What is a 'Stable Value Fund'
A stable value fund is an investment vehicle found in company retirement plans. Stable value funds are comprised of mostly synthetic guaranteed investment certificates (GICs), also known as wrapped bonds, because of their inherent stability. These bonds can be short or intermediate term with longer maturities than other choices such as money market funds; they are paired, or wrapped, with insurance contracts to guarantee a specific minimum return.
BREAKING DOWN 'Stable Value Fund'In times of economic recession or stock market volatility, stable value funds can be one of the most valuable investments. While many other investment returns are much lower in hard times, stable value funds remain just that, stable. The owner of the investment continues to receive the agreed-upon interest rate and the full principal regardless of the state of the economy. Generally speaking, funds and pooled investments tend to be less risky as the investment is not reliant on one specific company or stock, etc.
How Does a Stable Value Fund Work?
A stable value fund is an investment option available primarily to qualified retirement plans such as a 401(k) plan. It is a managed portfolio of highly rated corporate or government, short-term and intermediate-term bonds with a principal protection wrapper provided by a life insurance company. The objective of the fund is to generate a stable yield while preserving investor principal. Historically, these funds have been able to generate yields that have outperformed the typical money market fund at no greater risk. They do this by managing a portfolio of bonds just like any other bond fund, except any losses of principal resulting from fluctuating bond prices are made up by the insurance company wrapper.
Stable Value Fund Role in a Portfolio
Stable value funds are an appealing alternative to lower-yielding vehicles such as money market funds for the portion of a portfolio used to counter market volatility. Stable value funds can provide the essential elements of balance and stability in a portfolio weighted to some degree in growth investments. However, if a portfolio is weighted too heavily in lower-yielding investments such as stable value funds, inflation risk, interest rate risk and longevity risk, or the risk of outliving your income, the portfolio can be just as problematic as with market risk from stock price fluctuations. Investors also need to consider the expenses associated with stable value funds. Historically, their fees have been in the low range as compared to mutual funds. However, insurance companies have been increasing their fees due to the increased risk they are assuming in a more volatile market.