Government Bond Funds
Government Bond Funds (GBFs) provide a secure addition to your portfolio with a wide open gateway to profits through investing in government bonds (GB).
GBFs place funds primarily in bonds issued by federal government agencies or the US Treasury. As they are government backed, the credit risk is not an issue. Due to their high safety level, the yield and total returns tend to be lower than those of other bond funds.
The GBFs do fluctuate along with interest rates with the long term funds fluctuating much more than the short term funds.
When building a diversified fixed-income portfolio, one must understand how to invest in bonds because government bond investing can be an effective approach. Not only can they provide benefits like monthly cash flow and daily liquidity, they also provide diversification potential and professional fund management, meaning you don’t have to worry about its management as you will have a Fund manager for your fixed-income capital on a day-to-day basis. Building a portfolio of fixed-income funds starts with identifying your goals, then understanding how different types of bond funds align with those goals.
In creating a portfolio that generate income in government bond funds, the building blocks to consider are:
Investment-grade Government Bonds
These are funds that invest in high quality bonds rated as “investment grade” by bond rating agencies. These high quality bonds include those issued by government agencies, US Treasury as well as some corporations and most mortgage backed bonds.
Types of funds that fall into this broad category include:
- Government Bond Funds – These are funds primarily investing in bonds issued by US government, such as Treasury bonds and bills, as well as mortgage and other asset backed securities backed by the government. These funds also invest in bonds issued by government enterprises such as Fannie Mae and Freddie Mac. They do not offer the highest yields due to their high safety but can offset some of the credit risk within other parts of a portfolio.
- Inflation-protected funds. These funds primarily invest in Treasury Inflation Protected Securities (TIPS). TIPS are bonds whose face value adjusts to keep pace with the Consumer Price Index (CPI), making them a good hedge against inflation.
- Mortgage-backed bond funds. Mortgage-backed bond funds invest in securities backed by pools of mortgages.
These securities can be issued by government sponsored enterprises—such as Fannie Mae—or by a bank or other financial institution. Since mortgage-backed bonds are normally considered to have more risk than U.S. Treasury securities, they typically offer higher interest rates. For that reason, mortgage-backed funds could be an attractive investment for those willing to assume a bit more risk in exchange for potentially higher current income.
- Broad market bond funds. These funds are diversified across many different types of bonds including those issued by the U.S. government, government agencies, corporations, and bonds backed by mortgages. Investing in broad market bond funds can be an easy way to diversify your portfolio to include a wide variety of bonds from many different issuers, sectors, maturities, and credit qualities.
