TSP Funds Comparison

There are six major funds TSP participants can invest in:

G-Fund
F-Fund
C-Fund
S-Fund
I-Fund
L-Fund

The “G” Fund

Fund Objective

The G Fund’s investment objective is to produce a rate of return that is higher than inflation while avoiding exposure to credit (default) risk and market price fluctuations.

 

Investment Strategy

The G Fund invests exclusively in a nonmarketable short-term U.S. Treasury security that is specially issued to the TSP. The earnings consist entirely of interest income on the security.

 

Risks

The G Fund is subject to inflation risk, or the possibility that your G Fund investment will not grow enough to offset the reduction in purchasing power that results from inflation.

 

Rewards

The payment of G Fund principal and interest is guaranteed by the U.S. Government. This means that the U.S. Government will always make the required payments. In other words, your G Fund investment is not subject to credit (default) risk.

The G Fund interest rate calculation is based on the weighted average yield of all outstanding Treasury notes and bonds with 4 or more years to maturity. As a result, participants who invest in the G Fund are rewarded with a long-term rate on what is essentially a short-term security. Generally, long-term interest rates are higher than short-term rates.

 

How can I use the G Fund in my TSP account?

Consider investing in the G Fund if you would like to have all or a portion of your TSP account completely protected from loss. If you choose to invest in the G Fund, you are placing a higher priority on the stability and preservation of your money than on the opportunity to potentially achieve greater long-term growth in your account through investment in the other TSP funds

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The “F” Fund

Fund Objective

The F Fund’s investment objective is to match the performance of the Bloomberg Barclays U.S. Aggregate Bond Index, a broad index representing the U.S. bond market.

Investment Strategy

The F Fund assets are held in a separate account and managed to track the Bloomberg Barclays U.S. Aggregate Bond Index. This broad index includes U.S. Government, mortgage-backed, corporate, and foreign government (issued in the U.S.) sectors of the U.S. bond market. The earnings consist of interest income on the securities and gains (or losses) in the value of the securities.

The F Fund uses an indexing approach to investing. In other words, it is a passively managed fund that remains invested according to its investment strategy regardless of conditions in the bond market or the economy.

 

Risks

Because the F Fund returns move up and down with the returns in the bond market, your F Fund investment is subject to market risk. For example, when interest rates rise, bond prices (and thus, the returns of the index and the F Fund) fall. Conversely, in an environment of falling interest rates, bond prices, as well as the index and F Fund returns, rise.

As an F Fund investor, you are also exposed to credit (default) risk, or the possibility that principal and interest payments on the bonds that comprise the index will not be paid.

The F Fund is subject to inflation risk, meaning your F Fund investment may not grow enough to offset the reduction in purchasing power that results from inflation.

Your F Fund investment is also exposed to prepayment risk, which is the probability that if interest rates fall, bonds that are represented in the index will be paid back early thus forcing lenders to reinvest at lower rates.

 

Rewards

Although there are several types of risks associated with the F Fund, the overall risk is relatively low in comparison to certain other fixed income investments in the market because the F Fund includes only investment-grade securities. As a result, F Fund investors are rewarded with the opportunity to earn higher rates of return over the long term than they would from investments in short-term securities such as the G Fund.

 

How can I use the F Fund in my TSP account?

In periods of falling interest rates, the F Fund will experience gains from the resulting rise in bond prices. So in the long run, you may expect F Fund returns to exceed those of the G Fund; however, you should also expect greater price volatility (up and down movements).

It is also important to know that higher returns are not guaranteed. This is because losses may occur when interest rates are rising, causing bond prices to fall.

The F Fund can be useful in a portfolio that also contains stocks funds. This is because the prices of bonds and stocks don’t always move in the same direction or by the same amount at the same time. So a retirement portfolio that contains stock funds, like the C, S, and I Funds, along with the F Fund, will tend to be less volatile than one that contains stock funds alone.

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The “C” Fund

Fund Objective

The C Fund’s investment objective is to match the performance of the Standard and Poor’s 500 (S&P 500) Index, a broad market index made up of stocks of 500 large to medium-sized U.S. companies.

 

Investment Strategy

The C Fund assets are held in a separate account and managed to fully replicate the Standard and Poor’s 500 (S&P 500) Index. The earnings consist primarily of dividend income and gains (or losses) in the price of stocks.

The C Fund is a passively managed fund that remains invested according to its indexed investment strategy regardless of stock market movements or general economic conditions.

 

Risks

Your investment in the C Fund is subject to market risk because the prices of the stocks in the S&P 500 Index rise and fall.

By investing in the C Fund, you are also exposed to inflation risk, meaning your C Fund investment may not grow enough to offset inflation.

 

Rewards

While investment in the C Fund carries risk, it also offers the opportunity to experience gains from equity ownership of large and mid-sized U.S. company stocks.

 

How can I use the C Fund in my TSP account?

The C Fund can be useful in a portfolio that also contains stock funds that track other indexes such as the S Fund (which tracks an index of small U.S. company stocks) and the I Fund (which tracks an index of international stocks). The C, S, and I Funds track different segments of the overall stock market without overlapping. This is important because the prices of stocks in each market segment don’t always move in the same direction or by the same amount at the same time. By investing in all segments of the stock market (as opposed to just one), you reduce your exposure to market risk.

The C Fund can also be useful in a portfolio that contains bonds. Again, it is because the prices of stocks and bonds don’t always move in the same direction or by the same amount at the same time. So a retirement portfolio that contains a bond fund like the F Fund, along with other stock funds, like the S and I Funds, will tend to be less volatile than one that contains stock funds alone.

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The “S” Fund

Fund Objective

The S Fund’s investment objective is to match the performance of the Dow Jones U.S. Completion Total Stock Market Index, a broad market index made up of stocks of U.S. companies not included in the S&P 500 Index.

 

Investment Strategy

The S Fund invests in a stock index fund that tracks the Dow Jones U.S. Completion Total Stock Market Index. The earnings consist of dividend income and gains (or losses) in the price of stocks.

The S Fund uses an indexing approach to investing. In other words, it is a passively managed fund that remains invested according to its investment strategy regardless of conditions in the bond market or the economy.

 

Risks

Your investment in the S Fund is subject to market risk because the Dow Jones U.S. Completion Total Stock Market Index returns will move up and down in response to overall economic conditions.

By investing in the S Fund, you are also exposed to inflation risk, meaning your S Fund investment may not grow enough to offset the reduction in purchasing power that results from inflation.

 

Rewards

While investment in the S Fund carries risk, it also offers the opportunity to experience gains from equity ownership of small to mid-sized U.S. companies. It provides an excellent means of further diversifying your domestic equity holdings.

 

How can I use the S Fund in my TSP account?

The S Fund can be useful in a portfolio that also contains stock funds that track other indexes such as the C Fund (which tracks an index of large U.S. company stocks) and the I Fund (which tracks an index of international stocks). The C, S, and I Funds track different segments of the overall stock market without overlapping. This is important because the prices of stocks in each market segment don’t always move in the same direction or by the same amount at the same time. By investing in all segments of the stock market (as opposed to just one), you reduce your exposure to market risk.

The S Fund can also be useful in a portfolio that contains bonds. Again, it is because the prices of stocks and bonds don’t always move in the same direction or by the same amount at the same time. So a retirement portfolio that contains a bond fund like the F Fund, along with other stock funds, like the C and I Funds, will tend to be less volatile than one that contains stock funds alone.

 

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The “I” Fund

Fund Objective

The I Fund’s investment objective is to match the performance of the MSCI EAFE (Europe, Australasia, Far East) Index.

 

Investment Strategy

The I Fund invests in a stock index fund that fully replicates the MSCI EAFE (Europe, Australasia, Far East) Index. The earnings consist of gains (or losses) in the price of stocks, dividend income, and change in the relative value of currencies.

The I Fund uses an indexing approach to investing. In other words, it is a passively managed fund that remains invested according to its investment strategy regardless of stock market movements or general economic conditions.

 

Risks

Your investment in the I Fund is subject to market risk because the MSCI EAFE Index returns will move up and down in response to overall economic conditions.

Because of its exposure to currency risk, the EAFE Index (and the I Fund returns) will rise or fall as the value of the U.S. dollar decreases or increases relative to the value of the currencies of the countries represented in the EAFE index.

By investing in the I Fund, you are also exposed to inflation risk, meaning your I Fund investment may not grow enough to offset the reduction in purchasing power that results from inflation.

 

Rewards

While investment in the I Fund carries risk, it also offers the opportunity to experience gains from equity ownership of non-U.S. companies. Because it represents the stocks of companies in many developed countries (excluding the U.S.), it is an excellent way to diversify the stock portion of your TSP allocation.

 

How can I use the I Fund in my TSP account?

The I Fund can be useful in a portfolio that also contains stock funds that track other indexes such as the C Fund (which tracks an index of large U.S. company stocks) and the S Fund (which tracks an index of small U.S. company stocks). The C, S, and I Funds track different segments of the overall stock market without overlapping. This is important because the prices of stocks in each market segment don’t always move in the same direction or by the same amount at the same time. By investing in all segments of the stock market (as opposed to just one), you reduce your exposure to market risk.

The I Fund can also be useful in a portfolio that contains bonds. Again, it is because the prices of stocks and bonds don’t always move in the same direction or by the same amount at the same time. So a retirement portfolio that contains a bond fund like the F Fund, along with other stock funds, like the C and S Funds, will tend to be less volatile than one that contains stock funds alone.

 

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The “L” Fund

Fund Objective

The L Funds, or “Lifecycle” funds, use professionally determined investment mixes that are tailored to meet investment objectives based on various time horizons. The objective is to strike an optimal balance between the expected risk and return associated with each fund.

 

Investment Strategy

The L Funds’ strategy is to invest in an appropriate mix of the G, F, C, S, and I Funds for a particular time horizon, or target retirement date. The investment mix of each L Fund becomes more conservative as its target date approaches.

The strategy assumes that:

  • The greater the number of years you have until retirement, the more willing and able you are to tolerate risk (fluctuation) in your TSP account value to pursue higher rates of return.
  • For a given risk level and time horizon, there is an optimal mix of the G, F, C, S, and I Funds that provides the highest expected return.
 

Fund Composition

Each of the L Funds has a target asset allocation. In other words, each is made up of the combination of the five individual TSP funds (G, F, C, S, and I) that maintains an optimal balance of investment risks and rewards for a particular time horizon.

Each quarter, the L Funds’ target asset allocations change, moving towards a less risky mix of investments as the target date approaches. So if you are invested in one of the L Funds, you will notice that as you get closer to your target date, your allocation to the riskier TSP funds will get smaller while your allocation to the more conservative G Fund gets larger.

The rate of change in the target asset allocation is small when the L Fund target dates are in the distant future. The rate increases as the funds approach their target dates. For a visual representation of how the asset allocations change over time, click the individual L Fund tabs at the top of this page.

 

Fund Operation

When an L Fund has reached its target date, it will be rolled into the L Income Fund.

The L Income Fund:

  • Is the most conservative of the L Funds.
  • Focuses on capital preservation while providing a small exposure to the TSP’s riskier assets (C, S, and I Funds) in order to reduce inflation’s effect on your purchasing power.
  • Is designed to produce current income for participants who plan to start withdrawing from their TSP accounts in the near future and for those who are already receiving monthly payments from their accounts.
  • Has a set asset allocation that does not change over time.

The progression from a target date L Fund to the L Income Fund is automatic.

New Lifecycle funds will be added for distant target dates as they are needed.

 

Risks

When you invest in the L Funds:

  • You are subject to the investment risks associated with the G, F, C, S, and I funds.
  • Your account is not guaranteed against loss. The L Funds can have periods of gain and loss, just as the individual TSP funds do.
 

Rewards

The L Funds simplify fund selection. You choose the fund that is closest to your target date (or, if your target date falls between the target dates that are offered, you can split your account between the two target date funds closest to your time horizon).

When you invest in the L Funds:

  • You can be sure that your TSP account is broadly diversified.
  • You don’t have to remember to adjust your investment mix as your target date approaches – it’s done for you.
 

How Can I Use the L Funds in my TSP Account?

Use the L Funds if you are looking for a simple, low maintenance way of investing money in your TSP account. The L Funds make the investing process easy for you because you do not have to figure out how to diversify your account or how and when to rebalance.

The L Funds are designed so that 100% of your TSP account can be invested in the single L Fund that most closely matches your time horizon (or in the two L Funds closest to your time horizon). Any other use of the L Funds may result in a greater amount of risk in your portfolio than is necessary in order to achieve the same expected rate of return.

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Helpful Links:

● IRS: Explanation of TSP rules and regulations
● Congressional Research Service: Fed Ben | TSP 101

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