The continued volatility of the nation's financial markets means that investors at all levels must take steps to manage the risk of their investments.

Fortunately there are financial products and service providers available that offer an efficient and effective means of completing this risk management.

ISAs have become a major savings vehicle for vast numbers of people across the UK as many investors trust that they will be able to meet both their long and short-term savings objectives. However investments held within a Stocks and Shares ISAs remain at threat from a fall in the markets and as such need to be risk-managed in the same way as any other investment. The eligibility to invest in an ISA will depend on your individual circumstances, and they might not be around for ever as all tax rules may change in the future. This article is the second in a mini-series that will investigate the ways in which investors can develop a truly diversified ISA portfolio in a straight-forward and easily manageable manner. The options available present investors with the opportunity to select an ISA product from a range of ready-made portfolios designed to cover the full range of objectives and managed by a team of experts. Remember, the value of investments can go down as well as up and you may get back less than you invested.

In the second instalment of this series, following research with Fidelity Worldwide Investment concerning the products available to investors we investigate the option of Target Funds.

Target Funds

Target funds are essentially a "fund of funds" - a diversified range of funds all held within one fund that enables investors to save for one particular date in the future. They are structured to shift their focus from capital growth to stability over the designated time period and can be professionally managed to ensure that an expert strategy can be implemented.  

Initially, target funds are invested aggressively in order to maximise growth. The asset allocation within the fund is then automatically adjusted to ensure that the money within the fund is moved to more secure investments as the target date approaches in order to complete a gradual reduction of risk. In the period leading up to the target date, the time when the investor wishes to access their money, the investment is held in cash in order to help protect the final lump sum.

The expertise of a chosen fund manager is then used to adjust the portfolio in order to exploit opportunities and mitigate threats.

What are the benefits of target Funds?

• The focus of the investment activity moves from growth to stability over time.
• The target date can be chosen by the investor to ensure that the investment strategy matches their personal circumstances and objectives.
• Target Funds offer a means of creating a truly diversified portfolio in order to reduce risk.
• The expert and on-going allocation of assets helps to reduce risk and potentially increase growth levels achieved.
• The investor only has to monitor one fund instead of several and can access a target fund with a low level of initial minimum investment.

Target funds provide a simple solution if an investor wishes to invest for a specific goal such as university fees, mortgage repayment, or additional retirement benefits. They may also provide an effective option to the ISA investor who desires a 'core' long-term investment in addition to existing holdings, or to investors who prefer to have a fund that is actively managed on their behalf.