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  CDs and Investing Basics   Chapter 3: Investing in bonds
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TIPS (Treasury Inflation-Protected Securities)


Inflation-protected investments can help your fixed-income portfolio keep up with inflation.

Treasury Inflation Protected Securities, or TIPS, are one of the best-known inflation fighters. TIPS have been around since 1997. The Treasury uses the Consumer Price Index as a guide to adjust the principal for inflation on a semiannual basis. A fixed interest rate is paid semiannually on the adjusted principal. In that way, both interest payments and the principal are adjusted for inflation. At maturity, if deflation has decreased the value of the security, you're guaranteed to still receive the original principal.

Newly issued TIPS can be purchased without any fee in the months that they are auctioned directly from the government through its TreasuryDirect program. Purchases throughout the rest of the year can be made on the secondary market through investment professionals, banks and brokers. Those purchases will involve a fee or commission.


At a glance
Many experts advise individual investors to purchase TIPS through mutual funds rather than buying individual securities because you'll benefit from the wide array of TIPS held in the fund. Buying individual TIPS can be very expensive because the minimum purchase price is $1,000.

There's an important difference to remember when considering buying individual TIPS vs. buying a TIPS bond fund. You're always certain of getting your full principal if you hold an individual bond until maturity. Sell before maturity and you'll get the current price and risk losing principal.

On the other hand, there is no maturity date when you buy shares in a bond fund. While the individual bonds that make up the fund have maturity dates, the fund itself does not. You should plan to hold your shares for the long haul and sell them when it's most advantageous to you.

-- Posted: May 1, 2006
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