Adjustable Rate Mortgage Funds
Adjustable rate mortgage (ARM) funds are mutual funds that invest in adjustable rate mortgage securities endorsed by the federal government or its agencies.
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Warning
Adjustable rate mortgage funds invest in securities guaranteed by the federal government or its agencies. However, it's important to note that only the underlying securities are guaranteed; the fund shares themselves are not what's guaranteed. This distinction is important for purposes of accurately assessing the safety of investing in adjustable rate mortgage funds. Therefore, while the shares themselves are not guaranteed, you can at least have the comfort of knowing that the securities the fund invests in are.
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The cost of the securities making up these funds is based on the adjustable interest rates for mortgages that they invested in. These types of funds are not very high risk and do not offer very high returns. However, you may want to consider investing in these funds if you're looking for an investment on the lower-risk side and overall interest rates are low. This is because adjustable rate mortgage funds usually pay out higher yields than other low-risk investment vehicles, such as money market funds, when current interest rates are low.
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Tip
Another type of mortgage-backed bond is a real estate mortgage investment conduit (REMIC). REMICs are similar to other mortgage securities, but the difference is that mortgage payments applied to the property make up the collateral for the bonds issued. Also, depending on the type of interest you own in a REMIC, different tax treatment of income may result.
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