Mutual funds holding Treasury Inflation-Protected Securities (TIPS) can bolster investment returns when inflation is rising. With TIPS, you’ll get a "real" yield, which means it is on top of the inflation rate. In addition to the real yield, the value of your bond goes up every six months, to match the inflation rate.
As the value of your TIPS increases, the real yield stays the same but the interest you receive goes up. Say you buy $10,000 worth of TIPS when TIPS have a real yield of 2 percent. At that rate, the annual interest payment is $200: 2 percent of $10,000.
Over the years, your TIPS may gradually increase in value to $12,000 because of inflation adjustments. Then the annual interest payment would be $240: 2 percent of $11,000. If inflation averages 4 percent over the life of the TIPS, investors would receive 6 percent: the 2 percent real yield plus the 4 percent inflation rate. That likely will be a better return than you’d earn from other bond funds.
Several TIPS funds are available, from Fidelity, Vanguard, and other fund families.
