Demand for public target-return funds has surged in South Korea, but most investors bought share classes that charge sales commissions upfront, regulators said. Critics say investors are paying more than they need to because distributors keep recommending products suited to long-term holdings, even as the time it takes these funds to hit their targets has shortened sharply.
Public target-return funds attracted 3.2 trillion won ($2.3 billion) in the first half, equal to 61% of the 5.2 trillion won raised for all of last year, according to the Financial Supervisory Service on the 9th. Assets in these funds stood at about 100 billion won in 2022 and reached just 1.4 trillion won by 2024, but subscriptions have jumped recently amid the stock market rally that began last year.
A public target-return fund invests in risky assets such as stocks and, once it reaches a preset target return, shifts into safer assets such as bonds and holds them until maturity. Maturity dates vary depending on when the target is met, and early redemptions are common.
The issue is that 71.8% of investors in these funds chose the share class that deducts sales commissions upfront, known as A-class, even though rising market volatility from last year through the first half of this year steadily shortened the average time needed to reach target returns. That average fell to 105 days last year from 249 days in 2024, more than a halving, and dropped further to 57 days in the first half of this year.
A-class shares charge a sales commission upfront but carry a lower ongoing distribution fee, making them advantageous for long-term holdings. C-class shares charge no upfront commission but carry a higher ongoing fee, favoring short-term holdings. Total costs for the two classes typically converge after about two years. In other words, investors who expect to hold for a short period are at a cost disadvantage in A-class funds.
"We will guide distributors to fully explain the burden of sales commissions on target-return funds to consumers and establish sound market order," an FSS official said.
