We need a ceremony.

Perhaps a small parade of happy Treasury note owners followed by a frustrated mass of fixed income mutual fund shareholders hurling Molotov cocktails.

The occasion is the 100th 5-year test period. In each period I have compared the simple purchase of a 5-year Treasury note to ownership of 20 major government securities funds. In the 100th period--- the one that began in April 1996 and ended in March 2001--- direct ownership of a 5-year Treasury note did better than the government fund.

This is not a surprise.

It's getting a little predictable. Last month the 5-year T-Note had done better 85 of 99 periods. Now it has done better 86 of 100 periods. In beating an index of 20 funds, the 5-year T-Note also did better than 14 of the 20 funds.

This not a surprise, either. Usually, it places in the top five.

This is important information. The only place you will read about it is here. Don't expect it from your helpful mutual fund company.

This information is particularly important for people who are retired and taking income from their investments. It is less important if you are reinvesting all income.

Why the distinction?

Simple. One of the troublesome things about fixed income investing is the reinvestment of interest income. It comes in small, inconvenient amounts that tend to reduce your rate of compounding. The best way to eliminate this annoyance is to buy fixed income mutual funds. Then you have all income automatically reinvested in new shares.

People who are spending their interest income, however, don't have a reinvestment problem.

That's what my research project was set up to test.

Each month I buy a-5 year Treasury note and total the income received between issue and maturity. I do the same for each of 20 government securities funds. I buy (on paper) $10,000 of each fund, take the income, and record the principal remaining at the end of 5 years. Then I adjust the amount of income received upward or downward to bring the principal back to $10,000.

In most periods the government funds lose principal. Some of it is lost to front-end sales commissions. Some of it is lost because the fund declines. Either way, the investor is losing money against the simple alternative of a 5-year T-Note.

In the period ending March 31, you would have bought a T-Note for $10,000 in April 1996 and earned 6.30 percent a year, a total of $3,150.

The worst performing fund in the group for this month was AXP Federal Income A shares. With a 4.75 percent front-end load, the amount invested is reduced to $9,525 and that, in turn, declines to $9,378 over the five-year period. During that time the fund distributed $2,788 in interest income. This might have appeared to be a 5.58 percent yield on the original $10,000 investment.

But we don't have our original $10,000 investment. We only have $9,378.

We've actually lost $622 of principal over the period. If we adjust our return downward, our actual net return shrinks to a measly 4.33 percent. (If you want to get technical, it's actually lower because the interest income was taxable. We'd have to set aside more of our income earnings to deliver the $622 of after-tax income need to restore our original principal. I've left out that complication to keep things simple.)

While this is bad news for government securities funds as a group, there is also some good news for a few funds on the list. The top-performing fund is Vanguard GNMA. Over this period your original investment grew to $10,192 while the fund distributed $3,425 of interest income for a total gain of $3,617 and an equivalent return of 7.23 percent. Basically, Vanguard GNMA zapped the 5-year T-Note.

Recently, the fund reported a 30-day SEC yield of 7.15 percent.

It turns out that Vanguard GNMA (Minimum investment $3,500, tel: 800-662-7447) has been in the number one position most of the time. Skeptics can check this out for themselves by flipping through the archive of monthly reports on my website.

Regularly mentioned in this column as the research was updated, you should know that this is not a secret. With $13.6 billion in assets under management, Vanguard GNMA is the second largest fixed income fund in a universe of 2,200 taxable fixed income funds. Only 106 fixed income funds have assets of $1 billion or more.

Success has been rewarded.

Two other funds can get in the ring: Fidelity Government Income (Minimum investment $2,500, tel: 800-544-8888) and American Century GNMA (Minimum investment $2,500, tel: 800-345-2021). Fidelity Government Income has taken the number one position a few times; both funds have regularly placed second or third.

Tuesday: More About Fixed Income Investing