F Fund investors should move some funds to G Fund


It’s often said that it doesn’t pay to try to time the investment markets. However, we are in a situation now that makes one particular timing move a good bet for Thrift Savings Plan investors: moving some money out of the F Fund and into the G Fund.

The G Fund, a unique investment fund available only to TSP participants, guarantees to give you back whatever money you put into it, on demand, without risking the loss of your principal — like a money market fund. In other words, it’s liquid. But unlike a money market fund, which typically pays a relatively low variable interest rate in exchange for the principal guarantee and liquidity, the G Fund pays a variable rate of interest that is equivalent to the weighted average yield on all outstanding government debt — typically a much higher rate.

So, while most market funds are currently paying an interest rate of approximately zero percent, the G Fund is currently paying about 2.5 percent. It seems low, I know, but it’s better than zero. At least in the G Fund, you’re not standing still as inflation takes its toll. With the current distribution of federal debt, the G Fund’s interest rate makes it equivalent to a midterm Treasury bond, without the risk.

The F Fund, on the other hand, is a diversified bond fund. Its performance represents the aggregate return of the U.S. bond market, including government and corporate debt. Many investors incorrectly believe that bonds, particularly those backed by the U.S. government, don’t pose a significant risk to principal. While this is true if you hold individual bonds to maturity and then redeem them, it is not true for bonds along their path to maturity.

The market value of a bond rises and falls in response to interest rates demanded or offered for similar bonds. The bonds held by the F Fund are valued at the end of every day. Generally, if market interest rates rise, the value of your F Fund shares will fall, and vice versa. The effect of rising interest rates is offset, to some extent, by the interest payments that are periodically received from the bonds and credited to the shares’ value.

The differences between the G and F funds, considered within the context of the current bond market environment, lead me to recommend that you break the prudence against market timing. With short-term interest rates near zero and long-term rates near their historical lows, there isn’t much room for further reductions in interest rates. While rates might go lower, there is much more room for them to rise than to fall. Most observers seem to agree, and some downright fear, that interest rates will eventually begin to rise again.

When rates do rise, the value of your F Fund shares will fall if the loss in principal value exceeds the inflow of interest payments. Even without a rise in interest rates, the future rate of return for the F Fund is somewhat muted by the current circumstances.

For most Americans, this is not a good reason to abandon bonds as part of their asset allocation. Safer to stick with the appropriate allocation and rebalance to it periodically. But, that is because most Americans don’t have access to the G Fund. Since the G Fund eliminates the risk of loss in value and promises rates of interest that are similar to medium-term Treasury bonds, it’s essentially like holding a risk-free midterm Treasury bond fund.

The F Fund tends to hold about 20 percent of its assets in short- and medium-term Treasury bonds. Since you have a fund that is likely to equal or outperform those bonds with less risk of loss, I recommend that you consider substituting the G Fund for about one-fifth of your usual F Fund allocation until interest rates rebound to more typical levels — say, when three-month Treasury bills yield something closer to 3 percent.

This timing move will likely improve your portfolio’s performance over the coming few years with virtually no downside risk.


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  1. Will do, thanks Mike for the good advice. Was about ready to call the bookie at the race track. Better odds these days than Wall Street.

  2. I’m curous when this advice is supposed to pay off. Since the day after this article was written, the F-fund has gained +3.73%, while the G-fund has eeked out a paltry +1.08%. If this advice was followed and anybody transferred money shortly after the article was published, they’ve lost money.

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