An explanation of a stable value fund, along with an example
A conservative fund investment choice is known as a stable value fund, which is also known as a fund that is focused on the preservation of capital. This ensures that the value of your cash is preserved, regardless of what the movement of the stock and bond markets may be. Although there is a minimal likelihood of loss, the potential reward is not very high. 1 Participants in defined contribution plans, such as 401(k)s, are the only ones who can take advantage of this option.
Alternate names: Funds with a stable value are also referred to as:
- Principal pillar of defense
- Capital accumulation funds
- Contracts for group annuities
- Funds towards the preservation of
- Funds that are guaranteed.
- Contracts for investments that are guaranteed (GICs)
For instance, a company or government agency may provide its workers with the opportunity to invest the money they receive from a 401(k) or 403(b) plan in a stable value fund as one of the investment choices. It would not result in significant growth for the workers’ retirement savings, but it would guarantee that none of the money they invest would be wasted in any way.
A stable value fund is a kind of mutual fund that operates in a manner very similar to that of a money market fund. However, unlike a money market fund, a stable value fund often gives returns that are somewhat above those of the money market fund.
What is the inner workings of a Stable Value Fund?
Investments made by stable value funds often include fixed-income securities and wrap contracts provided by financial institutions such as banks and insurance firms. Wrap contracts often guarantee a particular return, even in the event that the assets they are wrapped around see a fall in value.
A wrap contract will rely not only on the value of the assets that are linked with it, but also on the financial backing of the entity that is issuing the wrap contract. Wrap contracts may be issued by financial institutions like banks as well as insurance firms. This ensures that the value of your money won’t drop below the amount you initially put into the fund at any point in time. No matter what happens to the economy as a whole, the firm that is providing the wrap contract ensures a guaranteed return. If for some inexplicable reason the value of the fund drops, it is the obligation of the wrap issuer to restore the funds to their original state.
Like any other kind of investment, stable value funds are subject to risk. In the case of SVFs, potential sources of risk include the firm that manages the fund, the company that provides the wrap contract, or a corporation that has a significant investment in the fund.
Your investment’s level of safety might be affected by any one of these participants’ experiences with insolvency, poor credit quality, or other obstacles to financial stability.
Although it is possible to suffer a loss when investing in stable value funds, this has only occurred a handful of times in the past. When it was liquidated in 2009, an SVF that was part of a deferred-compensation scheme for employees at Chrysler paid just 89 cents on the dollar. This was done before the automaker could initiate the bankruptcy process.
An SVF that was administered for employees of Lehman Brothers by Invesco had a value decrease of 1.7 percent during the month of December in 2008. That happened when a significant number of former employees of the failed Wall Street business withdrew their savings. The fund was forced to sell bonds at a loss in a hurry in order to cover the withdrawals. The fund was nevertheless able to generate returns of around 2% for the whole year of 2008.
Some of the SVFs that are administered by State Street Corp. may have experienced losses in 2008 if the corporation hadn’t invested more than 610 million dollars to restore the funds to their original state.
A Common Pool of Funds
A “pooled fund” is another name for this kind of investment vehicle. It is provided by a financial institution, such as a bank or another such organization. It pools the holdings of a number of separate retirement plans into a single investment vehicle. so that it might assist less ambitious ideas in achieving economies of scale.
Account That Is Handled Independently
An insurance provider will often provide clients with this kind of plan. It is backed by assets that are stored in a separate account that is managed by the insurance provider. Additionally, in the event that it is required, it is supported by the general account assets of the insurer. The insurance company is the legal owner of the assets that are held in the separate account. They are kept only for the advantage of the individuals who are enrolled in the plan.
Different Categories of Stable Value Funds
There are a few distinct configurations that may be used by stable value funds. The origin and kind of the underlying assets are what differentiates one from another of these options.
GIC synthesized by man
This kind of contract is very much like a traditional GIC; however, the assets are kept in the name of the retirement plan or a trustee of the plan rather than the individual.
Contract for Guaranteed Investment Returns (GIC)
An insurance company is the entity that creates a GIC. It provides a return equal to a specified rate over a certain period of time. The issuer’s general account assets are one possible source of backing for this form of contract. It is also possible for it to be supported by assets that are kept in a separate account. The insurance company is the owner of the assets in either scenario. The whole financial strength and credit of the firm that issued the obligation is being put up as collateral for the obligation to people who are participating in the plan.