Inflation Protected Bonds

Within the past few years, since the meltdown of 2008 to be exact, many people are leery of investing in the market. As a result they are looking for safe investment products to provide a ‘nest egg’ for the future yet they aren’t ready to risk great amounts of money in the process. One of the safest investment products would be U.S. Treasury Inflation-Protected Bonds (TIPS), even though they will not provide high yields quickly. Risk is minimized, ensuring your money will continue to grow even though you might get higher returns from other investment products. If you are looking to mitigate your risk while still realising gains, TIPS would be a good place to start.

Understanding Treasury Inflation Protected Bonds
The first thing that needs to be understood is that TIPS are indexed to inflation so that investors are protected against the negative effects. As far as investment products go they are considered to be extremely low-risk and are guaranteed by the U.S. government to provide a real rate of return. Based on the Consumer Price Index, the par value of these bonds rises with inflation but their interest rate remains fixed. Interest is paid every six months but investors don’t actually get to see that money until the bond matures. Even so, that profit is seen as capital gain and is therefore taxable by the IRS. The main benefit is that when the bond matures you are paid either the original principal or the adjusted principal based on which is greater. In cases of deflation, you would at least be guaranteed that you wouldn’t lose any of your investment because you would realise the original amount you paid.

How to Buy Inflation Protected Bonds
There are two ways to buy Inflation Protected Bonds, one of which is directly from the United States TreasuryDirect system and the other is within a mutual funds portfolio. Most experts believe that if you are looking for a ‘safe’ investment then you would probably want to buy TIPS from the TreasuryDirect system as those within a mutual fund portfolio are tied to other investment products within. If the other investment products lose, you will also lose. As mentioned above, even in times of deflation, you will at least get back your original investment because the government guarantees as much. TIPS are sold in $100 increments with maturity dates of 5, 10 and 30 years. Bear in mind that because they are tied to the Consumer Price Index and are valued according to inflation/deflation, the price can be greater than, less than or equal to the face value.

Important Facts to Consider
Be aware of the fact that 30 year TIPS are not available through Legacy Treasury Direct but are available through TreasuryDirect. Also, interest rates aren’t determined until the time of auction and remember they are sold in $100 increments with a minimum purchase of $100. They are issued electronically and you can hold them until they mature or you can sell them on the secondary market prior to maturity. There are two types of bidding, competitive and noncompetitive and a single investor can purchase up to $5,000,000 through noncompetitive bidding or in competitive bidding up to 35% of the original offering.

For a number of reasons investors may be looking for safe investment products, which is why they are considering Inflation Protected Bonds guaranteed by the federal government. Although they aren’t likely to be high yield investment products they do provide a safe return on your money at the very least equivalent to the original investment. If you are looking for a bit more risk with the hopes of higher returns then perhaps TIPS as part of a mutual fund portfolio might be a good option. In either case, they are guaranteed not to lose money.

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