Like other funds, those that own TIPS can suffer losses, particularly if managers are forced to sell holdings at an inopportune time to meet significant redemptions. Last year inflation-protect bond mutual and exchange-traded funds took a hit, declining by nearly 8 percent, according to Morningstar. In 2011 and 2012, such funds gained nearly 11 percent and about 7 percent on average, respectively.
Despite negative sentiment surrounding TIPS, financial advisors say the bonds might make sense for investors who have specific upcoming needs, such as paying for college. "You buy a TIP that matures within your time frame and you get this free hedge against inflation, which at this point doesn't seem to be a major concern," said Christopher Krell, a certified financial planner and principal at Cassaday & Co.
Some advisors have significantly scaled back their clients' TIPS exposure because of the volatility in the sector over the past year.
(Read more: Ready to bail on bonds? Not so fast)
Richard Kagawa, a certified financial planner with Capital Resources & Insurance, bought TIPS for clients as a cash equivalent in early 2010, gaining exposure to the sector through an exchange-traded fund. He said he expected TIPS to "cushion" client portfolios in case the Troubled Asset Relief Program and other government stimulus programs fueled inflation.
Kagawa said his clients made money on their TIPS investments, but he has dialed back their exposure significantly or pulled them out of the sector entirely over the past year. "TIPS have been disappointing because they acted as if they were traditional Treasurys," he said.
—By Anna Robaton, Special to CNBC.com