Many investors turn to investments issued by the U.S. government in order to keep their portfolios safe and secure. With some government securities backed by the full faith and credit of the U.S. Treasury, mutual funds and ETFs that invest in them have far less credit risk than funds that invest in corporate obligations. But that doesn't mean you can't lose money with government funds. Below, we'll take a closer look at some of the different types of government funds.
Government money market mutual funds
Investors use money market mutual funds as a substitute for cash. These funds hold short-term debt obligations that provide daily liquidity to investors, and they are designed to pay interest without seeing any changes in their share price or taking on potential loss of principal. Typically, shares of government money market mutual funds maintain a price of $1 per share and distribute income monthly.
There are two main types of government funds in the money market arena: those that invest only in Treasury obligations, and those that also invest in securities issued by governmental agencies such as Fannie Mae and Freddie Mac. Treasury government funds are generally safer, but they typically carry slightly lower interest rates than funds with a broader set of permissible investments.
Government bond funds
For those seeking higher rates, government bond funds hold securities that have longer maturities than government money market funds. Government bond funds are divided into several categories. Short-term funds hold government securities with maturities of two to three years or shorter, while intermediate-term funds have maturities in the three to 10-year range and long-term funds specialize in bonds with maturities of 10 to 30 years.
Different government bond funds also emphasize various classes of bonds. Some government bond funds focus only on Treasuries, while others focus only on agency-issued debt. So-called Ginnie Mae funds concentrate on mortgage-backed securities issued by the Government National Mortgage Association. You can also find government bond funds that invest in a broader mix of all of these types of bonds.
The different between bond funds and money market funds is that bond funds will see their share prices rise and fall. Even with minimal risk of default, changes in prevailing interest rates cause price changes, and the longer the term of the bond that a fund specializes in, the greater the impact of rate movements on its share price.
Overall, government funds can be useful for those seeking relative safety and security in their portfolios. They typically shouldn't make up your entire portfolio, but as a component of a smart asset-allocation strategy, government funds can play a useful role.
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