Very often the hardest part of mutual fund investing isn't finding the best funds to park your cash in; rather, it's figuring out how to allocate your money across all the various types of funds out there. How much should you have in bonds and how much in stocks? What about in small-cap versus large-cap? Domestic versus international? Foreign developed versus emerging markets?

Various academic studies have shown the asset allocation decision to be one of the primary determinants of long-term portfolio success. In other words, how you split up your funds among the various asset classes matters, so this isn't something you can afford to get wrong. Fortunately, there are some options out there for folks who want a little bit of help in crafting their asset allocation.

Targeted investing
Target date funds, sometimes referred to as lifecycle funds, are a relative newcomer to the fund world, but they have been growing by leaps and bounds. These funds typically invest in a number of other funds offered by the same fund shop. So for example, the Fidelity Freedom 2030 Fund (FFFEX) invests in 21 other Fidelity mutual funds, including Fidelity Blue Chip Growth (FBGRX) and Fidelity Overseas (FOSFX).

The nice thing about target date funds is that the investment manager sets the asset allocation, so you don't have to worry about finding the right mix. You pick the fund that corresponds closest to your anticipated retirement date, and you'll get a fund with a pre-designed asset allocation that the manager thinks is most appropriate for someone with your time horizon. You don't have to worry about allocating your money among the various funds -- the fund does that for you and monitors the mix on an ongoing basis. Over time, the manager will adjust the fund's asset allocation, cutting back on stocks and moving assets into bonds as your retirement date approaches. For investors who want a helping hand, having professional help in deciding how your money should be allocated can be a good deal.

Of course, target date funds are not without their drawbacks. One of the biggest problems is that you don't have any say in what underlying funds your target date fund invests in. That means you could end up with some really questionable funds that you wouldn't normally buy on your own. It can also be somewhat difficult to identify a target date fund that's right for you, since many funds with the same target retirement date have wildly different asset allocation schemes. For example, the USAA Target Retirement 2030 Fund (URTRX) currently has a 58% equity allocation, while the T. Rowe Price Retirement 2030 Fund (TRRCX) has an 84% exposure to stocks. You can't always tell what your asset allocation will look like based solely on the target retirement year of the fund in question.

Try before you buy
If you think a target date fund might be right for you, there are a few things you need to keep in mind. First of all, make sure you understand exactly how much equity exposure your fund has. Target date funds ran into a lot of problems in the 2008 bear market since many funds, even those with close-at-hand retirement dates, had oversized equity positions. That meant investors in these funds got socked with losses even though they didn't have as long to recoup those losses before retiring. So before you buy, make sure you understand how much equity exposure your fund has and whether or not you are comfortable with that level of risk should another market downturn materialize.

Secondly, be sure you understand how fees are handled within your target date fund. Unfortunately, a good number of these funds "double dip" with respect to fees, charging you management fees for the underlying funds and also charging another layer of expenses for the actual target date fund itself. These double-dip fees can push up the total expenses on some target date funds up above that of the average mutual fund, at which point it doesn't make much sense to own funds like these.

Best of the best
There are a growing number of fund shops that offer target date retirement funds, so you have plenty of options to choose from. However, there are some fund families that stand out as better options than most of the rest of the competition. If you have the flexibility to do so, I would recommend checking out the Vanguard or T. Rowe Price fund line-ups. Both of these fund shops avoid the hated "double-dipping" fee structure while still keeping overall expenses low. In addition, both fund families have a wide selection of underlying mutual funds so investors will have access to the full range of asset classes.

For example, the Vanguard Target Retirement 2040 Fund (VFORX) comes with a super-low 0.19% price tag and ranks in the top 11% of similar funds over the past three years. The fund invests in five Vanguard index funds, including the Vanguard Total Stock Market Index (VTSMX). I like this fund because it offers exposure to stable, large-cap blue chip names with decent dividend yields such as Procter & Gamble (NYSE: PG) and Chevron (NYSE: CVX) while also offering an allocation to faster growing mid-cap stocks with stronger growth potential such as BMC Software (NYSE: BMC), which recently exceeded fiscal 2011 third quarter estimates and raised expectations for its current fiscal year.

Likewise, the T. Rowe Price Retirement 2040 Fund (TRRDX) charges 0.77% a year and lands in the top 1 % of its peer group in the most recent five-year period. Investors in this fund can access the now-closed T. Rowe Price Mid Cap Value (TRMCX), one of the better mid-value funds around. This category-topping gem has a solid bet going on many mid-size financial names including insurance firm Marsh & McLennan (NYSE: MMC) as well as Northern Trust (Nasdaq: NTRS) and CIT Group (NYSE: CIT). Although manager David Wallack sees significant near-term uncertainty for the financial sector and has underweighted the fund in this area as compared to its benchmark, he believes these three names offer attractive risk/reward trade-offs compared to their competition. There are many other fine actively managed funds in the T. Rowe fund family, so investors can count on getting some good fund choices here.

Target date funds aren't for everyone, but they can be an excellent tool for investors in search of a little bit of asset allocation guidance and a desire for a one-stop fund shop. A little bit of research and investigation before you buy should ensure that you can safely invest for many, many years with such a fund.

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