It is important to note that some fund families offer more specific categories, such as "moderately conservative" or "moderately aggressive," to provide an even more tailored approach to investing.

When should you invest in lifestyle funds?

Lifestyle funds are suitable for investors who are looking for a long-term investment strategy, especially those who want a savings vehicle that they can cash out by a certain time, such as retirement. They are also ideal for those who don't want to build and manage a custom portfolio of individual assets.

Lifestyle funds are highly customised funds that create personalised investment strategies to meet an investor's specific needs and goals. They are designed to offer a consistent level of risk that matches the investor's financial goals. The funds are managed according to the investor's age, risk tolerance, and investment objectives.

For example, younger investors tend to prefer riskier lifestyle funds as they seek long-term growth, while older investors, especially those nearing retirement, prefer a conservative fund investing style to keep their principal amount secure and provide a regular income.

There are three main types of lifestyle funds:

• Conservative lifestyle funds: These funds prioritise capital preservation and income, offering low volatility and relatively consistent returns. They are suitable for risk-averse investors and retirees.
• Moderate lifestyle funds: These funds balance growth with capital preservation, with a higher allocation of stocks than conservative funds. They offer a middle ground between conservative and aggressive funds in terms of risk and reward.
• Aggressive lifestyle funds: These funds focus on capital appreciation and are suitable for investors with a longer timeline, a higher risk appetite, and a strong focus on growth.

When deciding whether to invest in lifestyle funds, it is essential to consider your risk tolerance, investment goals, and time horizon. It is also important to understand the fees and expense ratios associated with the funds, as these can impact your expected returns. Consulting a financial advisor can help you determine if lifestyle funds align with your investment objectives.

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