Government Backed

• The acronym GNMA stands for Government National Mortgage Association, and the bonds offered by this organization are the only ones to be backed by the full faith and credit of the United States government. That safety is what sets Ginnie Mae bonds apart from other mortgage-backed securities and makes them a suitable investment for conservative investors who need current income.
  
  

Bonds vs. Funds

• Investors can purchase individual Ginnie Mae bonds if they wish, or they can diversify their holdings by purchasing a mutual fund that invests in GNMA securities. If you choose an individual GNMA bond, you are guaranteed a specific rate of interest for the entire term of the bond, and you are guaranteed to get your money back when that bond matures. If you choose a GNMA bond fund, you are part owner of many different bonds, and the interest rate and net asset value of the fund will fluctuate as some bonds mature and others enter the portfolio.
  
  

Interest Rate Risk

• One of the advantages of a GNMA bond fund is that the bonds it holds are backed by the full faith and credit of the United States government. That means that there is no risk of a default as there is with other mortgage backed securities. However, GNMA bonds do carry interest rate risk, just as other bond funds do. When interest rates rise, the net asset value of the GNMA fund declines. That meas investors who sell their shares may receive more or less than what they originally paid.
  
  

Current Income

• Investors who are looking for a steady stream of income coupled with protection of their principal can use a GNMA bond fund to achieve both goals. The interest rate on a GNMA bond fund will fluctuate along with the rates on the underlying mortgages, but there is no risk of default. Investors can even overcome the interest rate risk inherent in bond funds by simply holding the GNMA fund and continuing to collect the interest.