What is the purpose of a target-date fund?

The purpose of a target-date fund is to automatically adjust asset allocation based on a future date. This type of investment vehicle is specifically designed for individuals who are saving for a specific goal, typically retirement, that is set for a particular year. As the target date approaches, the fund automatically reallocates its investments from higher-risk, equity-based assets to lower-risk, fixed-income assets in order to reduce risk and protect the invested capital.

This gradual shift is intended to align with the changing risk tolerance of investors as they near their financial target, such as retirement age. Investors benefit from this systematic approach without needing to actively manage their asset allocation as they would in a traditional investment strategy.

In contrast to this correct choice, other options do not align with the primary function of a target-date fund. Guaranteeing returns regardless of market conditions does not reflect the inherent investment risks associated with stocks and bonds. Focusing solely on high-risk investments is not characteristic of target-date funds, as they aim for a balanced approach. Providing maximum liquidity is also not a primary purpose of target-date funds; instead, they are designed with a specific investment horizon and target date in mind.