agencies will be through mutual funds. For a minimum initial investment of as little as $500, you can get into a government bond fund that invests in agencies. Mutual funds spread your money across numerous government securities with a range of maturities and yields–as opposed to your purchasing just one bond with a set maturity date. Additionally, the funds you invest in a mutual fund are looked after by an experienced market professional with the expertise and research tools that will help him or her make smart choices about when it’s time to buy or sell.
Bond funds are a bit trickier than stock mutual funds, however. Like bonds, government agency debt is sensitive to interest rates. If rates rise, bonds decrease in value, and the entire portfolio of a bond mutual fund will be hit. The opposite, of course, also holds true: if interest rates fall, your government bond increases in value. But your main concern will be safeguarding your principal from the ups and downs. Look for a bond fund with a low average maturity of three to five years to insulate the portfolio from shifts in interest rates.
Otherwise, it’s wise to choose a no load mutual fund, or one that doesn’t charge a sales commission that’s taken out of whatever gains your fund racks up over time. One no-load choice is Vanguard’s GNMA (800- 662-2739), which invests in Ginnie Maes or collections of home mortgages that the U.S. government packages as bonds. Banks, savings and loans and other financial institutions sell these mortgages to the GNMA, which in turn offers them to investors. Ginnie Maes pay among the highest yield of all agencies. The Vanguard GNMA Fund has a minimum initial investment of $3,000 or $1,000 for IRA accounts, and has averaged a return of 6.91% for the last five years. Another no-load choice, Fidelity Mortgage Securities (800-544-8888), has posted an average annual return of 7.25% over the last five years.