Ginnie Mae's hot cakes*

* That little mark there is an asterisk. In case you haven't been paying attention to the investment advertisements, it's how you begin to find out what you'll really get out of an investment, compared with what the headlines say.

The asterisk leads to another, smaller asterisk where the nearly microscopic type will talk about how the high yield in the huge type may not be what you'll end up with. The most important words come at the end of the tiny type: ``Because both yield and price fluctuate, your return will vary from this yield.''

In the last year or so, the printers have been making heavy use of the asterisk on ads for mutual funds of mortgage-backed certificates issued by the Government National Mortgage Association, or Ginnie Mae. These have been one of the hottest mutual fund products in a very hot year for all funds. In the first 10 months of the year, more than $9.8 billion of Ginnie Mae funds were sold, compared with about $2.8 billion in the same period last year.

The reason for the big sales is yields. Mutual fund investors, spoiled by double-digit returns of money market funds a few years ago, and even bank certificates of deposit until early last year, get wide-eyed at ads touting monthly income from 11.25, 11.5, or even 11.85 percent yields (sometimes also called ``current returns'').

So how can Ginnie Mae funds keep paying nearly 12 percent when the best-yielding of the actual Ginnie Mae certificates are only paying a little better than 10 percent?

They can't. And if interest rates stay down or fall some more, the difference between what those ads say and what investors actually get will look even worse. The big numbers in the ads can be based on the yield for any seven-day period in the last month, not just the most recent week. The yield is then annualized; that is, the dividends paid during that week are multiplied by 52 and divided by the net asset value per share. So over the course of a year, your yield will be very different, and a lot lowe r if interest rates stay down or drop even further.

``And the rates are dropping like a stone,'' says Thomas Foley, a financial planner in Minneapolis. ``If you live by the sword, you die by the sword,'' he says, meaning funds that reap big sales with high yields are going to be the first ones to get hurt, and hurt their investors.

``We've had a lot of problems with the Ginnie Mae funds,'' says Gary Peters, senior vice-president and director of mortgage-backed securities at Butcher & Singer, a brokerage. ``The actual yield will be less than a customer could get by buying the Ginnie Mae itself.''

But buying a Ginnie Mae yourself can cost from $10,000 for one on the secondary market to $25,000 for a new one. So investors looking for convenience, high yield, and safety have turned to the Ginnie Mae funds, where they can get in for $1,000.

And, the ads say, they can also get a United States government guarantee. But this is just a guarantee of the underlying certificates, which means that if the mortgage holders don't pay on time or default, the government guarantees investors the continued mortgage payments. The government does not guarantee the yield, and it does not guarantee the price of the certificates on the open market.

To achieve and maintain higher yields, a fund will go to the secondary market and buy previously issued certificates paying a higher rate. The fund might buy some at 11, 12, even 15 percent. But to get those higher-yielding certificates, the fund managers have to pay more than ``par.'' That is, instead of paying $100,000 for the same amount of Ginnie Maes at 13 percent, for example, the fund might have to pay $116,000. But the certificates are still being repaid as if they were at par.

How does this affect the investor? First, homeowners with high-interest mortgages tend to pay them off faster, mostly through refinancing. So if the high yield on your Ginnie Maes is based on those mortgages, the air in your inflated yield is going to start leaking, fast.

Second, as the more expensive mortgages are repaid early, your monthly payments will contain bigger and bigger shares of principal, as well as interest. And as the principal gets paid down, that leaves less money to earn interest, so your monthly payments go down, too.

And third, because the fund paid more than par for the certificates, the value of your portfolio isn't as great, so the value of your fund shares -- or net asset value -- is going to be reduced, too.

While Mr. Peters, as a wholesale broker of Ginnie Mae certificates to other brokers, has a greater interest in seeing people buy straight Ginnie Maes instead of funds, he has no problem with people using funds if they don't have $10,000 to $25,000 to invest or if diversification breaks up their investment money into smaller pieces.

First, he recommends looking for a no-load fund. If 4 to 7 percent is lopped off the top of your investment for a sales commission, your money will earn even less.

Watch, too, for funds using the ``12b-1'' system. This one, named for a Securities and Exchange Commission rule, permits funds to use a small percentage of assets for an annual fee to cover distribution and marketing costs. Some so-called no-load funds will use the 12b-1 to pay a broker's commission. It may not be called a load, but it's still a load, and it cuts your return.

Then, Peters says, look for a fund that is promoting an ``honest'' yield. At present that should be about 10.2 to 10.5 percent. Some of the no-load funds with more realistic yields, he notes, are offered by Dreyfus, Fidelity, and Vanguard.

Ginnie Mae funds do offer a good yield and security on the underlying investments. Although a fund cannot prevent prepayments and changing yields, a diversified porfolio and professional management can shield investors from some of their effects. So if investors skip the hype, pay attention to the asterisks, and read the prospectus, they will find Ginnie Mae funds a good, if inconsistent, source of income.

If you have a question that would make a good subject for this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given. References to investments are not an endorsement or recommendation by this newspaper.