I was looking at information on Vanguard's website about the Vanguard Short-Term Treasury Fund (VFISX), particulary the historical growth of a $10,000 investment over the past 10 years. According to the chart, the value of the investment would have droppd about $200 at one point during the seventh year. My question is: If this fund "invests in debt issued directly by the government in the form of Treasury bills," why would an investment in it ever lose value at any point? If an intial investment is made, and if interest is paid at certain intervals, even if rates change, why would there ever be a subtraction in the value of the investment that has already been accumulated?(I think my question is just a bit different than the one that An321 posted just before me.)
A mutual fund is generally priced at the end of the trading day with a net asset value (NAV), that is the per-share value of the assets it holds. A short term treasury fund holds obligations of the US Treasury that are sensitive to interest rate changes. Generally, as the relevant interest rate goes up, the value of the obligation goes down, and vice versa. When the value of the investments held in a mutual fund goes down, the price of the fund goes down, and vice versa.
JMS,My question is: If this fund "invests in debt issued directly by the government in the form of Treasury bills," why would an investment in it ever lose value at any point? If an intial investment is made, and if interest is paid at certain intervals, even if rates change, why would there ever be a subtraction in the value of the investment that has already been accumulated?The simplest way to put it is this:A government or any "guarantee" generally only refers to the guarantee that at the specified dates, you will get a fixed amount of principal and/or interest payments.But few investments guarantee what the market value of these principal and interest claims will be worth.The generally small short term fluctuations in prices you see are just the collective market judgements of the changing value of these guaranteed cash flows.Even with the shortest term bonds that are gov guaranteed, inflation expectation, real return expectations, changes in liquidity requirements, and other movements may alter what market participants think the cash flows are worth.If you look at longer term "guaranteed" instruments like US long term bonds, these fluctuations can be absolutely huge.There are a few kinds of investments where there is a regulatory or insurance guarantee such as Money Market funds (who's investments do fluctuate, but as long as they remain within 0.5% of their $1.00 NAV, they are allowed to report no change in their NAV), or Stable Value Funds (used in retirement accounts, these funds have an insurance company that essentially smooths any price changes over time via a guarantee which essentially masks the underlying market change to investors), or non-brokered FDIC insured CDs (which may charge a penalty for early withdrawal which is partly intended to compensate for market value loss effects).But in general, anything that is traded in the market will fluctuate daily. That is true in fund or individual security form.Hope that helps.Ben
One would think that a bond, any bond that is kept to maturity would redeem at par and therefore theoretically could never lose money.The problem with mutual funds, including govt bond funds, that if there is a sharp movement in the value of an investment and a lot of investors decide to redeem , this causes the managers of the mutual fund to sell assets earlier than they might, locking in losses in order to cover the cash redemption requirements of the funds.
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