What Is a Government Income Fund?

In the United States, a government income fund is a type of mutual fund which makes the majority of its investments in securities which are backed up by the U.S. government. These funds are generally considered safe investments because many of the securities included are unlikely to default since the U.S. Treasury guarantees them. The downside of a government income fund is that it cannot offer returns that are comparable with some funds dedicated to riskier investments. One other caveat is that the performance of these funds, since they deal mainly in debt securities like government bonds, is at the mercy of rising and falling interest rates.

For an investor looking for a safe investment, government-backed securities are generally considered one of the safest bets available. Many people in the United States partake of these securities by buying U.S. Treasury bonds, which are essentially loans from investors to the government. These bonds return investors fixed income in the form of interest payments. A more diversified form of investment in the government is a government income fund.

Like all mutual funds, a government income fund gathers money from multiple investors and spreads those funds over many different securities. In the case of this type of bond, however, the majority of those investments are made by fund managers on government-backed securities. Different government income funds have varying amounts of leverage to stray from this narrow type of security. The investment prospectus for the fund will reveal the specific investment strategy.

Another similarity to mutual funds is that the net value of the assets within a government income fund determines the amount of return for its investors. Government debt safely returns most investments, but doesn’t offer much more in the way of profits. That is because government securities like Treasury bonds can only offer low interest rates. Investors looking at this type of fund are more likely looking for safety and stability in the long term rather than any type of quick, significant profits.

When investing in a government income fund, investors should understand some of the pitfalls of such an investment. Considering the low return on investment associated with these funds, there is a possibility that the profits gained will fall behind the rate of inflation. In addition, these funds will be affected by any movement in interest rates. Rising rates mean that the fund will likely lose value, since investors would likely buy available securities with the higher rates, causing existing bonds to suffer.