The Federal Retirement Thrift Investment Board currently contracts BlackRock to manage the F Fund assets. The TSP F Fund is an index fund, which strives to replicate the returns of Barclays Capital U.S. Aggregate Bond Index, a broad index representing the U.S. bond market. The bond market basically consists of government, corporate, and mortgage backed securities. It invests about 30 percent in corporate bonds and 70 percent in U.S. government bonds of all maturities.
The chart above is a great reference for the index fund that the F Fund strives to mimic throughout the year. As you can see the fund has steadily increased over the previous nine years. This is due in part to the developing bubble in the bond market. However, the goal of the F Fund is to generate consistent interest income similar to the G Fund along with the potential for capital gains. The potential for capital gains also opens the door for capital losses. You also run the risk of inflation eroding your interest returns in the F Fund, but this would be highly unlikely unless the U.S. experiences a high rate of inflation.
What You Need To Know About The F Fund
If you don’t take anything else away from this article please remember that the F Fund is directly tied to interest rates. A lot of people use way too much financial jargon to explain the concept I am about to tell you. You will likely be skeptical at first because it’s so simple but trust me, it’s this simple!
When interest rates trend lower, the F Fund trends higher. When interest rates trend higher, the F Fund trends lower!
That is literally all you need to know about the F Fund. Take a look for yourself!
Benefits & Risks Investing in the TSP F Fund
Generally speaking there are several risks bond investors (including investors in the F Fund) open themselves up to on a consistent basis. These risks are inflation, an interest rate spike, and a potential default by one of the issuers in the bond portfolio. Let me explain in a little more detail:
- Inflation risk: With most fixed income investments they tend to offer lower yields than traditional investments in the stock market. It is because of this that they run the risk of having inflation outpace their performance. For example, say the F Fund returned 4% for the year of 2014 but the U.S. Inflation rate for 2014 was 5%. Effectively you lost 1% for the year of 2014 because your returns were not sufficient enough to offset the reduction in purchasing power that resulted from inflation.
- Interest rate risk: As I previously stated, when interest rates increase the F Fund will decrease. This happens because investors would rather take interest from the U.S. government with little to no risk, than invest in corporate bonds with comparable returns but have higher risk. If you take a look at the chart above you can see that interest rates have been steadily declining for years.
- Credit risk: This is generally referred to as “defaulting,” the premise is simple. As individuals we take out loans under the agreement we will pay them back with interest, the same is true for companies and governments. As individuals we sometimes come on hard times and are unable to pay back the loans we initially agreed upon. When this happens, it’s called bankruptcy and most of our debts are wiped clean. The same goes from companies and governments, if for whatever reason they can no longer make payments to bondholders (F Fund investors) then the bond defaults and you could lose some or all of your investment.
How Do I Use The F Fund In My TSP Account?
Contrary to popular belief, bond prices and stock prices are not correllated at all. Matter of fact, they are two completely separate markets and a little unknown fact that most investors don’t realize… the bond market is far larger than the stock market, 80% larger to be precise!
The TSP F Fund provides a similar function to the G Fund but offers the potential for higher returns. However, as I previously stated, the potential for higher returns comes with more risk.
My personal opinion of the F Fund is that it is best for individuals approaching retirement in the next 1-3 years. I believe that the G Fund is more fitting for individuals approaching retirement however, if for some reason you are looking for higher potential gains but do not want to be exposed to the actual stock market, then the F Fund is what you want.
Here is an overview of the all the TSP Funds! Additionally we publish a monthly newsletter that utilizes a proven strategy for identifying bullish and bearish markets. We have tailored this strategy towards the Thrift Savings Plan in order to help you increase your TSP portfolio returns significantly over time.