A stable-value fund is an excellent way for those approaching retirement age to diversify their portfolios. Stable-funds tend to offer higher returns than similar investments like money market accounts, but do involve slightly more risk.
Until recently, stable-value funds were an incentive only available through employer 401(k) benefit plans, but things have changed. Now individual investors can take advantage of this conservative type of investment through their IRA as well.
How a Stable-Value Fund Works
Stable-value funds are made up of ”synthetic guaranteed investment contracts” or “wrapped bonds.” They tend to be high quality, shorter term bonds that are bound by insurance wrappers. If the stable-value investment declines below the wrapper’s rate of return, the insurer fills in the financial gap, thus stabilizing the fund’s value. However, if the stable-value fund grows beyond the wrapper return, the fund returns the difference to the insurer.
Value of Adding Stable-Value Funds to Your Portfolio
If you are planning your retirement, a stable-value fund can provide diversification to your portfolio. Stable-value funds are fixed income investments, derived of an assortment of high quality bonds. The investments tend to be consistent with their delivery–so capital investments are predictable.
Anyone considering this type of investment strategy should thoroughly investigate their options, as well as properly research all the fees associated with these funds. Private investors choosing to diversify their IRA portfolio may be hit with up to a 1% fee according to the Stable Value Investment Association.
Plus, there are redemption rules specific to stable-value commodities. Most stable-value funds have no withdrawal restrictions. However, since these investments tend to be part of a person’s retirement strategy, there may be penalties associated with that fund.
photo credit: Epicharmus