Inflation Protected Securities
Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
Inflation protected securities allow investors to get inflation protection and invest in inflation-indexed securities. It is a kind of fixed income investment that insures a real rate of return. The real rate of return defends investors from inflation.
Inflation protected securities allow investors to get inflation protection and invest in inflation-indexed securities. It is a kind of fixed income investment that insures a real rate of return. The real rate of return defends investors from inflation.
The primary objective of the inflation protected securities is to provide current income. The inflation protected securities fund primarily invests in inflation adjusted debt securities. The investors do not normally stress on real rate of return on their investments. They normally stress on nominal rate of return. Investors normally seek asset classes that are uncorrelated. This is because of it’s risk adjusted properties, the inflation protected securities are growing rapidly in the world’s major markets .
Difference: Normal bonds and inflation protected securities
On the basis of the fluctuation of inflation rate, the real rate of return will change in normal bonds, but it does not change in case of inflation protected bonds. At the time of purchasing a normal bond, the investors only come to understand about the nominal return at maturity, not the real rate of return. This is because of the fact that the investors will not be able to know, what rate of inflation will prevail during the life of the bonds.
The other difference is that unlike normal bonds, the interest payments structure of inflation protected securities is divided into two parts. On maturity the final amount accrued is the sum of the inflation adjusted amount and the principal. In the second part, the regular coupon is paid, which is evaluated on the basis of real rate of return. In case of inflation protected securities, both the interest and principal are protected against inflation.
To know more about inflation targeting, one can browse through the following links:
- DFA Inflation Protected Securities
- Fidelity Inflation Protected Bond Fund
- Dreyfus Inflation Adjusted Securities Fund
