Series 7 Exam Question 342: Answer and Explanation

Question: 342

Which of the following funds changes its balance to hold more fixed-income securities and less equity securities as the years pass?

• A. A balanced fund
• B. A hedge fund
• C. A life-cycle fund
• D. A growth fund

Correct Answer: C

Explanation:

C. Life-cycle funds are ideal for investors of any age. The idea behind them is that investors buy into life-cycle funds that are targeted for their age. The percentage of equities held by the fund decreases over time, whereas the percentage of fixed-income securities increases, because investors should hold a higher percentage of fixed-income securities as they age. For example, say a 45-year-old investor buys into a life-cycle fund that's targeted for investors who are currently between the ages of 44 and 47. At this particular point, the fund may have a nearly 50-50 split between equity securities and fixed-income securities. The fund rebalances every so often so that 10 years into the future, the fund may have 40 percent invested in equity securities and 60 percent invested in fixed-income securities. Ten years after that, the fund may have a 30-70 split between equity and fixed-income securities. This fund is designed to take the guesswork out of the equation for investors.