Gilts and corporate bonds can provide investors with a low-risk investment with steady, predictable returns. When stock markets are volatile, gilts and bonds can be a sensible alternative to equities. You could obtain a certain and stable income, and as long as you don’t buy high risk bonds, your capital is generally safe. A bond is a loan made by a person like you, to a government or company allowing them to raise money. Few investors fully understand the useful role that they can play in a portfolio.

Fixed income investments potential beneifts:

• Low risk
• Sell at any time
• Steady fixed returns
• No capital gains tax payable on gilts and some bonds
• Easy access to your money

Bonds explained

A bond is a form of debt issued by companies or the government to raise money as an alternative to taxation (for governments) and share options (for companies). If you buy one you are, in effect, lending money to the issuer. In return, the issuer promises to pay you a set rate of interest each year and to repay your capital at a set date in the future (the maturity date).

Gilts explained

Gilts are bonds issued specifically by the British Government. A conventional gilt will pay you a fixed cash payment every 6 months until maturity, at which point you will receive your final payment and the return of the initial investment.

You can sell corporate/government bonds at any time, and because prices go up when interest rates fall, modest capital gains are possible. These gains are tax-free on Government bonds and some corporate bonds. Interest earned is usually taxed, unless bonds are held in an Investment ISA.

The potential return from corporate bonds is generally higher than from government bonds, to compensate for the additional risk, volatility and liquidity. Investors must be aware that they are only as safe as the financial standing of the company that issues them. If the bond issuer collapses, you will be paid before shareholders, but it may turn out that there is nothing for anyone. Therefore, you should ensure that you select an issuer which meets your risk profile.

The difference between bonds and equities

The major difference between bonds and stocks & shares is that shareholders have a stake in the company, whereas bond holders are lenders to the issuer. Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely.

Bond prices go up and down like share prices but not as much. The issue price is linked to long-term interest rates, but once issued, their value will go down when rates are rising, and up when interest rates are falling.

How do gilts & bonds work?

Bonds are usually issued at £100 each and pay back £100 when they mature, plus interest at a fixed rate each year until then. If you buy in the market for more than £100 after they are issued and hold the bond until maturity, you will get back less than you invested, However, you may be prepared to do this because the interest that the bond offers is higher than what’s available in the market at the time and overall you make a profit. If you pay less than the issue price you will make a gain on the repayment of your capital, but it is likely the interest rate will be lower than what’s available in the market. So when buying a bond or gilt you should consider the overall return that it offers you.

How to invest

Bonds or gilts can be held in a trading account, ISA or SIPP.

You can also invest in a collective investment scheme that focuses on gilts and bonds, like a fund. Unlike directly held bonds, funds have no fixed maturity date, so returns are less certain.

Alternatively you can invest in gilts through an Exchange Traded Funds (or Share) such as the Shares FTSE UK All Stocks Gilt (IGLT). Both funds and Shares can be traded online.

Investors who are keen on fixed income should contact there relationship manager who will be to assist you into incorporating this asset class into you investment portfolio.