What Is a Stable Value Fund?
A stable value fund is a portfolio of bonds that are insured to protect the investor against a decline in yield or a loss of capital. The owner of a stable value fund will continue to receive the agreed-upon interest payments regardless of the state of the economy.
Stable value funds are a common option in some retirement plans such as company 401(k) plans, especially aimed at those savers nearing retirement.
Key Takeaways
- A stable value fund is an insured bond portfolio, popular with investors that have low risk tolerances.
- The insurance piece of these funds makes them nearly as safe as money market funds.
- A stable value fund is an option in many retirement plans, but often carries lower yields and higher fees.
Understanding Stable Value Fund
Stable value funds invest in high-quality government and corporate bonds, short-term, and intermediate-term. They are no different from any bond fund, except they are insured. An insurance company or bank is contractually obligated to protect the fund's investors from any loss of capital or interest.
The bonds in such a fund are sometimes called "wrapped" bonds, referring to the fact that they are insured. The insurance is commonly issued in the form of a so-called syntheticguaranteed investment certificate (GIC).
A stable value fund is inherently as safe an investment as a money market fund. Historically, such funds provide a slightly higher rate of return than money market funds.
Pros and Cons of Stable Bond Funds
Stable value funds remain just that: stable. They don't grow over time, but they don't lose value either.
In times of recession or stock market volatility, stable value funds are guaranteed. While many other investments drop in value, the owner of a stable bond fund continues to receive the agreed-upon interest payments and never loses principal regardless of the state of the economy. The insurer must compensate the fund for any losses.
Because of the insurance, however, these funds come with extra management costs and fees, which can be a drag on the already lower yields that these investments offer due to their low risk.
How to Invest in a Stable Bond Fund
A stable value fund is often an investment option in qualified retirement plans such as 401(k) plans. A stable value fund may also be an appealing alternative to lower-yielding vehicles such as money market funds for the portion of an investor's portfolio that is used to counter market volatility. Stable value funds can provide the essential elements of balance and stability in a portfolio weighted in growth investments.
However, there is a danger if a portfolio is weighted too heavily in lower-yielding investments such as stable value funds. The investor risks being squeezed by inflation down the road. A retirement income that seems sufficient initially can gradually become inadequate as the years pass and inflation mounts.
Most professional financial advisors recommend a portfolio that is a mix of safe but low-yielding investments and risky but potentially rewarding investments, with a gradual reweighting towards safety as the investor approaches retirement age.
Investors also should check the expenses associated with stable value funds. Historically, their fees have been in the low range compared to most mutual funds. However, insurance companies have been increasing their fees due to the perceived risks of a more volatile market.
FAQs
A stable value fund is an insured bond portfolio, popular with investors that have low risk tolerances. The insurance piece of these funds makes them nearly as safe as money market funds. A stable value fund is an option in many retirement plans, but often carries lower yields and higher fees.
How does a stable value fund work? ›
The goal of stable value funds in a portfolio is capital preservation. They invest, directly or indirectly, in high-quality, short- to intermediate-term fixed income investments and are distinguished from bond funds by maintaining a constant $1 share price net asset value (NAV).
What are the risks of value funds? ›
Value funds can be less volatile than growth funds in the short term, as they tend to invest in stocks that are already out of favor. However, they are still subject to the risks of the stock market, and their performance can lag behind growth funds during bull markets.
What are stable value funds in defined benefit plans? ›
Stable value funds are typically only offered in defined contribution plans, such as a 401(k). They are conservative investments that provide steady income with relatively little risk as your principal is guaranteed. However, less risk also means lower returns.
Can you withdraw from a stable value fund? ›
Participant withdrawals and transfers are freely permitted daily according to plan provisions. Stable value funds from The Standard provide participants with full book value liquidity for benefit payments (death, disability or retirement) and transfers to other investment options.
Should I move my 401k to a stable value fund? ›
Over 80% of employer-sponsored 401(k) plans offer stable funds. Stable value funds offer safety for risk-averse savers, but returns are generally low. Beware of high fees associated with stable value funds that can cut into your returns.
Are stable value funds risky? ›
A stable value fund is an insured bond portfolio, popular with investors that have low risk tolerances. The insurance piece of these funds makes them nearly as safe as money market funds. A stable value fund is an option in many retirement plans, but often carries lower yields and higher fees.
What can I use instead of stable value funds? ›
Money market funds are the primary alternative to a stable value strategy, when plan sponsors decide which stable net asset value option to offer its participants.
Do stable value funds protect against inflation? ›
Stable value funds provide a reliable way to generate steady returns over time while minimizing volatility. Stable value funds have historically outperformed both money market funds and the rate of inflation, which has made them a go-to capital preservation option for defined contribution plan sponsors.
What are the risks of a defined benefit plan? ›
But they also have their downsides: Employees can't choose their plan. There are limited drawdown options. If an employer experiences financial difficulties, the employee may receive less.
One, albeit extraordinary, example of this decline is the Lehman Brothers bankruptcy. In late December 2008, the Stable Value Fund that Invesco offered to Lehman Brothers employees lost 1.7% in value because of a fall in bond prices and because the wrap contract ended in response to Lehman's bankruptcy filing.
What is the average return on a stable value fund? ›
The 15-year annualized return for stable value funds as of March 2023 was 2.99%, according to the non-profit group Stable Value Investment Association (SVIA). The same figure for money market funds was 0.55%.
How often do stable value funds pay interest? ›
Stable value fund managers invest in a diversified portfolio of high-quality, intermediate duration fixed income securities. Participants earn a crediting rate, not to fall below 0%, which is typically reset quarterly.
Is a stable value fund the same as a money market fund? ›
Historically, money market and stable value funds both provide capital preservation and low volatility. However, stable value funds have had historically higher return and are designed to do so. So it's a more attractive risk-return profile for investors.
Is a value fund a good investment? ›
Whether you choose to invest in value stocks or growth stocks will likely depend on your personal preference. Value stocks appeal to some investors because when value investing is done right, it can be a low-risk way to beat the market, especially if you're investing in stocks with predictable cash flows.
