Ginnie Mae (GNMA) securities are backed by the government but not FDIC insured

My husband is considering investing $10,000 dollars in a mutual fund which invests in GNMA securities. I am worried about the safety of the mutual fund. Do you know if it is FDIC insured?

Mutual funds that invest in GNMA securities are not FDIC insured. These bond mutual funds invest mainly in mortgage backed securities (which are bond investments backed by the Government National Mortgage Association (GNMA or “Ginnie Mae”). These mortgage backed securities (MBS) are formed by aggregating residential mortgages, mainly from the Federal Housing Authority (FHA) and the Department of Veterans Affairs (VA). While Ginnie Mae does not buy, sell, issue, or even aggregate these MBS, they do guarantee the timely payment of the interest and principal associated with the MBS if the underlying mortgages are in default.

Ginnie Mae is a government corporation that is a part of the Department of Housing and Urban Development (HUD). It deals in the residential housing and mortgage markets similar to government-sponsored enterprises, such as the Federal National Mortgage Association (FNMA or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (FHMLC or “Freddie Mac”). However, unlike Fannie Mae and Freddie Mac, Ginnie Mae is not a publicly traded company. Ginnie Mae securities are also the only ones that are federally guaranteed by the full faith and credit of the U.S. Government – like U.S. Treasuries (e.g., T-Bills, T-Bonds, T-Notes, TIPS). If the underlying owner (of a mortgage) in a Ginnie Mae MBS, defaults on the loan, the U.S. Government will continue to pay the investor of the MBS the interest and principal earned on the MBS investment.

It is important to note that this guarantee does not protect investors of bond mutual funds (which hold Ginnie Mae securities) from fluctuations in the value of the bond fund. The value of a bond (and thus, the value of a mutual fund that holds these bonds) has an inverse relationship with interest rates. When interest rates increase, the value of a bond decreases. Conversely, when interest rates decrease, the value of a bond increases. This means that regardless of whether or not the interest payments or principal of a bond are guaranteed, as they are for Ginnie Mae mortgage backed securities, the value of that bond or Net Asset Value (“NAV”) will fluctuate as interest rates fluctuate.

The fluctuations in the value of a bond would not affect your original principal invested if the bond is held until it matures. However, if you do not hold it until maturity and you were to sell the bond during a period of rising interest rates, relative to when you bought the fund, you would likely see a decrease in the value of your investment – resulting in a potential loss of some of your initial investment. If, on the other hand, you didn’t hold it until maturity and you sold it in a period of declining interest rates, you would likely see an increase in the value of your bond fund – resulting in a gain.

Investing in Ginnie Mae mortgage backed securities does provide you with protection from defaults of the original, underlying mortgages but they do not protect against the impact of changing interest rates.