Whether you're brand new to the mutual fund investing arena or experienced at making money via funds, there's generally a good time and place for conservative bond investments.
In January 1997, the U.S. Department of the Treasury brought to market a new kind of debt instrument--the U.S. Treasury Inflation-Indexed Securities.
"These are the kinds of securities that will do well in an inflationary period, and if anything, we've seen inflation pressures abate," says David Schroeder, who has managed the fund since its inception in February 1997.
These fixed-income instruments are issued with maturity dates of either five or 10 years. In addition, unlike other bonds, their principal will adjust for inflation through the years. (The rate of inflation is determined by the Consumer Price Index.)
Even in deflationary periods, when the principal value of these bonds could decline, the least amount bondholders will get back when their bonds mature is the par amount stated on the date the bond was first issued.
Add to those pluses the fact that these bonds pay interest twice a year, and that timely payment of both principal and interest is backed by the full faith and credit of the U.S. government, and it's easy to see why they appeal to conservative, savings-oriented investors.
As for their drawbacks? Critics cite the fact that inflation-adjusted bonds are complex, may be difficult to understand and could be hard to sell if not held until maturity.
While these bonds have not been wildly popular with the investing public thus far--experts speculate one reason is that inflation has remained low for the past several years--at least one fund family has created a fixed-income fund made up of U.S. Treasury Inflation-Indexed Securities: American Century's Benham Inflation-Adjusted Treasury Fund.
The objective of this fund is to provide a real investment return and inflation protection. Portfolio managers plan on meeting that objective by investing at least 65 percent of the fund's total assets in U.S. Treasury inflation-indexed securities. The fund also invests in other U.S. securities that are not indexed to inflation.
Inflation is the number-one indicator of future buying power; any time it's moving ahead, investors are losing money.
Consider this example: If you had $100, and the inflation rate was 2 percent, in five years your $100 would have the buying power of $90.57. If the inflation rate remained at that level for 20 years, the buying power of your $100 would be $67.30. Looking at a 3.5 percent annual rate of inflation, the buying power of $100 over 20 years is cut in half--to $50.26.
Historically, inflation rates have bounced all over the board. Between 1926 and 1996, they've been as high as 18.2 percent and as low as -10.3 percent.
"I would call this more of a portfolio shock-absorber than a core holding," says Schroeder. "I would use them like cash or [zero-coupon bonds] and have only a small portion of my portfolio invested in them as a hedge against inflation."
Dian Vujovich is a nationally syndicated mutual fund columnist and author of Straight Talk About Mutual Funds (McGraw-Hill); Straight Talk About Investing for Your Retirement (McGraw-Hill); and 10-Minute Guide to Stocks (Macmillan).
At A Glance
Fund name: Benham Inflation-Adjusted Treasury Fund
Managed by: American Century
Total assets: $3.9 million
Year-to-date return: 1.54%*
Management fee: 0.5%
Minimum initial investment: $2,500
Phone: (800) 345-2021
Figures are as of September 26, 1997, except where noted.
- As of October 27, 1997
American Century, http://www.americancentury.com.