Sure, Ginnies Look Rosy But Watch Out For Thorns

Low interest rates have savers itching to abandon the safety of certificates of deposit and money-market funds, but many are leery of taking on risk. So imagine their reaction when they hear "credit safety," "guaranteed," and "8% to 9% yields" all in the same breath. That's the lure of Ginnie Mae funds--bond funds that invest in mortgage securities backed by the Government National Mortgage Assn. (GNMA). But Ginnies have other risks.

Almost all bond funds are vulnerable to rising interest rates, which hurt the funds' net asset value, or share price. But for Ginnies, falling rates can be a problem, too. If mortgage rates drop two or more points, homeowners tend to prepay and refinance mortgages, returning principal to the fund early. The fund will most likely have to invest that money at lower rates, deflating yield.

The last big refinancing wave was in 1986 and 1987, when mortgage rates were at about today's levels. Fund yields slumped, and investors bailed out, taking losses. "Ginnie Maes have proved to be good investments," says Don Phillips, publisher of Morningstar Mutual Funds. "But for people who panicked and got out in 1987, they were very bad."

SURPRISE. Fund managers expect some prepayments, but they stress that the risk is not as great today, in large part because many high-rate mortgages have already been refinanced. The bigger concern is rising interest rates. Says David Glen, portfolio manager for Scudder's GNMA fund: "If rates go up significantly, people who switched money from CDs into Ginnie Mae funds may be in for a surprise." If interest rates were to rise one point in a short time, Glen figures the share price of his fund would drop 4% to 5%.

The funds have to invest at least 65% of their assets in Ginnie Maes, but they part ways after that. "Pure" funds, such as Fidelity's Ginnie Mae Portfolio, hold Ginnie Mae securities almost exclusively, albeit focusing on different coupons. Others, like Federated's GNMA fund, mix in other securities, such as bonds from other government agencies and collateralized mortgage obligations (CMOs). Most funds put some money in U. S. Treasuries. That dampens volatility but shaves off yield.

Fund managers suggest using dollar-cost-averaging, where you invest a bit at a time so you don't buy in at a peak. Minimum investments often start at $1,000 or $2,500 but can be as high as $25,000. If you call a broker, you'll pay a sales charge of 4% to 5%. But there are many good no-load funds with management fees of about .5%.

      Fund name            Total  Current
                          return*   yield
      SECURITIES            15.49% 8.26%
      SECURITIES            15.40  7.58
      VANGUARD GNMA**       15.14  8.38
      LEXINGTON GNMA**      14.99  7.97
      FEDERATED GNMA**      14.98  8.29
      * For year ended Aug. 31, 1991
      ** No-load funds