Fund expert offers tip on TIPs

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"Like other US Treasuries, Treasury Inflation Protected Securities (TIPs) have virtually no credit risk," explains fund expert Mark Salzinger.

The editor of The No-Load Fund Investor adds, "Unlike other US Treasuries beyond short-term bills, however, TIPs also have no inflation risk." Here, he looks at an EYF based on TIPs.

"Twice a year, TIPs' principal valuis are adjusted upward by the amount of the increase in the Consumer Price Index Urban (CPI-U), thus protecting their holders against increases in inflation.

"The total return of the bond equals its yield plus the change in principal value based on inflation, changes in real interest rates (published interest rates minus inflation) and supply-demand in the market for TIPs.

"TIPs' yields are lower than those of regular Treasury sercurities of similar maturities. That's one of the disadvantages of TIPs.

"The other is that any increase in principal value due to the biannual inflation adjustment gets taxed every year as if it were received income.

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