TIPS

Posted by | February 20, 2008 | Current Affairs | No Comments

I wouldn’t lie to you, I am still under the ‘blue’, and not recovered from my extensive travel, so another reason for me to pick up the ‘entrepreneur’ and read through before a meeting.

As readers of my blog, you can see the number of articles I write on the U.S. economy. I have always wondered about the ways that people would adopt to safeguard their earnings, savings (if any) and protect themselves for a unpredictable future, the answer I found in the ‘entrepreneur’ magazine titled ‘Turning Point’ ;featured was the story of John Gaines who is feeling the heat of the inflation and decided to take a step to safeguard his and his wife’s future. Well what did he do? He invested in TIPS or Treasury Inflationary Protected Securities. As far as my knowledge goes I think it was introduced in early ’97. They are quite secure like nominal bonds but yet differ from them greatly. TIPS are quite attractive in case of Inflation and nominal bonds are not.

According to the article, TIPS follows the rate of inflation as followed by the CPI (or Consumer Price Index) for all urban consumers and is adjusted daily. The coupons is constantly fed from the inflated principal and is paid on maturity. Many agree that TIPS is the saving grace of the lot in ‘fixed Income category’. Well that TIPS is the great option for these categories in these time for the U.S economy is because the Government guarantees the original investment regardless of how the inflation rate travels, even in case of the deflationary market. Well what more the U.S treasury Dept. sells TIPS directly to investors in the category of five year, 10 year and 20 year maturity.

The other side of the story being that TIPS is highly taxable (Where else will the Govt. make money) in addition to the annual addition to inflationary adjustments. Well there is a way out of this too, just buy the TIPS through Mutual Funds. So here is one good TIP!

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