What is the F Fund and Should You Invest in It?

Who wants to invest in securities that are boring? If you are seeking relative security as you accumulate money for your retirement, boring is not bad.

What is the F fund and should it be part of your Thrift Savings Plan (TSP) investment?

Several readers have written in to ask questions about the F fund recently. The questions are often along these lines: “Why doesn’t the F fund go up when the stock market goes up? It looks like I can make more money on my investment by investing only in the TSP stock funds?”

Back in 2008, we published this comment on the FedSmith site: “Stock and bond prices often move in opposite directions. While your stock funds have been going down in recent months, the F fund has been performing well….The investment in bonds, which some people consider staid and boring, can be a good cushion for your retirement funds when (not if) your stock funds start going down.”

In 2007, the stock market was doing very well. The C fund was finishing up a five year run of high returns for investors and the S and I funds did even better than the C fund.

The F fund also made money but who wants a return of only 4.11% when the C fund hits 28% in a year and the S fund made almost 43%?

In the long run, you will probably make more money in the TSP stock funds than you will make in bonds. But keep this in mind: In 2008, the F fund returned 5.45%. That is a healthy return. In that same year, the C fund lost almost 37%; the S fund went down 38% and the I fund declined by 42%.

If you are retired, or close to retirement, watching your money decline by 40% or so in a single year is devastating. That 5.45% positive return provided by the F fund was magnificent by comparison and provided a cushion (along with the G fund) for TSP investors who were as upset as any other investor watching their assets disappear rapidly.

The less is this: Bonds often provide a sound diversification for your investments.

There is risk in the F fund and the fund can go down. From 1988 – 2009, the F fund went down in two years: -0.85% in 1999 and -2.96% in 1994. It has had a positive return in all of the other years.

As noted by the TSP on its website: “The risk of nonpayment of interest or principal (credit risk) is relatively low (in the F fund) because the fund includes only investment-grade securities and is broadly diversified.” By law, the F Fund has to invest in fixed-income securities.

The F fund invests in high quality fixed-income securities with maturities of more than one year. It invests in Treasury and Agency bonds, asset-backed securities, and corporate and non-corporate bonds and has wide diversification with more than 9000 bonds in the portfolio.

As with most investments, there is no guarantee of a great return and there is a possibility of losing some of your money. But the risk is not as high as it is in stocks. And, when stocks go down, bonds often go in the opposite direction as investors seek the relatively safety of bonds. Your earnings in this fund are made up of interest income paid out on the bonds and gains (or losses) in the value of the securities.

Since no one can accurately predict the future, bonds provide a great degree of safety as you invest for your retirement future (or work to preserve your money in retirement). While you may not make as much money in bonds as you may make with stocks, you are also unlikely to experience the large dips that occur on a regular basis with stocks. And, with continuing economic uncertainty, you want to give yourself as much of an opportunity as possible for your investment to survive or thrive during the turmoil.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47