Consumer Affairs Office
Investing

Investment Basics | TSP | FAQ | Links | Investment Basics

• What are you saving for? (retirement, college, home, etc)
• What level of risk are you willing to take? (higher yield usually equals higher risk)
• The earlier you begin to invest a portion of your income, the earlier you will reach your investment goals. Below is a chart showing how $100 grows over a period of 25 years at different risk levels.

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Thrift Savings Plan (TSP)
The TSP is a retirement savings plan for civilians who are employed by the United States Government and members of the uniformed services. The TSP offers Military Members the same type of savings and tax benefits that many private corporations offer their employees under "401(k)" plans. Effective in January 2006, military members can contribute any whole percentage of their base pay, as long as the annual total of taxed deferred investment doesn’t exceed $15,000.00 for 2006. Soldiers also have the ability to invest all or part of their bonuses, special pay or incentive pay, as long as the member contributes from basic pay. Those serving in a tax-free combat zone are allowed up to $44,000.00 in annual contributions.
Find more information on TSP at www.tsp.gov.

Mutual Funds

INVEST WISELY:
AN INTRODUCTION TO MUTUAL FUNDS
Over the past decade, American investors increasingly have turned to mutual funds to save for retirement and other financial goals. Mutual funds can offer the advantages of diversification and professional management. But, as with other investment choices, investing in mutual funds involves risk. And fees and taxes will diminish a fund's returns. It pays to understand both the upsides and the downsides of mutual fund investing and how to choose products that match your goals and tolerance for risk.
KEY POINTS TO REMEMBER
• Mutual funds are not guaranteed or insured by the FDIC or any other government agency — even if you buy through a bank and the fund carries the bank's name. You can lose money investing in mutual funds.

• Past performance is not a reliable indicator of future performance. So don't be dazzled by last year's high returns. But past performance can help you assess a fund's volatility over time.

• All mutual funds have costs that lower your investment returns. Shop around, and use the SEC's Mutual Fund Cost Calculator at www.sec.gov/investor/tools.shtml to compare many of the costs of owning different funds before you buy.

HOW MUTUAL FUNDS WORK
What They Are
A mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments. The combined holdings the mutual fund owns are known as its portfolio. Each share represents an investor's proportionate ownership of the fund's holdings and the income those holdings generate.
Some of the traditional, distinguishing characteristics of mutual funds include the following:

Advantages and Disadvantages
Every investment has advantages and disadvantages. But it's important to remember that features that matter to one investor may not be important to you. Whether any particular feature is an advantage for you will depend on your unique circumstances. For some investors, mutual funds provide an attractive investment choice because they generally offer the following features:
• Professional Management — Professional money managers research, select, and monitor the performance of the securities the fund purchases.

• Diversification — Diversification is an investing strategy that can be neatly summed up as "Don't put all your eggs in one basket." Spreading your investments across a wide range of companies and industry sectors can help lower your risk if a company or sector fails. Some investors find it easier to achieve diversification through ownership of mutual funds rather than through ownership of individual stocks or bonds.

• Affordability — Some mutual funds accommodate investors who don't have a lot of money to invest by setting relatively low dollar amounts for initial purchases, subsequent monthly purchases, or both.

• Liquidity — Mutual fund investors can readily redeem their shares at the current NAV — plus any fees and charges assessed on redemption — at any time.
But mutual funds also have features that some investors might view as disadvantages, such as:
• Costs Despite Negative Returns — Investors must pay sales charges, annual fees, and other expenses (which we'll discuss below) regardless of how the fund performs. And, depending on the timing of their investment, investors may also have to pay taxes on any capital gains distribution they receive — even if the fund went on to perform poorly after they bought shares.

• Lack of Control — Investors typically cannot ascertain the exact make-up of a fund's portfolio at any given time, nor can they directly influence which securities the fund manager buys and sells or the timing of those trades.

• Price Uncertainty — With an individual stock, you can obtain real-time (or close to real-time) pricing information with relative ease by checking financial websites or by calling your broker. You can also monitor how a stock's price changes from hour to hour — or even second to second. By contrast, with a mutual fund, the price at which you purchase or redeem shares will typically depend on the fund's NAV, which the fund might not calculate until many hours after you've placed your order. In general, mutual funds must calculate their NAV at least once every business day, typically after the major U.S. exchanges close.
Different Types of Funds
When it comes to investing in mutual funds, investors have literally thousands of choices. Before you invest in any given fund, decide whether the investment strategy and risks of the fund are a good fit for you. The first step to successful investing is figuring out your financial goals and risk tolerance — either on your own or with the help of a financial professional. Once you know what you're saving for, when you'll need the money, and how much risk you can tolerate, you can more easily narrow your choices.
Most mutual funds fall into one of three main categories — money market funds, bond funds (also called "fixed income" funds), and stock funds (also called "equity" funds). Each type has different features and different risks and rewards. Generally, the higher the potential return, the higher the risk of loss.
Fees and Expenses
As with any business, running a mutual fund involves costs — including shareholder transaction costs, investment advisory fees, and marketing and distribution expenses. Funds pass along these costs to investors by imposing fees and expenses. It is important that you understand these charges because they lower your returns.
Some funds impose "shareholder fees" directly on investors whenever they buy or sell shares. In addition, every fund has regular, recurring, fund-wide "operating expenses." Funds typically pay their operating expenses out of fund assets — which means that investors indirectly pay these costs.
SEC rules require funds to disclose both shareholder fees and operating expenses in a "fee table" near the front of a fund's prospectus. The lists below will help you decode the fee table and understand the various fees a fund may impose:
Shareholder Fees
• Sales Charge (Load) on Purchases — the amount you pay when you buy shares in a mutual fund. Also known as a "front-end load," this fee typically goes to the brokers that sell the fund's shares. Front-end loads reduce the amount of your investment. For example, let's say you have $1,000 and want to invest it in a mutual fund with a 5% front-end load. The $50 sales load you must pay comes off the top, and the remaining $950 will be invested in the fund. According to NASD rules, a front-end load cannot be higher than 8.5% of your investment.

• Purchase Fee — another type of fee that some funds charge their shareholders when they buy shares. Unlike a front-end sales load, a purchase fee is paid to the fund (not to a broker) and is typically imposed to defray some of the fund's costs associated with the purchase.

• Deferred Sales Charge (Load) — a fee you pay when you sell your shares. Also known as a "back-end load," this fee typically goes to the brokers that sell the fund's shares. The most common type of back-end sales load is the "contingent deferred sales load" (also known as a "CDSC" or "CDSL"). The amount of this type of load will depend on how long the investor holds his or her shares and typically decreases to zero if the investor holds his or her shares long enough.

• Redemption Fee — another type of fee that some funds charge their shareholders when they sell or redeem shares. Unlike a deferred sales load, a redemption fee is paid to the fund (not to a broker) and is typically used to defray fund costs associated with a shareholder's redemption.

• Exchange Fee — a fee that some funds impose on shareholders if they exchange (transfer) to another fund within the same fund group or "family of funds."

• Account fee — a fee that some funds separately impose on investors in connection with the maintenance of their accounts. For example, some funds impose an account maintenance fee on accounts whose value is less than a certain dollar amount.
Annual Fund Operating Expenses
• Management Fees — fees that are paid out of fund assets to the fund's investment adviser for investment portfolio management, any other management fees payable to the fund's investment adviser or its affiliates, and administrative fees payable to the investment adviser that are not included in the "Other Expenses" category (discussed below).

• Distribution [and/or Service] Fees ("12b-1" Fees) — fees paid by the fund out of fund assets to cover the costs of marketing and selling fund shares and sometimes to cover the costs of providing shareholder services. "Distribution fees" include fees to compensate brokers and others who sell fund shares and to pay for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature. "Shareholder Service Fees" are fees paid to persons to respond to investor inquiries and provide investors with information about their investments.

• Other Expenses — expenses not included under "Management Fees" or "Distribution or Service (12b-1) Fees," such as any shareholder service expenses that are not already included in the 12b-1 fees, custodial expenses, legal and accounting expenses, transfer agent expenses, and other administrative expenses.

• Total Annual Fund Operating Expenses ("Expense Ratio") — the line of the fee table that represents the total of all of a fund's annual fund operating expenses, expressed as a percentage of the fund's average net assets. Looking at the expense ratio can help you make comparisons among funds.
A Word About "No-Load" Funds
Some funds call themselves "no-load." As the name implies, this means that the fund does not charge any type of sales load. But, as discussed above, not every type of shareholder fee is a "sales load." A no-load fund may charge fees that are not sales loads, such as purchase fees, redemption fees, exchange fees, and account fees. No-load funds will also have operating expenses.
Be sure to review carefully the fee tables of any funds you're considering, including no-load funds. Even small differences in fees can translate into large differences in returns over time. For example, if you invested $10,000 in a fund that produced a 10% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years you would have roughly $49,725. But if the fund had expenses of only 0.5%, then you would end up with $60,858 — an 18% difference.
Tax Consequences
When you buy and hold an individual stock or bond, you must pay income tax each year on the dividends or interest you receive. But you won't have to pay any capital gains tax until you actually sell and unless you make a profit.
Mutual funds are different. When you buy and hold mutual fund shares, you will owe income tax on any ordinary dividends in the year you receive or reinvest them. And, in addition to owing taxes on any personal capital gains when you sell your shares, you may also have to pay taxes each year on the fund's capital gains. That's because the law requires mutual funds to distribute capital gains to shareholders if they sell securities for a profit that can't be offset by a loss.
Tax Exempt Funds
If you invest in a tax-exempt fund — such as a municipal bond fund — some or all of your dividends will be exempt from federal (and sometimes state and local) income tax. You will, however, owe taxes on any capital gains.
Bear in mind that if you receive a capital gains distribution, you will likely owe taxes — even if the fund has had a negative return from the point during the year when you purchased your shares. For this reason, you should call the fund to find out when it makes distributions so you won't pay more than your fair share of taxes. Some funds post that information on their websites.
SEC rules require mutual funds to disclose in their prospectuses after-tax returns. In calculating after-tax returns, mutual funds must use standardized formulas similar to the ones used to calculate before-tax average annual total returns. You'll find a fund's after-tax returns in the "Risk/Return Summary" section of the prospectus. When comparing funds, be sure to take taxes into account.

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US SAVINGS BONDS
I Bonds
I Bonds are a low-risk, liquid savings product. While you own them they earn interest and protect you from inflation. You may purchase I Bonds via TreasuryDirect, at most local financial institutions or through payroll deduction. As a TreasuryDirect account holder, you can purchase, manage, and redeem I Bonds directly from your Web browser.
Rates & Terms
• I Bonds earn a guaranteed real rate of return. They are an accrual-type security. Interest is added to the bond monthly and is paid when you cash the bond.
• I Bonds are sold at face value; i.e., you pay $50 for a $50 bond.
Redemption Information
• Minimum term of ownership: 1 year
• Interest-earning period: 30 years
• Early redemption penalties:
o Before 5 years, forfeit 3 most recent months'interest
o After 5 years, no penalty
EE Bonds
Series EE savings bonds are safe, low-risk savings products that pay interest based on current market rates for up to 30 years for bonds purchased May 1997 through April 30, 2005*. You may purchase EE Bonds via TreasuryDirect or at almost any financial institution or through your employer's payroll deduction plan, if available.
Rates & Terms
• EE/E Bonds you purchased between May 1997 and April 30, 2005, earn a variable market-based rate of return.
• Series EE Bonds issue dated May 2005 and after will earn a fixed rate of interest.
• They are an accrual-type security, which means interest is added to the bond monthly and paid when you cash in the bond.
• Paper bonds are sold at half the face value; i.e., you pay $25 for a $50 bond.
• Electronic bonds purchased via TreasuryDirect are sold at face value; i.e., you pay $25 for a $25 bond.
Redemption Information
• Minimum term of ownership: 1 year
• Interest-earning period: 30 years
• Early redemption penalties:
o Before 5 years, forfeit 3 most recent months' interest
o After 5 years, no penalty

What's the Difference Between
I Bonds and EE Bonds?

The chart below will help you understand, at a glance, the major differences between I Bonds and EE Bonds.
EE Bond I Bond
Features Issued at 50% of face value. (A $100 EE Bond costs $50.) Issued at face value. (A $100 I Bond costs $100.)
Offered in 8 denominations ($50, $75, $100, $200, $500, $1,000, $5,000, and $10,000). Offered in 8 denominations ($50, $75, $100, $200, $500, $1,000, $5,000, and $10,000).
$30,000 issue price annual purchase limit per person. $30,000 annual purchase limit per Social Security Number.
Interest Calculated as 90% of 6-month averages of 5-year Treasury Securities yields. Calculated as an earning of a fixed rate of return and a semiannual inflation rate based on CPI-U.
Rates announced every May 1 and November 1.

Please Note: Series EE bonds purchased May 2005 and after will earn a fixed rate of return. See our press release for more information. Rate Announcement: Same as EE.
Guaranteed to reach face value in 20 years. No guaranteed level of earnings.
Increases in value monthly and compound semiannually. Interest is paid when the bond is redeemed. Generally increases in value monthly and interest compounds semiannually (except in periods of deflation when the bond value could remain unchanged). Interest is paid when the bond is redeemed.
Earn interest for up to 30 years. Life span: Same as EE.
Cashing Can be cashed any time after 12 months. Same as EE.
A 3-month interest penalty applies to bonds redeemed during the first 5 years. Same as EE.
Financial institution reports interest earnings (difference between redemption value and purchase price) on IRS form 1099-INT. Savings bonds are exempt from state and local income taxes. Same as EE.
Eligible for tax benefits upon redemption when used for qualified education expenses. Same as EE.

Frequently Asked Questions
Q. Do I get to choose what fund my money is invested in with the TSP?
A. Yes. TSP has five different funds, and you decide which percent of your contribution you want to put in each fund. You can change the distribution at any time.
Q. What happens if I want to pull money out of my TSP before I reach 59½ years old?
A. You will pay a 10% penalty on the money that you withdraw, plus taxes that are owed on this money.
Q. What happens to my TSP fund if I get out of the military?
A. You can no longer contribute to the fund, but you have several options of how to handle the TSP. You can let the money sit in the TSP and earn interest until 59½. You can roll the money over to a 401k or an IRA.
Q. Can the CAO advise me on what time of fund to invest my money in?
A. The CAO must remain objective, and cannot advise you on which fund to invest your money. We can, however, point you towards many resources on which to base your decision.
Q. How do I set up an allotment for US Savings Bonds to come out of my paycheck?
A. The MYPAY website allows you to set up allotments for the purchase of Bonds.
Q. Should I mix insurance and investments?
A. No, be wary of life insurance products that are sold as or with savings or investment products.
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Links
Thrift Savings Plan (TSP)
www.tsp.gov
Morningstar
(Rates mutual funds and stocks based on many different characteristics)
www.morningstar.com
Treasury Direct
(Purchase government savings bonds)
http://www.savingsbonds.gov/
US Security and Exchange Commission (SEC)
www.sec.gov
National Association of Insurance Commissioners
(more information on mixing investments with insurance)
www.naic.org/cis

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