A stable value fund is a bond-type investment opportunity that provides the stability of a typical money market fund coupled with the potential for higher earnings over the life of the investment. These funds are most popular with people at or near retirement age who wish for something in their portfolio that lacks risk and still delivers a decent return. The stable value fund is so named because it gains its stability from the fact that it is backed by large companies that insure the fund. Risks can arise if one of those large companies suffers some sort of huge financial meltdown, such as a sudden bankruptcy.
While it may not hold much sizzle for younger investors who wish for greater returns on their investment, a stable value fund might be just the instrument to enliven the portfolio of those thinking of retirement. The funds actually originated as part of company retirement plans but then became available to the public as individual retirement account options. These funds offer the promise of investment protection while outperforming the small interest returns on money market funds.
The reason these funds are so stable is because they are backed by banks or insurance companies, which act as "wrappers" for the fund. In essence, if the portfolio of bonds and investments that comprise the fund performs below the rate of return set by the insurer, or wrapper, then that institution pays the difference to make sure the fund loses no money. When the fund outperforms this predetermined rate of return, then the wrapper pockets the difference. This ensures that the principal of the investment stays guarded at all times.
Whereas a typical money market fund averages less than a one percent return on investment, a stable value fund can reach a level usually associated with intermediate bond funds. That rate of return is probably not high enough for someone at a younger age trying to build up enough income for retirement down the road. For those who already have amassed a sizable retirement account, however, the combination of stability and performance can be very attractive.
Although a stable value fund usually holds little risk to an investor, there are certain extreme circumstances which would increase the fund's volatility. If the company serving as the wrapper should have a financial emergency such as a bankruptcy, the stipulations of the "wrapping" contract allow it to back out of any guarantees to insure the fund. This is known as an "employer-initiated" event, and it would not only likely eliminate interest payments to those invested in the fund, but it could also put the principal of their investments in jeopardy.
