Corporate Bond Funds and Gilts Explained

Corporate Bond Funds and Gilt Funds are under the broader umbrella of Fixed Income Funds. Both Corporate Bonds and Gilts are based on the same premise. This is that an entity is looking to raise capital for a specific purpose.

Corporate Bonds are issued by companies, whereas Gilts are issued by Governments.

Providing you with an income

If you are an Income Investor, they can be appealing as these type of Fixed Income Funds provide a specified rate of interest (also known as a coupon) and when the bond reaches maturity (usually after a specified amount of years), you receive the full amount of cash you invested. This is in addition to the interest you continued to receive over the years.

Bond prices are also dependent on the wider macro environment. For example, if interest rates are low, then the price of Bonds tend to increase – this is because the lure of a regular and higher income from a Bond is of greater appeal. If interest rates rise, then they become less appealing. If inflation increases then they become less appealing as their income is worth less in relative terms.

A caveat is that the bond itself is that they are only as reliable as the issuer themselves – so bonds issued by large companies and strong economies are viewed as less risky. However, like shares, they can fall in value or worse (and you can lose all your money). Although should this happen, the benefit is bondholders are paid back before shareholders should a Company fail (both are paid after creditors).

Gilts tend to offer a lower rate of interest than Corporate Bonds because they are perceived as more safe (being issued by a Government).

Credit ratings and balancing the risk and reward

However, one of the ways to understand the level of risk across Bonds and Gilts is to understand the credit rating. Ratings agencies will assess the likelihood of the issuer not paying back its debts. The rating is usually on a scale of AAA to D. AAA is viewed as the least risky, so the interest rates are lower. D (known as High Yield’) is viewed as most risky and the rate of interest paid is higher because of the higher chance of the issuer defaulting and not being able to pay you back in full.

Investing in Bond funds tends to be the more appealing choice for investors. They will invest in a variety of Bonds for you. Making the choice is easy as a Fund Supermarket will also segment Bond Funds between; Corporate Bond Funds, Gilt Funds, Global Bond Funds (Global remit across Corporate Bonds and Gilts), High Yield Bond Funds (lower credit ratings) and Strategic Bond Funds (investing across all 4 areas).

Like choosing any other type of Fund, you will be able to see the holdings, the fund manager, KIID and so on as you make the best choice for you.

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