Funds of the Month

April 8, 2005

Lifecycle funds Each month, we feature two mutual funds in a single investment category.

Lifecycle funds-also known as pre-mixed portfolios, and lifestyle funds-are becoming more popular. According to Morningstar, assets in lifecycle funds grew 43 percent in 2004, to $75 billion. Many major investment companies, including Fidelity Investments, Scudder Investments, T. Rowe Price Investment Services, and The Vanguard Group, offer some form of lifecycle fund.

What are they? They're a predetermined combination of mutual funds geared to the investor's risk tolerance or future retirement date. The two funds we refer to below are predetermined based on risk tolerance. Perhaps most important, they're designed to be the main investment in a person's portfolio.

The advantages: Since the fund company does all the work, lifecycle funds are great for busy investors and can reduce the volatility in a portfolio because of the inherent diversification they provide.

Options T. Rowe Price Personal Strategy Growth Fund. This is the most aggressive of the three versions of lifecycle funds that T. Rowe Price offers under its "Personal Strategy" moniker. The fund typically invests approximately 80 percent of its assets in stocks and 20 percent in bonds and money-market securities. However, allocations can vary by up to 10 percentage points from these guidelines. In fact, its equity allocation was 87.6 percent of the fund's holdings as of Dec. 31, 2004.

With a low level of risk, its high returns hold up over a long period of time. Historically, it ranked in the top 3 percent for its category (large blend) in 3-year annualized returns, the top 5 percent for 5-year annualized returns, and in the top fifth of similar funds for 10-year annualized returns.

Vanguard LifeStrategy Growth Fund.S This fund offers broad equity-oriented exposure while limiting the amount of risk. It's aimed at investors who are looking for current income as well as growth of capital. Their money is invested in Vanguard's Total Stock Market Index Fund (50 percent), Asset Allocation Fund (25 percent), Total International Stock Index Fund (15 percent), and Total Bond Market Index Fund (10 percent). Vanguard funds are known for their low expenses. While the LifeStrategy Growth Fund has no annual fund operating expenses, it does bear the expenses of its underlying funds. Even so, its annualized indirect expense ratio was only 0.26 percent.