What are the risks of investing in stable value? - Stable Value (2024)

FAQs

What are the risks of investing in stable value? - Stable Value? ›

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.

The primary risk of investing in Value Funds is the market risk associated with equity investing. Additionally, there is the risk that the fund's assessment of a stock's intrinsic value may not align with the market trends.

Stable value funds are a portfolio of bonds with an insurance guarantee. 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.

Stable value investments seek to provide relatively stable income that is comparable to shorter- to intermediate-term bonds over time but with preservation of capital.

Three commonly used stable value investment contracts include: traditional GICs, separate account GICs, and synthetic GICs (also known as security-backed investment contracts). Many stable value investment strategies utilize a combination of contracts from these three alternatives/ categories.

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.

Interest is credited to balances on deposit in the fund on a daily basis based on the daily equivalent of the annual effective crediting rate (“daily factor”), which is applicable to such balances.

The following are the features that contribute to Stable Money being considered a safe and secure platform. All the banks that have partnered with Stable Money are regulated by the Reserve Bank of India (RBI). Moreover, these banking partners are insured by RBI's DICGC subsidiary up to ₹5 lakhs.

How does stable value work? ›

Stable value funds invest in bonds that are insured against the loss of principal and yield. The bonds often have staggered maturity dates, which provide liquidity for the fund. The insurance can be in the form of a stable value wrap contract, guaranteed investment contract (GIC), or group annuity.

Stable value strategies are capital preservation investments (typically separate accounts or commingled vehicles) available in 401(k)s and other retirement savings plans.

Whereas money market funds typically have an average maturity of 30 to 45 days, stable value funds usually have a 3.0 to 3.5-year average maturity. The ability to invest in longer-dated, higher- yielding assets has historically provided stable value funds a return advantage compared to money market funds.

A stable value investment is neither insured nor guaranteed by the U.S. government.

Tips for researching stable value funds

Look at consistency of performance across multiple time periods, for example, 1-, 3-, 5-, 10-year and since-inception returns. Don't compare net crediting rates in a vacuum. Consider the underlying investment strategy and investment managers that support that crediting rate.

If an investor is looking for a low-risk option that provides steady income and capital preservation, a stable value fund may be a good choice. However, if an investor is willing to take on more risk for the potential of higher returns, a bond fund or other investment option may be more appropriate.

Steady returns, lower investment risk

Stable value funds have historically offered consistent returns with exceptionally low volatility, making them an attractive choice for risk-averse participants.

Overpaying for a stock is one of the main risks for value investors. You can risk losing part or all of your money if you overpay. The same goes if you buy a stock close to its fair market value. Buying a stock that's undervalued means your risk of losing money is reduced, even when the company doesn't do well.

Value mutual funds are suitable for investors who have a long-term investment horizon, a high risk appetite, and a contrarian mindset. Value investing requires patience and discipline, as it may take time for the market to recognise the true worth of the undervalued stocks.

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.