Inflation is probably the greatest enemy of a bond investor. Again it is true for a person with fixed income too. It is capable of putting your entire budget plan down. So, question may arise in your mind ? is there any investment option which can fight against it? Where to put the hard-earned money so that it yields at least some relief at the devastating period of inflation?
Well, there is a very good way, which can help you in this situation, some TIPS. Don?t get confused. It stands for Treasury Inflation-Protected Securities and TIPS is really a great offer from the Federal Government, which is a sure shot way to beat inflation with no risk of money. If you could know the best way to use TIPS, then surely you will gain the power to fight against inflation.
How does TIPS work?
In order to know how TIPS works, you have to know the function of a normal bond. While buying a normal bond, you have to purchase it for a price ($1000, in general), right? And after the maturity period, you get back the principal amount. But, TIPS work differently. Unlike the normal bonds, the principal value of TIPS rises with the consumer price index. So, if there is a rise in consumer price index, then your principal value will also go high. But the greatest advantage here is, if the CPI falls, the principal value remains the same.
Moreover, the coupon interest payment is also not the same for TIPS. Here, instead of a constant amount of interest, you get a certain percentage of the principal value. Therefore, a rise in CPI will also increase the interest rate.
How to purchase them?
It is always a good decision to invest in individual TIPS only. You can either approach a broker for this purpose or purchase directly from the treasury through internet. The broker will either get you some newly issued TIPS at one of the quarterly auctions or some previously issued TIPS on the secondary market. You can collect the latest information about this from the Treasury website.
Are they really good for you?
To know whether TIPS is a good option for you or not, you can check the historical records. From the time it came into being i.e. from the year 1997, it is being seen that TIPS works as very good investment option during the time of inflation, but works a slight differently when deflation occurs.
TIPS versus Corporate Bonds- Which one should you prefer?
Before you make any final decision about the bonds, you must find out the type of bond that would serve you better. Whether it is the TIPS or the corporate bonds, it totally depends upon your priority to go for any one of them. If you are more concerned about the interest rates, then the corporate bonds would be a better investment option for you. But if you are more tempted towards the safety of the bonds, then TIPS would definitely be the better option for you.
Angel Clark is a passionate writer who writes mainly on investment and personal finance related topics aiming to help others. His contents help people to decide which investment is the best and which is not.
Clark personally believes that Gold is the ultimate source for almost every investment. http://www.geopulseinc.com/contact.php
from ezine articlesSource: http://goldsilver-etf.com/tips-treasury-inflation-protected-securities-for-a-safer-bond-investment/
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