Because the government guarantees that the interest and principal will be paid on Ginnie Maes, there is virtually no risk, even though many people cannot pay their mortgages.
"After Treasuries, Ginnies are the next safest," said Daniel Hall, a principal in portfolio review for the Vanguard Group Inc.
But with bonds - whether Ginnie Maes, Treasuries, municipal bonds, or corporate bonds - there is another way to lose money: If interest rates start to climb, you can lose money on the bonds.
Recently, Ginnie Maes have been yielding more than 4 percent. Meanwhile, many CDs are paying 2 percent or more, and 10-year Treasuries are more than 3 percent.
But this is an unusual period. The likelihood of interest rates staying at these low levels is remote. So when investors can earn more on bonds, they are not going to want low-interest individual bonds or the low-interest bonds in your Ginnie Mae bond fund.
Consider when CDs and Treasuries start paying 6 percent or more, as they have in the past. Your Ginnie Maes yielding 4 percent will not look as good to you. And they will not look good to other investors.
So the value of your Ginnie Maes could fall. If you hold on to them until they mature, you will not lose money, but you will settle for the low interest assigned to them. But if they are in a Ginnie Mae fund, the value of your fund will likely fall because the fund will be loaded with low-interest bonds when investors can find other, higher-interest bonds.
Hall notes that, in 1994, as rates climbed sharply, the total return on Ginnie Maes declined 0.95 percent.
If this happens again, your bond fund will not be a loser forever, because the fund manager will start buying higher-interest bonds. But if you have been using a Ginnie Mae fund like a savings account, and need the money when values are down, you could take a loss.
