Ask the Expert: Are bonds and gilts the right investment for me?
“I’ve been reading about bonds and gilts but am confused about what they are and how safe they would be.”
I’d like to invest in something reasonably safe, but not just a savings account. I’ve been reading about bonds and gilts but am confused about what they are and how safe they would be. Can you help?
Response from Carl Lamb of Almary Green
Gilts and bonds are, in essence, loans that you make to governments or companies in return for a regular income over the period of the loan and full repayment at a given point in time.
Gilts are issued by the UK government at a fixed rate of interest. As they are government-backed, your money is secure but the returns may not be high: some are linked to inflation (RPI).
You can buy government bonds from other countries, but it’s important to think about the strength of the economies in question – so whether or not you can be confident that the bond will be repaid.
Corporate bonds are issued by companies who want to raise capital for their business. They do have a certain degree of risk – some have been as volatile as equities in recent years – as the bond might not be repaid if the business went into liquidation, but they have the potential for higher returns.
Unlike shares, with bonds you’re not dependent on the performance of the company (provided it remains solvent) but are simply loaning the money at an agreed rate of return.
What complicates the situation somewhat is the fact that gilts and bonds are bought and sold during the life of the contract in a secondary market. It means that you could perhaps pay less than the bond amount to buy it, so standing to make a profit when the term ends. Or indeed you could pay more than the nominal value, in the hope of selling again at an even higher value.
Bonds and gilts also feature as components in collective investments where a mix of investments is combined into a fund and this is normally the only suitable route for individual investors unless there are very large sums to invest.
This is a fairly complex area so I do think that you would benefit from independent advice, at least at the stage of making initial investments. The old saying of not putting all your eggs in one basket still rings true: it’s normally important to have a diversified portfolio of investments to balance risk and return.