Right now, there is a lot of talk about trying to improve yields from cash and near cash investments. I received this question from a reader:
I’m looking to get a better yield than my online savings account (1.65%) but want the cash to be liquid. Would a GNMA fund be an option? What is the cost to get in and out? How liquid is this type of investment?
First of all, I should point out that we are dealing with personal finances and that everyone’s situation and needs are different. It should also be noted that I am not a financial professional and that you should consult with a professional or do your own research before making a decision about your personal finances. That said, here is my take on the GMNA fund.
This is a bond fond related to the Government National Mortgage Association — also called Ginnie Mae. It consists of mortgage backed securities guaranteed by the U.S. Treasury (so you do not have to worry about default). The risks include volatility and changing value, as well as the possibility that some of the loans are paid off early, so the entirety of the original earnings expectations may not be realized. You are likely to get a better return than with your online savings account. And, generally, funds are relatively liquid. The downside in selling any investment is that if you have to sell while the investment is down, you could sustain losses.
Costs depend on where you invest in the GMNA fund. Vanguard, Fidelity, T. Rowe Price, Payden and others offer GMNA bond funds. Minimums vary according to where you invest, generally ranging from $2,500 to $5,000. If you put it in an IRA, you can usually get away with a small minimum. Expenses range from 0.5% to 1.5%, and you can usually find GNMA funds with no load fees. If you get these funds, you should try to go for those with lower expenses. You can write checks from some GMNA funds, which is a bonus, allowing you instant access to your money.
I think a GMNA fund would be great for a long-term investment. Something that is used to anchor a retirement portfolio with safety. However, I would think twice about using a GMNA as an integral part of an emergency fund. Instead, I’d consider setting up a CD ladder. You’ll get better yields than your savings account, and the money always grows — you won’t be caught if things head a little lower for a while. Be careful with the way you set up your CD ladder, though. You want to be able get access to the money without early withdrawal fees. (The Simple Dollar has a great post on using a CD ladder for your emergency fund.) Other options include rewards checking or money market savings or checking accounts. Both of these accounts can have higher yields in some cases, and they feature liquid funds. Just make sure you are FDIC insured.