DFA Inflation Protected Securities
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DFA inflation protected securities provide insurance to investors against inflation. The principal target of DFA inflation protected securities is to provide current income. The DFA mainly invests in debt securities that are inflation adjusted.
Investment objective
The DFA inflation protected securities portfolio is determined to provide investors inflation protection and at the same time help them to gain current income that is ordered with preservation of capital. Normally the portfolio will invest major portion (about 80%) of its assets in inflation protected securities that are issued by the Government of United States and it’s agencies. In normal cases, the portfolio buy securities with maturities between 5 and 20 years and do not change the maturity of it’s investments predicting the probable interest rate variations. Normally, on the basis of market values, it applies an average weighted maturity.
Risks: DFA inflation protected securities
In case of inflation protected securities, the interest and principal amounts are adjusted periodically on the basis of the inflation fluctuation. In the event of sustained deflation, the DFA inflation protected securities may incur loss and eventually payment may be uncertain.
In the event of any short-term rise of inflation, the fund’s value tends to fall, as inflation protected securities are normally protected from long term inflationary trends. This is a major risk.
One other risk arises when the interest rate climbs up due to reasons other than inflation. In that case, fund’s investment in these securities would not be protected enough. This is because of the fact that the increase of interest is not for rise of inflation but for some other reasons. For this reason, the current market value of inflation protected securities are expected to vary with regard to the changes of real interest rates. The final value will be nominal interest rate minus expected inflation rate. Normally the value of the inflation protected securities declines in the event of rise in the real interest rate . In the same way, the value of the inflation protected securities will rise if real interest rates drop.
