Investing in Treasury Inflation Protected Securities

Are you afraid of rising inflation rates? And want to ensure better returns over inflation from your investments at lowest risk? Then Treasury Inflation Protected Securities (TIPS) can be the best investing option for you.

Treasury inflation protected securities, also known as Treasury Inflation Index Securities and Real Return Bonds (RRB), are known as ‘safest of the safe’. There is minimum downside risk on investing. TIPS are long term fixed income investments protected from inflation rate fluctuations.

TIPS are treasury notes which offer guaranteed payments – interests in every six months and principal on security maturing. In every six months the value of TIPS is automatically recalculated with respect to the inflation rate (measured based on Consumer Price Index, CPI). That is when inflation rate is up, value of TIPS is also increased automatically. In other words, inflation protection is available on both capital and investment. But there is no fall in original investment value of tips, as government guarantees that payment.

Treasury inflation protected securities are either bought directly or through mutual funds. There are TIPS with different maturity periods – 5 years, 10 years and 20 years. When buying directly, minimum capital investment is $1,000 and investments can be multiplication of thousands. Purchasing TIPS through mutual funds offer more flexibility.

There are many advantages of investing in treasury inflation protected securities.

1. TIPS are very good long-term investments.




2. They are government guaranteed.




3. TIPS are excellent ways to diversity your portfolio and to reduce total portfolio risk.




4. They are good option to hedge increasing commodity and service prices and they minimize total portfolio volatility.




5. TIPS require less active investment management and thus favor both beginners and experienced investors.




6. They are useful when inflation rates are expected to move up and when economy slows down.

But there are also some drawbacks.

1. Treasury inflation protected securities offer less interest on capital compared to bonds and other fixed income securities.




2. They offer poor return when inflation rate stays stagnant and in deflation.




3. Earnings from TIPS are taxed unless they are used in non-taxable and non-deferred accounts.




4. Investors cannot actively control their investments, as they aren’t traded as easily as equities.




5. And also interest rates are adjusted according to CPI, a switch from CPI to Chain-weighted CPI can cause problems.