Bonds

A bit of background

Bonds are simply loans to institutions that need to raise money. Think of them as IOUs. In return for lending your cash to these companies or governments for a fixed period of time, you receive regular interest payments. The issuer also promises to give you back your original amount at the end of the period.

UK government bonds are known as ‘gilts’, while bonds from companies are called corporate bonds. Both types are seen as being a safer bet than investing in the stock market. There is some element of risk, though – while it’s extremely unlikely that the UK government would ever default on its obligations, there is the chance that some companies might be unable to pay you back at a future date. To compensate for this risk, you’ll often receive a higher rate of interest.

You might also hear bonds referred to as ‘fixed interest’ or ‘fixed income’ investments, since investors collect interest payments at a set rate for a set period of time. Somewhat confusingly, they’re in no way related to ‘investment bonds’, which are separate products sold by life insurance companies.

The benefits of bonds

Although they're viewed as more of a ‘safe haven’ option, like anything else, bonds are not a risk-free investment. However, including bonds in your portfolio can be an effective way of spreading your investments. They provide you with a steady, defined income stream, and put you ahead of equity investors in the event that a company is forced into liquidation. Since they tend to have an inverse relationship with the performance of equities, holding bonds also offers you a certain level of protection against stock market slumps.

Investing in bond funds

Although the basic concepts of bonds are fairly straightforward, the ins and outs of this asset class can be quite complex. Choosing one of our bond funds means you don’t have to be daunted by decision making, allowing us to apply our years of fixed-interest expertise to your advantage.

Have a look at the range of bond funds we offer.