With domestic and overseas stock markets rising together recently, investors are pouring money into target-conversion public funds, and the Financial Supervisory Service urged caution about potential losses.
According to the Financial Supervisory Service (FSS) on the 16th, the size of target-conversion public funds surged from 228.9 billion won (12 funds) in 2023 to 1.43 trillion won (38 funds) last year and 2.8905 trillion won (50 funds) through September this year.
A target-conversion fund is a product that, after raising money for a set period, first invests a certain share in risky assets such as stocks, then automatically switches to safe assets such as bonds to manage until maturity once the pre-set target rate of return is reached.
Target-conversion funds have the advantage in rising markets of reaching the target rate of return early and allowing easy reinvestment after locking in returns. However, they are investment products that can incur losses depending on market fluctuations.
The Financial Supervisory Service (FSS) emphasized that the target rate of return of a target-conversion fund is neither a guaranteed return nor an expected return. Like typical equity funds, target-conversion funds can incur losses depending on market conditions. In fact, the risk ratings of target-conversion public funds range from level 2 (high risk), which sellers classify as "high-risk products," to level 5 (low risk).
It is also necessary to check whether the investment strategy—such as the assets targeted for investment and the target rate of return—of the fund of interest matches the investor's own risk profile. Even if fund names are similar, the included assets, allocations, and investment strategies may differ depending on market conditions at the time of launch.
In addition, in a falling market, target-conversion funds have no cap on investment losses, while in a rising market, they can incur opportunity costs by not enjoying returns above the target rate because they switch to safe assets once the target is reached. Investors should also consider that additional sales fees must be paid upon reinvestment.
An official at the Financial Supervisory Service (FSS) said, "Target-conversion funds are often redeemed before maturity, so investors should consider the expense burden by subscription class," and added, "Rather than simply following a seller's recommendation, investors should think carefully about the investment period to avoid heavy future expenses and choose the subscription class that fits them."