Wanting to invest in UK gilt bonds - inflation linked or not?

[ForgottenwhoIam]

Hi, I am looking at investing in UK gilt bonds and have found there are a few to choose from, but which one?

I’m looking to invest in one for about 10 years accumulating.

People mention inflation linked but if inflation is going down, does that mean less returns, or…..I don’t have a clue.

I am in Vanguard and they have the following:

UK long duration Gilt Index fund
UK inflation linked Gilt Index fund.
UK Gilt UCITS ETF

If anybody has any of these, are you happy with the one you have? Which one would be best accumulation wise?

Are there any UK gilt ones outside of Vanguard any good also? Can anybody recommend?

I know bonds have struggled recently, but they have forecast better returns.
Please can anybody help? MTIA 😊

Ignore some of what I said in the original post, I might rule out the long duration/10 year plan.

Are you clear about the fact you are looking at index funds, and not individual gilts or bonds? The two products are not the same entity and do not operate in the same way?

I ask because you mention ruling out the long duration 10 year fund - (you don't need to hold these for 10 years).

Hi OP. I’m a professional in this area. Nobody can tell you which one will do better. If anybody pretends to know, ignore them. Why do you want to own gilts? There are some tax benefits to owning gilts directly (no CGT) but I don’t know whether you would get those in an ETF. Why do you prefer gilts to a more diversified and/or higher income bond index? And if you’re investing for accumulation rather than income, why bonds at all?

Yes, I am clear that these are index funds, but now you have mentioned individual gilts, are these better? If so, how do I buy some?

I know I don’t need to hold them for 10 years, it was just a plan which I have now ruled out, but thank you 😊.

What are you trying to achieve with this investment OP?

If you bought individual gilts you could hold to maturity and know at the end you get your money back (+ interest between now and then but this wouldn’t automatically be reinvested in gilts).

If you buy a gilt fund/ETF the price will go up and down depending on interest rates so your return will depend on when you buy and sell. You can have interest reinvested. But as a PP says, you might be better off in a fund with more potential growth if you are investing for 10 years.

Hi @Greenbike , I had heard that UK gilts were a safe option. I never considered a more diversified and/or higher income bond. I honestly haven’t a clue as you can tell 😁.

Reading your post, you have raised a good question re: accumulation rather than income.

In May/June this year, I will have around £10000 to invest, can you recommend any diversified and/or higher income bonds at all?

Hi, thank you for your input @Justbetweenus yes I need to put money in a fund with more potential growth/diversified higher income bond instead.

Thank you all for your replies, very useful, thought provoking and informative.

Yes, you can buy individual bonds - gilts, but it takes a bit of research and effort. Not all platforms provide this service and the broker will charge commission.

These types of investments are usually popular at retirement. It protects the capital sum whilst providing a steady and reliable source of income in the form of interest (known as the coupon) for a set amount of time until maturity, when the value of the bond is returned.

If your aim is to grow your investment, gilts are unlikely to be what you're looking for.

hi OP. You’re right that gilts can be low risk, in the sense that if you buy one of them you’re guaranteed to get your money back in 5/10/30 years (delete as appropriate). But in the meantime the price can go up and down a lot, and potentially by much more than a more diversified bond fund with a higher return.

I think you’re on the right track looking at ETFs though. They tend to be quite simple and low cost (not always).

If you want something very low risk you can look at what’s called an “ultrashort” bond ETF. This is basically one step in riskiness (but also return) above keeping your money in a bank account. An example of this would be a GBP Ultrashort bond ETF. If you search for that you should find a couple of providers. Quite low risk, quite low return, but probably better than the bank account. Vanguard and iShares are well known names but there are also others.

One step above this on the risk/return spectrum would be a short duration corporate bond fund. Search GBP Corp Bond 0-5 year UCITS ETF (again, Vanguard and iShares are the Sainsbury/Tescos of the space, but there are others which are also fine). This will probably pay you an income so you might have to occasionally reinvest the cash.

If you want to go riskier than that you can look at high yield bond ETFs or equities, but from what you’ve written it sounds like you’re quite conservative so that might be less relevant. I would encourage you though to think about how much risk you are willing to take. The basic rule of investment is risk is (normally) related to return, ie if you want something very low risk you probably have to accept low returns. Longer time horizons enable you to take more risk, because you can ride out the peaks and troughs (and short time horizons suggest low risk for the opposite reason).

If you have £10,000 which you don’t need for ten years that would normally suggest that you are in a good position to take some risk on it, and potentially gain a higher return. But if you’re naturally cautious and don’t want to, that’s fine - just buy one of the lower risk options I mentioned above, or something similar.

Thank you, I think I’ll leave the gilts until I retire then 😊.

Is the £10K your only savings?

If you are a cautious investor, and don't want to risk the capital sum, you might be better using cash savings accounts, and make use of best rates and bonus offers to boost returns.
Over 10 years returns on S&S investments might not beat the interest you could receive on savings, as 10 years might be quite a short time-frame for investing - you could see a good return but you might not. Historically it has not always been the case depending on the market.
Make sure you understand the risks and possible volatility in the investments you choose.