[Practical Financial Planning] Retirement Funds, Children's College, Wedding Expenses... Help Me Save Lump Sum with TDF

Customized Financial Planning for Major Life Events
Finding Breakthroughs with TDFs in a Low-Interest, Low-Growth Era

Funds Automatically Allocating Stocks and Bonds Based on Retirement and Other Target Dates
Higher Returns and Stable Design Compared to Savings

10 Domestic Asset Management Firms
TDF Assets Under Management of 3.0849 Trillion KRW
Stable Returns Above 5%
Tax Benefits When Using Pension Accounts

[Asia Economy Reporter Park Jihwan] As the era of low interest rates and low growth fully arrives, target date funds (TDFs), which offer higher expected returns than traditional savings and installment savings products while maintaining stability, are gaining steady interest from investors. The feature of automatic asset allocation strategies that adjust the proportions of stocks and bonds according to market conditions to achieve stable performance at target times such as retirement has been highlighted, leading to rapid accumulation of investment funds.

According to financial information provider FnGuide on the 12th, as of the 10th, the total assets under management of TDFs by 10 domestic asset management companies amounted to 3.0849 trillion KRW. Since the beginning of this year alone, 562.4 billion KRW has newly flowed into the TDF market. Compared to a year ago, the fund size increased by 1.1469 trillion KRW.

Looking at the situation by asset management company since the beginning of the year, Mirae Asset Global Investments attracted the largest investment inflow of 244.5 billion KRW. Next were Samsung Asset Management (157.3 billion KRW), Shinhan BNPP Asset Management (47.8 billion KRW), Korea Investment Management (37.6 billion KRW), KB Asset Management (48.1 billion KRW), Hanwha Asset Management (14.6 billion KRW), Kiwoom Asset Management (5.3 billion KRW), NH-Amundi Asset Management (3.3 billion KRW), Kyobo AXA Asset Management (3.1 billion KRW), and Hana UBS Asset Management (0.7 billion KRW), in that order.

TDFs are fund products that automatically allocate investment funds into assets such as stocks and bonds according to life cycle stages aligned with investors’ target times, such as retirement or children’s marriage. During periods when asset growth is needed, the proportion of risky assets is increased, and as the target time approaches, the proportion of safe assets like bond funds is increased to reduce the risk of principal loss. Typically, the initial risky asset proportion in TDFs reaches 90%, but this proportion drops to the 30% range as retirement nears. TDFs are characterized by investing in various global sub-funds for ultra-long-term installment investments, significantly reducing risks that may arise from concentrated investments. Additionally, as retirement approaches, the stock investment proportion is lowered to reduce downside risk just before retirement. Investors can consider subscribing to TDFs to prepare lump sums for retirement funds, children’s college tuition, or wedding expenses.

TDFs were introduced in the United States in the mid-1990s and rapidly grew after the enactment of the Pension Protection Act in 2006, boasting a scale of 1,352 trillion KRW as of February last year. TDFs were first introduced in Korea in 2011, but market attention began in 2016. At that time, large asset management companies started launching TDF products in earnest, and the market size, which was around 70 billion KRW in 2016, grew to the 3 trillion KRW level by August this year.

The recent popularity of TDF products is due to increased demand for stable returns amid heightened volatility in global financial markets caused by the COVID-19 pandemic and other factors. Distrust in private equity funds, which have repeatedly suspended redemptions since last year, also plays a role. Above all, the advantage of higher expected returns than savings products combined with greater stability compared to other financial investment products is strongly emphasized.

Returns are also relatively high. Most TDF products have posted returns above 5%. Among major asset managers, Korea Investment Management and Mirae Asset Global Investments ranked first and second with returns of 10.82% and 10.21%, respectively, over the past year. Hana UBS Asset Management (8.81%), Kiwoom Asset Management (7.39%), Hanwha Asset Management (6.90%), Samsung Asset Management (6.89%), KB Asset Management (6.60%), and NH-Amundi Asset Management (5.50%) also achieved favorable returns above 5%. Even lower-ranked Shinhan BNPP Asset Management and Kyobo AXA Asset Management posted returns of 3.86% and 2.40%, respectively, which are high compared to other financial products.

TDFs also have the advantage of decreasing fees over time. This is because the proportion of stock investments decreases as the target date approaches. Especially when using pension accounts, fees are lower than for general funds, and tax benefits can be received, allowing for additional expected returns. The tax deferral effect inherent in pension products also provides a compound investment benefit.

The performance of TDF products generally depends on the asset composition within the fund. Asset managers use an investment strategy called the "Glide Path." This strategy increases the proportion of risky assets like stocks during the life cycle and decreases it as retirement approaches, resembling the curve of an airplane landing, hence the name. Domestic asset managers actively enter into memorandums of understanding (MOUs) with overseas TDF specialists and engage in delegated management to enhance returns.

A financial investment industry official said, "When investing in TDFs, it is necessary to comprehensively consider portfolios and fees according to the asset management company’s strategy. To build target retirement funds within a limited period and capital, increasing returns is the fastest way, and for investors who have chosen only fixed-rate products for many years, TDFs will be a good alternative."