Riding the boom in Korea's stock market, sales of target-conversion funds have surged, and more than seven out of 10 investors signed up for products that charge a front-end load. As the time to reach target returns has recently shortened to around two months, some noted that a fee structure advantageous for long-term investing could instead add to investors' burden.
According to financial authorities on the 6th, the Financial Supervisory Service held the 4th Consumer Risk Response Council on the 4th, chaired by Lee Chan-jin, to examine the risk of misselling that could occur in the sales process of target-conversion funds.
A target-conversion fund invests in risky assets such as stocks and automatically switches to safe assets such as bonds when it reaches a preset target return. Sales have grown rapidly in step with the recent market rally. Publicly offered target-conversion fund assets under management jumped from 200 billion won in 2023 to 5.2 trillion won last year, and another 3.2 trillion won was set up in the first half of this year.
What the Financial Supervisory Service (FSS) focused on was the fee structure. From 2025 through the first half of this year, 71.8% of target-conversion fund investors enrolled in Class A, which charges a front-end load. In Class A, investors pay the fee up front, but the ongoing sales fee rate is lower, making it relatively advantageous for long-term investing.
However, the investment period for target-conversion funds is getting shorter. The average time to reach the target return plunged from 249 days in 2024 to 57 days in the first half of this year. If investors redeem after reaching the target return and repeatedly re-subscribe to other products, the burden of front-end loads can increase.
The Financial Supervisory Service (FSS) saw a possibility of misselling if distributors recommend products without fully explaining this cost structure and the pros and cons of each class to investors. In response, it plans to require the "investment precautions" section of fund filings to specify, in more detail, the fee structure by class and the pros and cons depending on the investment period. It also directed distributors to strengthen explanations about expense burdens such as front-end loads.