What Is a Stable Value Fund?

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Stable value funds offer guaranteed returns for retirement accounts. Fund managers create these investment vehicles by bringing together high quality corporate bonds, insurance contracts and other stable fixed income-generating securities. These stable value funds are ideal for both conservative investors and people who are nearing their retirement age.

Identification

  • The securities contained within stable value funds are often either guaranteed by insurance contracts or are invested in so-called "wrapped bonds." These bonds are guaranteed for a certain level of return by an insurance company, which pays the difference if the bond fails to perform up to that level. As long as the bond insurers remain solvent, a stable value fund will pay back the principal invested along with the guaranteed returns.

Effects

  • Including fees, stable value funds typically provide returns slightly in excess an FDIC-insured money market account. The majority of the investments are in bonds, so investors can expect to receive a constant stream of income from the yields. Typically, stable value funds do not involve investments in government bonds, as most customers of these funds invest in them through tax sheltered retirement accounts like 401k plans and IRAs--which nullifies the ordinary tax advantages of investing in federal, state or municipal bonds.

Function

  • In certain markets, stable value funds provide impressive returns relative to other funds. While the annual appreciation rate may not cause anyone to sit up straighter, they do offer guaranteed returns at a relatively high rate. Stable value funds can be used to secure a portfolio, as they make an excellent candidate for an iron-clad fixed income section with superior returns relative to both government bonds and FDIC insured savings accounts.

Warning

  • The major hidden risk contained in every stable value fund is that of an eventual insolvency on the part of the bond insuring company. The value of the investments depend strongly on whether or not the bonds are properly insured. If an insurance company goes bankrupt, they may not have to honor their contracts. However, it's more likely that the company's performing assets--like the bond insurance contracts that underlie stable value funds--will be auctioned to other, solvent insurance companies.

Considerations

  • Many 401k plans offer stable value funds. Companies favor them, in fact, because of their predictability. Employees can generally choose them without fear of losing their principal. This has grown the market for stable value funds massively, which in turn has lead to more competition among both funds and insurance companies to bring down costs. As these vehicles become more popular, they will offer higher returns thanks to reductions in price brought by the increase in supply.

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