Series 7 Exam Question 185: Answer and Explanation

Question: 185

Which of the following statements is NOT true of life-cycle funds?

• A. As life-cycle funds get nearer to their target date, the portfolio holdings will be adjusted to purchase more equity securities and less fixed-income securities.
• B. These funds are usually set up as funds of funds.
• C. The asset allocation of the fund will be rebalanced on a regular basis to make sure that the risk/reward balance is correct given the target date of the fund.
• D. The objective of the fund assumes that most investors cannot tolerate as much risk as they get older.

Correct Answer: A

Explanation:

A. Life-cycle funds are often funds of funds, which are based on an investor's age. Investors buy a life-cycle fund designed for people their age. Life-cycle funds adjust their holdings every so often so that investors are taking less risk as they get older. Because younger investors can afford to take more risk, a larger percentage of their portfolio is in equities and less is in fixed-income securities. As investors get older, they should have an increasing number of fixed-income securities and less equity securities. Life-cycle funds automatically take care of that for investors.