There are various types of risk associated with the TSP funds. There is no risk of investment loss in the G Fund. However, investment losses can occur in the F, C, S, and I Funds. Because the L Funds are invested in the individual TSP funds, they are also subject to the risks to which those underlying funds are exposed. These risks include:
Credit risk - The risk that a borrower will default on a scheduled payment of principal and/or interest. This risk is present in the F Fund.
Currency risk - The risk that the value of a currency will rise or fall relative to the value of other currencies. Currency risk occurs with investments in the I Fund because of fluctuations in the value of the U.S. dollar in relation to the currencies of the 22 countries in the EAFE index.
Inflation risk - The risk that your investments will not grow enough to offset the effects of inflation. This risk is present in all five funds.
Market risk - The risk of a decline in the market value of the stocks or bonds. This risk is present in the F, C, S, and I Funds.
Prepayment risk - A risk associated with the mortgage-related securities in the F Fund. During periods of declining interest rates, homeowners may refinance their high-rate mortgages and prepay the principal. The F Fund must reinvest the cash from these prepayments in current bonds with lower interest rates, which lowers the return of the fund.