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Ginnie Mae (gnma) mutual funds: What is covered by government guarantee and what is not?
Ginnie Mae mutual funds are mutual funds that have holdings in Government National Mortgage Association securities, also called Ginnie Mae securities. The US government owned GNMA is a part of the Department of Housing & Urban Development. These securities are very attractive to many investors, because of the guarantee given concerning interest and principal payments on them. The securities must be collateralized by certain mortgages for the guarantee to apply. What exactly does the government guarantee cover though, and what is not covered? The interest and principal payments on the investment is covered by the guarantee, but interest fluctuations that may affect the value of the bond mutual funds owned are not covered.
GNMA mutual funds are backed by a guarantee from the US Government. This guarantee ensures that the investor receives a payment each month from the investment in these securities, even if the underlying mortgage is not paid by the homeowner. The amount of the payment received each month is not guaranteed and can fluctuate, depending on whether the homeowner makes a payment which is larger or smaller than normal. The mortgages which create these securities may also be prepaid, and this can affect the rate of return that you will see as well. Ginnie Mae is completely owned and operated by the US Government.
The guarantee that GNMA mutual funds offer is from the United States Government, which means these funds have very few risks involved. The guarantee offered does not cover fluctuating interest rates or values due to market changes, or the prepayment in part or full of the underlying mortgages. As an investor you may still experience losses with GNMA mutual funds, and the guarantee does not cover a specific price or value amount. It only covers whether payments are made on time, as long as the mortgage is outstanding. Because these securities are backed by the US Government, they are very popular with conservative investors. These mutual funds are considered a safer investment option than many others, and Ginnie Mae securities are offered by a large number of brokers and investment companies.
GNMA mutual funds can be a wise investment for many investors, but they should not be considered completely safe or foolproof. Just because these securities are guaranteed does not mean a guaranteed profit, and a loss is still possible with these choices. Just like with any other investment choice it is necessary to do the research and evaluate all of the possibilities before deciding on the ideal investment option. Ginnie Mae mutual funds are a perfect choice in many circumstances, and the government guarantee does help minimize the risk of complete losses from the investment though, but it does not eliminate these risks completely. It is important to understand that this guarantee does not cover any interest or value fluctuations, and the securities may be paid off sooner than expected, which can mean you can have some losses.
The information supplied in this article is not to be considered as medical advice and is for educational purposes only.
|Mutual Funds Investment11 May 2010|