Whenever there's an extended bear market, investors start looking for guarantees. Wall Street typically responds by creating products that promise returns-if you follow the rules.
Balanced-target-maturity funds, for instance, come with guaranteed returns. First introduced in the 1990s, these funds invest a portion of their assets in stocks and another in zero-coupon bonds. It's a sweet combination for some investors because the zero-coupon bonds portion of the portfolio gives these funds a maturity date as well as a guaranteed return. Meanwhile, the stock portion can add juice to that return, provided the stocks increase in value over the life of the fund.
But keep in mind that the return these funds promise isn't an average annual percentage return. Rather, it's a return of your principal (the money initially invested). To get that principal return, you must stay in the fund until it matures-typically 10 or 20 years after the fund first comes to market. Also, selling shares before the fund matures means forfeiting their guarantees.
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Fund families such as Merrill Lynch, Scudder and Smith Barney are the primary players in Lipper's Balanced-Target-Maturity Funds category. When you're researching, understand some existing funds may be closed to new shareholders. But if you like the concept of these funds, don't let that be a turnoff. Once one fund closes, there's often a new one around the corner.
Dian Vujovich is an author, syndicated columnist and publisher of the fund investing site www.fundfreebies.com.
Originally published in the June 2003 issue of Entrepreneur Magazine