Q: You and others have recommended TIPS as a bet against inflation and as part of a defensive portfolio strategy over the years, and as such I have allocated a part of my IRA to inflation linked bond funds. My American Funds Inflation Linked Bond Fund (BFIGX) is down 2.16 percent YTD, according to their website. Isn't this the type of fund that is supposed to perform well in the current rising inflation and interest rate environment? What am I missing?

Brad M, Mendota Heights

A: Treasury Inflation Protected Securities (TIPS) are designed to protect the value of an investment dollar from inflation. The first auction of 10-year TIPS was in 1997 and, with fits and starts since then, the TIPS market has settled into three maturities — 5, 10 and 30 years. (When writing my response BFIGX was down 1.13 percent year-to-date.)

TIPS are a complicated security. Key is the difference between owning individual TIPS and owning through funds. Individual TIPS are a much better hedge against inflation. TIP mutual funds and exchange traded funds are more convenient to own.

Buying individual TIPS and holding until maturity is the best inflation hedging strategy. For tax reasons TIPS are best held in a tax-sheltered account (like an IRA or 401(k)) but, for a variety of legal and regulatory reasons, you can't purchase TIPS directly from the government for your retirement savings account. You must go through a financial institution.

Many investors don't want to own and manage a portfolio of individual TIPS. Instead, they turn to mutual funds and exchange traded funds in their tax-sheltered accounts. Problem is, like all bond funds, the net asset value of the TIP fund fluctuates with changes in the interest rate environment. The funds can be volatile for reasons other than inflation rates and inflation expectations. Compared to individual TIPS there is less of a match against inflation since the fund doesn't mature. TIP funds can be a disappointing investment but, with a lag the funds do offer insurance against inflation. The best way to think of TIP funds is less as an investment and more as an insurance policy. And inflation still remains relatively tame.

Your question gives me the opportunity to plug my favorite inflation-hedge for the average saver: I-bonds. This savings bond can be purchased online from the government. The annual limit is $10,000. No commission is charged. The I-bond compounds tax sheltered until redeemed when you'll pay taxes on the gain. There's no credit risk.

Chris Farrell is senior economics contributor, "Marketplace," commentator, Minnesota Public Radio.