We bought TIPS directly. Life's a tradeoff; here are the tradeoffs I see:
1) Often people buy MFs (including ETFs, which are mutual funds BTW) for diversification. This is unnecessary for govvies, agencies, and TIPS because there is essentially no risk of default.
2) Often people buy MFs in order to hold bonds of various maturities. IMO this is much less of an issue with TIPS because yield curves are pretty flat. TIPS yield curves do not have to factor in a consensus inflation risk like traditional govvies and agencies do.
3) Often people buy MFs because they perceive that this is simpler than buying individual bonds. This is really not true. A call to the Bond Desk at Schwab or Fido should slay this perceived monster.
4) Expense ratios have come down on TIPS MFs but they still are not zero.
5) MFs have the advantage of easy reinvestment. As a practical matter it would take a pretty big holding of individual TIPS before the semiannual interest payments would be big enough to reinvest.
So, what did we do?
In the winter of 2006/2007 we bought a slug of the 2s of 2026 into our IRAs. This was the lowest coupon (minimum reinvestment risk) and the longest (minimum hassle) issue we could get at the time. From the beginning this was a buy and hold plan. We view it as we view fire insurance. We gave up a little yield in exchange for the inflation protection. That was/is the insurance premium. Paying a fire insurance premium does not make us wish our house burns down, nor does paying an inflation protection premium make us wish for high inflation.
One issue I see with TIPS: I think it is a go-big-or-go-home kind of investment. A few percent in a portfolio is not likely to make a difference if the SHTF. In our case, we put enough into TIPS to provide at least 5 years of needed cash flow during a major inflation event and recovery. Remember, too, inflation is a loss forever, quite unlike dips in the stock market that are always (last 100+ years anyway) followed by recoveries.