The TSP C Fund (“the Fund”) is one of the five individual funds available under the Thrift Savings Plan.
In this article, we will go over the following topics:
- Who is eligible to invest in the TSP C Fund?
- What is the Fund’s investment strategy?
- What kind of returns can I expect from investing in the Fund?
- What is the typical risk profile of an investor in the Fund?
- What are the main reasons to invest in the Fund?
- What should an investor be aware of before investing in the Fund?
Who is eligible to invest in the TSP C Fund?
As the TSP program falls under the Federal Employees Retirement System, most employees of the United States government are eligible to invest in the Fund. For a detailed breakdown on eligibility requirements, please refer to the official TSP site here: (https://www.tsp.gov/PlanParticipation/EligibilityAndContributions/index.html).
What is the Fund’s investment strategy?
The Fund is a passively-managed fund that tracks the performance of the S&P 500 Index, which consists of the 500 large-cap companies listed on the NYSE or NASDAQ (The ‘C’ refers to common stock). The Fund’s assets are held in a separate account and fully replicate the performance of the index.
What kind of returns can I expect from investing in the Fund?
The table below shows the historical performance of the Fund over various time periods. While past performance is not indicative of future performance, this should give you a broad idea of the range of returns you can expect to receive. Note that the figures below assume that dividends are reinvested back into the Fund.
What is the typical risk profile of an investor in the Fund?
That would depend on the percentage of assets an investor decides to allocate into the Fund. However, generally speaking, an investor who would allocate a significant percentage of assets into the Fund would likely be an investor who believes in the long-term viability of the US Equity markets in general and thus wants exposure to its large-cap stocks. Such an investor would not be concerned with ‘stock picking’ and as the index only tracks large-cap stocks which tend to be mature companies, investing in the Fund is likely for those seeking conservative growth in their returns over a medium to long-term time period.
What are the main reasons to invest in the Fund?
1. Portfolio diversification
For the average investor, the Fund is a great choice to add diversification via US Equity exposure into their investment portfolio without needing to spend much energy actively researching the market. Other parts of the portfolio can then be allocated toward even more conservative options, such as money market funds or the TSP G Fund. Yet other parts of the portfolio can also be further allocated to higher risk/return assets, such as actively managed mutual funds, hedge funds, or individual equities.
2. Historical Performance Statistically Likely to Outperform Actively-Managed Funds
Statistics have shown that historically speaking, the S&P 500 Index outperforms the majority of actively-managed mutual funds. According to the S&P Index Versus Active (“SPIVA”) scorecard, which measures the performance of actively-managed funds versus the index, as at year-end 2015, 66% of large-cap funds underperformed versus the S&P 500 over a 1-year period, 76% over a 3-year period, 84% over a 5-year period, and 82% over a 10-year period! This shows that the ability of fund managers to actively beat the market is not the norm, and that the majority of investors would have gained more returns from tracking the market rather than trying to beat it.
The investment guru himself, Warren Buffett, in his 2013 letter to Berkshire-Hathaway shareholders, stated the following:
“It’s vital, however, that we recognize the perimeter of our “circle of competence” and stay well inside of it. Even then, we will make some mistakes, both with stocks and businesses. But they will not be the disasters that occur, for example, when a long-rising market induces purchases that are based on anticipated price behavior and a desire to be where the action is. Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power…
The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal. That’s the “what” of investing for the non-professional…
My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit… My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund… I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”
3. Lower Costs Compared to Other Index Funds
In 2015, the average net expense for TSP Funds was 0.029%, which translates to $0.29 per every $1000 invested. The table contrasts the expense ratios of the 4 S&P 500 Index Funds mentioned here. (http://www.investopedia.com/articles/markets/101415/4-best-sp-500-index-funds.asp)
|Index Fund||Expense Ratio|
|Vanguard 500 Index Fund Shares||0.16% (Investor Shares) |
0.05% (Admiral Shares)
|Schwab S&P 500 Index Fund||0.09%|
|Fidelity Spartan 500 Index Investor Shares||0.09%|
|SPDR S&P 500 ETF||0.09%|
Source: Respective company websites
What should an investor be aware of before investing in the TSP C Fund?
The main thing that investors should be aware of is the lack of flexibility when it comes to TSP Funds in general. In terms of interfund transfers, the TSP only allows a maximum of 2 per month (unless transferring into the TSP G Fund) and in terms of withdrawing from the TSP itself, there are numerous restrictions such as:
- Not being able to return or repay money removed (if in-service).
- Income taxes on withdrawal.
- Additional 10% early penalty tax if hardship withdrawal, plus an additional restriction on making contributions to your account for 6 months.
- Only one partial withdrawal allowed after leaving the Federal service after which only full withdrawal options available.
For a detailed list of withdrawal conditions, please refer to: https://www.tsp.gov/PlanParticipation/LoansAndWithdrawals
Thank you for reading this article; we hope you now better understand the TSP C Fund and how it can fit in with your overall investment strategy. Please also check out our other articles on the other TSP Funds to see if they can meet your investing needs. View the TSP F fund page.