Earning 3 percent in a 1 percent world may be appealing, especially if you won’t lose principal. That’s what stable value funds offer these days. These funds invest in fixed-income instruments with fluctuating values, such as mortgage-backed paper and credit card debt; they also purchase insurance agreements (“wrappers”) to protect themselves against rising rates-and falling asset values.
Stable value funds usually are offered only in retirement plans and 529 plans, where redemptions are expected to be light. When selecting a stable value fund, though, you need to be aware of restrictions. Some funds might impose a 2 percent surrender charge, for example, if short-term rates go higher than long-term rates. Also, you should peek inside the wrapper to see what risks are being taken, in return for higher yields and principal protection.
