Why Inflation-Adjusted Treasures Look Attractive?

varsha sarkar

July 14, 2023

11:39 am

Inflation-Adjusted Treasures

The rate at which the prices of goods and services are swelling and the purchasing power of money is eroding is referred to as Inflation. Inflation can have a significant impact on investment returns, particularly for fixed-income investments such as bonds.

Treasury Inflation-Protected Securities (TIPS), often called inflation-adjusted treasures, are a type of bond issued by the US government. These bonds have a principal value that is adjusted for inflation to safeguard investors from price increases. In this article, we will learn, what inflation-adjusted treasures are, why they are attractive, and how to invest in them.

Understanding Treasury Inflation-Protected Securities (TIPS)

Treasury Inflation-Protected Securities (TIPS) shield investors against a fall in the purchasing power of their investments by indexing to an inflationary gauge. As the bond’s principal value goes up in proportion to inflation, investors get a real return. TIPS investors earn a real interest rate since the interest payment is also indexed with inflation.

For Example, if the principal amount is 5,00,000 and the interest rate is 4% then the interest payment will be 20,000. But in case inflation rises from 2% then the principal amount would be 5,10,000 and the interest payment will be 20,400.

TIPS are available in various maturities, ranging from 5 years to 30 years and TIPS bonds are the bonds that are backed by the US government and  are regarded as low-risk investments.

Benefits of investing in Inflation-Adjusted Treasures

TIPS serves many benefits to its investors however; we have mentioned the top three benefits:

  • One of the main benefits of investing in inflation-adjusted treasures is that they protect against inflation. Inflation can have a significant impact on investment returns, particularly for fixed-income investments such as bonds. TIPS offer a real return, which means that investors can protect their purchasing power against inflation.
  • Another benefit of investing in TIPS is that they are backed by the US government, which means that they are considered to be one of the safest investments available. Investing in TIPS can provide investors with a low-risk way to protect their portfolio against inflation.
  • TIPS can be a useful diversification tool for investors. Investing in TIPS can provide a hedge against inflation that is not correlated with other asset classes, such as stocks or commodities.

Risks associated with investing in Inflation-Adjusted Treasures

Although TIPS offers protection against inflation, there are some inherent risks involved as well. Interest rate risk is one of the key concerns of investing in TIPS. The value of TIPS may diminish when interest rates increase, which might result in investors losing their money.

Liquidity risk is another concern of investing in TIPS. As TIPS are less liquid than conventional bonds, selling them during a market slump may be problematic. Because of this, it could be difficult for investors to sell their stakes quickly to earn income.

Factors to consider before investing in Inflation-Adjusted Treasures

Investors should think about their financial goals, risk tolerance, and time before making a TIPS investment. Investors seeking a low-risk approach to hedge their portfolio against inflation may find TIPS to be the ideal option to invest in. TIPS might not be a good choice for investors aiming for higher returns or who have a limited time for their investments.

Investors should also take into account the charges before investing in TIPS. Due to the US government’s backing, TIPS are regarded as one of the safest bets available.

Why Inflation-Adjusted Treasuries Finally Look Attractive?

The historical performance of TIPS has been mixed. In some periods, TIPS have outperformed traditional bonds, while in other periods, they have underperformed. However, over the long term, TIPS has provided a real return that has kept pace with inflation.

For example, over the last 20 years, the average annual return on TIPS has been 2.5%, while the average annual inflation rate has been 2.2%. This means that investors in TIPS have received a real return of 0.3% per year over the last 20 years.

Conclusion

Inflation-adjusted treasures can be an attractive investment option for investors looking to protect their portfolios against inflation. TIPS provide a real return that can keep pace with inflation, and they are backed by the US government, which means that they are considered to be one of the safest investments available. However, investors should carefully consider their investment objectives and risk tolerance before investing in TIPS.

varsha sarkar

July 14, 2023

11:39 am

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