How Investors Are Preparing For Inflation

According to Morningstar, over $17 billion has been pumped into funds that invest in Treasury Inflation Protected Securities (TIPS) this year. Last year, the same group of funds saw a total net inflow of just under $10 billion.

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Why the rush to TIPS? Fear of inflation.

Many investors and analysts believe inflation is on the horizon due to government spending.

The fear is that the increased spending will lead to higher inflation, and higher inflation will eat away at returns on other investments.

TIPS offer protection against inflation by providing an inflation-adjusted principal. The bonds pay a fixed rate coupon every 6 months, and as inflation (measured by CPI) changes so do the principal and interest payments. They are offered in 5, 10 and 20 year terms.

There are three ways to buy TIPS:

Straight from the government – You can purchase TIPS and other government securities from the U.S. Treasury. TIPS are available with a minimum investment of $100, visit TreasuryDirect for more information. This is the cheapest way to buy individual bonds.

Through a broker – If you must deal through an intermediary, you can also buy TIPS through a broker.

Through a mutual fund – This option is good for investors who want a diversified portfolio that includes TIPS. Diversification and management are possible perks, but the management part will come at a cost.

A note of caution with TIPS: Although the value of a TIPS bond held to maturity will never pay less than its original principal value, if you have bought the bonds and inflation does not rise as expected, the principal value can decrease.