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Thursday, April 17, 2008

Treasury Inflation Protected Securities (TIPS)

Treasury inflation protected securities or TIPS are treasury notes which offer fixed-income protected from inflations. They offer guaranteed payments which are automatically adjusted with the rise and fall in inflation rate estimated by Consumer Price Index or CPI. TIPS are also known as Treasury inflation index securities and Real Return Bond or RRB (in Canada).

TIPS are referred as safest of the safest. With TIPS, the face value of securities is recalculated in every six months and the interest amount is adjusted with the rise or fall in face value. Thus the security holder will get inflation-protection both in interest rate and capital. TIPS can be used as a measure of diversifying portfolio, reducing risks and minimizing portfolio volatility with time. They can be purchased directly as individual bonds or through mutual funds.

Treasury inflation protected securities are better for long-term income goals. They come handy when inflation rate is expected to increase. But they offer less interest in comparison to other fixed-income securities and bonds; also they offer poor returns when inflation is on downside or in deflation. Unlike equities, TIPS investing are not that much actively controlled.

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