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Government bond funds
Government bond funds | Monkey Business Images/Shutterstock.com

Government bond funds

How they're valued: Government bond funds are mutual funds that invest in debt securities the U.S. government and its agencies issue. The funds invest in debt instruments such as T-bills, T-notes, T-bonds and mortgage-backed securities issued by government-sponsored enterprises such as Fannie Mae and Freddie Mac.

Risks: Funds that invest in government debt instruments are considered to be among the safest investments because the securities are backed by the faith and credit of the U.S. government. However, like other mutual funds, the fund itself is not government-backed and is subject to risks -- namely interest rate fluctuations and inflation. If interest rates rise, bond prices decline, and if interest rates decline, bond prices rise. Interest-rate risk is greater for long-term bonds. Further, if the inflation rate rises, purchasing power can be diminished.

Liquidity: Bond fund shares are highly liquid, but their values fluctuate depending on the interest-rate environment.

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