Tsp Funds: Investing For The Future

The Thrift Savings Plan (TSP) is a retirement savings and investment plan for federal employees and military personnel. It is one of the best retirement systems in the world, offering a straightforward investment account that is accessible and understandable for all employees. TSP funds can be invested in a variety of different funds, including U.S. Treasury securities, bonds, or U.S. or international stocks. The five core funds offered by the TSP are the Government Securities Investment (G) Fund, the Fixed Income Index Investment (F) Fund, the Common Stock Index Investment (C) Fund, the Small Capitalization Stock Index Investment (S) Fund, and the International Stock Index Investment (I) Fund. Each of these funds offers a different level of risk and potential return, and investors can choose to invest in any combination of these funds to create a diversified portfolio. In addition to the five core funds, the TSP also offers Lifecycle (L) Funds, which are composite funds that invest in a combination of the five core funds and adjust over time to become more conservative as the investor approaches retirement.

Government Securities Investment Fund (G Fund)

The Government Securities Investment Fund (G Fund) is a low-volatility, virtually risk-free US bond fund. It is one of the five core funds of the Thrift Savings Plan (TSP), which serves as a government version of a 401(k) for civilian and military federal employees.

The G Fund is invested in short-term US Treasury securities, specially issued to the TSP, with a long-term interest rate. The payment of principal and interest is guaranteed by the US government, so there is no credit or default risk. The G Fund's investment objective is to ensure the preservation of capital and generate returns above those of short-term US Treasury securities.

The G Fund rate is calculated by the US Treasury as the weighted average yield of approximately 191 US Treasury securities on the last day of the previous month. This calculation results in a long-term rate being earned on short-term securities, as long-term interest rates are generally higher than short-term rates. Thus, the G Fund securities usually earn a higher rate of return than "safe" investments like US T-Bills or money market funds.

The G Fund has historically outperformed 3-month US Treasury Bills, and between its inception and 2010, it managed to outpace inflation by a significant margin. However, due to historically low-interest rates, the G Fund no longer outpaces inflation as of 2020.

The G Fund is a good option for investors who want a portion of their retirement account to be completely protected from loss and prioritise the stability and preservation of their money over potential long-term growth. It has a better risk/reward ratio than any other Treasury investment and is only available to TSP investors.

Fixed-Income Investment Index Fund (F Fund)

The Fixed-Income Investment Index Fund (F Fund) is a U.S. bond index fund that tracks the Bloomberg U.S. Aggregate Bond Index, a broad index representing the U.S. bond market. The F Fund's investment objective is to match the performance of this index.

The F Fund is designed to provide investors with the opportunity to earn higher rates of return over the long term compared to short-term securities such as the G Fund. It invests in a diverse collection of government bonds, corporate bonds, and mortgage-backed securities.

The F Fund has a relatively low level of overall risk compared to certain other fixed-income investments in the market. This is because it includes only investment-grade securities. However, it is important to note that F Fund returns are subject to market and inflation risk. F Fund investors are exposed to the possibility of credit default risk and prepayment risk. Additionally, there is a chance that F Fund investments may not outpace or grow enough to offset the reduction in purchasing power due to inflation.

In terms of its performance, the F Fund has historically provided slightly better annual returns than the G Fund, although it is also slightly more volatile. As of December 31, 2023, the F Fund had assets of $33.1 billion and a total expense ratio of $0.490/$1,000 account balance (4.9 basis points).

When considering how to use the F Fund in a Thrift Savings Plan (TSP) account, it is worth noting that the prices of bonds and stocks don't always move in tandem. Investment-grade bonds are often uncorrelated or negatively correlated to stocks. Therefore, including an allocation to bond funds like the F Fund in addition to stock funds in a retirement portfolio can help reduce volatility.

Common Stock Index Investment Fund (C Fund)

The Common Stock Index Investment Fund (C Fund) is one of the five core funds of the Thrift Savings Plan (TSP). It is a US large-cap stock index fund that tracks the S&P 500 index, which is a collection of around 500 of the largest and most profitable US corporations. These companies represent 123 industries classified into 11 major sector groups, and they make up about 75% to 85% of the market value of the US stock markets.

The C Fund's objective is to match the performance of the S&P 500 index. It holds all the stocks included in the index in virtually the same weights that they have in the index. The fund's performance is evaluated based on how closely its returns match those of the S&P 500.

The C Fund offers investors the opportunity to experience gains from equity ownership of large and mid-sized US companies. Historically, the S&P 500 has delivered returns of about 9% per year, which is better than most other investments. However, it is also fairly resistant to inflation over the long term. The C Fund is subject to market risk, meaning that its returns move up and down with the prices of the stocks in the S&P 500.

The C Fund can be a useful addition to a portfolio that contains other stock funds or bond funds. By investing in all segments of the stock market, investors can reduce their exposure to market risk. Additionally, a retirement portfolio containing a mix of stock and bond funds will tend to be less volatile than one that contains only stock funds.

The C Fund has an annual expense ratio of 0.025% or 0.048%, making it a very low-cost way to gain diversified exposure to the US stock market.

Small-Capitalization Stock Index Fund (S Fund)

The Small-Capitalization Stock Index Fund, or the S Fund, is one of the five core funds of the Thrift Savings Plan (TSP). The S Fund is an index fund that seeks to match the performance of the Dow Jones U.S. Completion Total Stock Market Index, which is made up of small-to-medium-sized U.S. companies not included in the S&P 500 Index.

As of December 31, 2023, the S Fund had assets of $99.9 billion, with a total expense ratio of 0.079%. The fund's top ten holdings as of that date included Snowflake Class A, Crowdstrike Holdings Inc Class A, and Workday Inc Class A.

The S Fund offers investors the opportunity to gain from the potential growth of small-to-medium-sized U.S. companies. It provides a means to further diversify your domestic equity holdings, as it covers a different segment of the stock market compared to other funds such as the C Fund and I Fund.

However, it's important to note that investing in the S Fund carries risks, including market and inflation risk. There is a possibility of loss if the Dow Jones U.S. Completion TSM Index declines due to changes in the overall economic conditions or if the fund's investments do not offset the reduction in purchasing power.

The S Fund is considered one of the two funds with the greatest risk in the TSP due to its focus on smaller and less established companies. It has outperformed the C Fund with greater volatility over time, and historically, small-cap stocks have outperformed large-cap stocks.

In summary, the S Fund provides investors with exposure to small-to-medium-sized U.S. companies, offering potential growth opportunities and a means to diversify their portfolio. However, it's important to carefully consider the associated risks before investing.

International Stock Index Investment Fund (I Fund)

The International Stock Index Investment Fund, or the I Fund, is one of the five core funds of the Thrift Savings Plan (TSP), a retirement system for federal civilian and military personnel. The I Fund offers investors exposure to international stocks, specifically those of large, medium, and small companies in over 40 developed and emerging market countries, excluding the US, China, and Hong Kong.

As of July 31, 2024, the I Fund's benchmark index is the Morgan Stanley Capital International ACWI IMI ex USA ex China ex Hong Kong Index, which includes over 5,000 stocks across 44 countries. The fund's investment objective is to match the performance of this index. The I Fund is passively managed and remains fully invested during all market cycles and economic conditions.

The I Fund provides an opportunity to diversify your TSP portfolio beyond domestic stocks and bonds. By investing in international stocks, you reduce your exposure to market risk, as the prices of domestic and international stock markets do not always move in tandem. Additionally, the I Fund can be useful in a portfolio that contains bond funds, as bonds can provide a buffer during market downturns and reduce overall volatility.

It's important to note that the I Fund is subject to market and inflation risk. The returns of the I Fund move in tandem with its benchmark index, which will rise or fall as the value of the US dollar fluctuates relative to the currencies of the countries represented in the index. Additionally, there is a risk that the I Fund investments may not grow enough to offset the reduction in purchasing power.

The I Fund has an annual expense ratio of 0.054%, making it a low-cost option for gaining diversified exposure to the international stock market. As of October 11, 2024, the fund had a compound annual growth rate of 6.0% and a 10-year return of 6.51%.

Frequently asked questions