High Yield Mutual Funds

Maximizing Your Returns

GNMA Mutual Funds

Fannie Mae and Freddie Mac are but two of many semi-government organizations in the business of guaranteeing mortgages. Whilst the former two fell into dire straits during the great financial crisis of 2007, Ginnie Mae (or GNMA) continued to thrive with strong performing pools of mortgages. The secret lies in their conservative investments, leading to very stable mortgage pools.

The GNMA Mutual Funds With The Best 5-year Returns (Annualized)

You will not find these products as the top performers in the best mutual fund companies because they have low yields, but they are extremely stable. The stable mortgage pools means that many people regard GNMA mutual funds as low risk investments (which may or may not be true depending on the quality of mortgages held). Before we go deeper into what a GNMA fund is, we present here an updated table for 2010. Here we have compiled for the reader a list of the top 10 GNMA-related mutual funds ordered by 5-year annualized returns. (If you have javascript enabled, click on column heading to sort table).

Description from Fidelity

What is the definition of a GNMA or Ginnie Mae mutual fund? From Fidelity's website on their own Ginnie Mae offering:

"Normally investing at least 80% of assets in Ginnie Maes and repurchase agreements for Ginnie Maes Investing in other U.S. Government securities and instruments related to U.S. Government securities. Engaging in transactions that have a leveraging effect on the fund."

Morningstar also describes this type of fund as Intermediate Government, denoting that the security is of intermediate capitalization and belongs to the government sector. People who are interested in lower risk investments may wish instead to consider something like the money market deposit account or money market mutual funds.

Less Risky But Lower Yields

First compare these rates to other mutual fund rates. People looking for traditional high yield mutual funds may wish to turn away from the GNMA. Mutual funds based on the pools of mortgages guaranteed by GNMA are known as GNMA mutual funds. The downside has historically been a lower yield than the dizzyingly high yields of REITs and other mortgage investments based on Fannie and Freddie Mac. But many people are deeply attracted to what seems to be a relatively low-risk investment that outperforms money markets, bank CDs, savings accounts, and government bonds which gives the investor a feeling of safe, constant income. The investor should be aware of a few points when investing in GNMA mutual funds.

Differences Between GNMA Mutual Funds

Not all of the GNMA mutual funds are alike. It is true that they are predicated on the same pool of mortgages guaranteed by Ginnie Mae, however each fund may participate in derivatives and other securities that depend on Ginnie Mae mortgages. This yields higher returns sometimes, but also increases the risk due to the extra leverage. One example is Putnum U.S. Government (PGSIX) which lost money because of the infamous CDOs that were included in their GNMA mutual funds. The financial rules state that a fund with the words "Ginnie Mae" in its name must have 80% of its portfolio invested in Ginnie Mae directly. The other 20% is the source of uncertainty. Therefore, GNMA mutual funds are high yield mutual funds only in a narrow sense.

Sensitive to Government Interest Rates

GNMA mutual funds, like almost any other financial instrument, fluctuate as a result of movements in interest rates (unlike fixed income securities which do not exhibit variations in their underlying value). In fact they can be quite volatile and sensitivie to changes in Federal Reserve policy shifts. However, the fact that mortgages are tied very strongly to current interest rates means that GNMA mutual funds may be especially sensitive. How a particular fund responds is a function of the mortgages in the portfolio, depending on characteristics such as the distribution of maturity dates. Furthermore, refinancing activity by mortgage holders can cause the output of the fund to fluctuate.

Watch Out For Fees

The fees or load associated with these funds can be relatively high given that the returns are "moderate". On the high end are stocks which have the highest yield at around 10-11%. On the low end are government treasury bonds and savings account which in the late 2000's have experienced rates of 0-2%. The GNMA mutual funds lie somewhere between these two extremes. As such, small fees can really erode any earnings.