There are many options available for investors to try and ensure that their capital investments do not suffer from inflation. Inflation risk is something that many investors try to avoid since it might eat up on their investment’s rate of return over time. One of those options available for investors in putting their money on Inflation Protected Securities or IPS.

What Are They?

Inflation Protected Securities may be considered as a type of bond in terms of its structure. But there is also a distinct difference between them. Investing in a normal bond nets you a specific amount in terms of return upon its maturity, assuming that the bond issuer does not go into default. Its nominal return remains the same, regardless of the inflation rate. While the amount remains the same, its worth or value upon maturity may change when adjusted for inflation.

A typical bond gives investors a nominal return. An IPS, on the other hand guarantees investors a real rate of return. They come with risk-adjusted returns. With an IPS coupon, interest payments come in two parts rather than just one as in normal bonds. The payments are based on the real rate of return that are adjusted for inflation. The principal likewise are adjusted on the inflation rate when computing for the interest. In short, an IPS coupon has its principal as well as interest protected from inflation.

Advantages And Disadvantages Of IPS

One advantage of Inflation Protected Securities is that real returns are provided upon maturity rather than just the nominal returns. If there is an increasing rate of inflation, investors need not worry about receiving returns of lessened value or worth. But ti still depends on its performance depending on a number of factors.

One distinct disadvantage of Inflation Protected Securities is that it may not necessarily outperform normal bonds in the market. Most IPS being offered usually comes with a lower interest rate paid upon maturity as compared to normal bonds. The yield of a normal bond may also be higher than that of an IPS, if the rate of rise in inflation does not reach a certain average for the life of the bond.

Purchasing An IPS

Just like normal bonds, Inflation Protected Securities are being offered by governments of developed markets. They usually are capable to issue an IPS. But there can also be certain IPS issues from the private sector, usually from large and established companies. These type of securities can either be purchased individually through a mutual fund or in combination with other securities such as in ETF’s.