Thinking of UK Index Linked Gilts

masonic

newbinvestor wrote: »

Why?

In essence, when you buy units in a bond fund, then you will be buying the underlying bonds at their current market price. Then when you sell units in the bond fund, you'll sell all of those underlying bonds at their current market price. Unless you hold a bond fund for an extremely long time, and it is a vanilla index fund that does not trade its bond holdings, you will in effect be trading bonds rather than holding them all to maturity.

While if you buy individual bonds and hold them to maturity, you will get a known and fixed return, your return from a bond fund will depend on price fluctuations in the individual bonds and so your return could be higher or lower than the return from the underlying bonds held to maturity. The same is true if the fund trades the underlying bonds instead of buying them and holding them to maturity like a vanilla index fund would.

Here is another bond fund (corporate) Priced at £0.52

https://www.fidelity.co.uk/factsheets/?id=F00000SXB4&idCurrencyId=&idType=msid&marketCode=

Absolutely nowhere does it say if it's trading at a premium or discount to the "face value". Very confusing.

Again, the unit price of the bond fund really doesn't come into discussions about premiums or discounts - it starts at an arbitrary value and rises and falls with the performance of the fund over time.

The fund can only trade the underlying bonds at one price - the market price of those bonds, which you can look up (at least for the top 10 holdings) if you are interested. Essentially, when you invest your money, the fund manager will go out and buy the bonds in the portfolio at their current market price, which could be a premium to their face value. This is where the fund price comes in because it reflects how many units in the fund you will end up owning and is calculated using the total net assets the fund currently holds divided by the total number of units that currently make up the fund. Such that when your units are created they are equal in value to the rest of the units in the fund owned by other investors.

Thrugelmir

newbinvestor wrote: »

Absolutely nowhere does it say if it's trading at a premium or discount to the "face value". Very confusing.

Because the underlying investments are priced at today's values.

[Deleted User]

I understand they're priced at the bond's value. But the bond value/price is relative to the initial £100 "face value" when the bond was issued. Eg a bond fund price of £120, 110, 150, 200, you will still only get £100 back if held to maturity. Or is there a different value you will back if held to matury. If a bond fund is priced at £130, do you get £110 back at maturity? Or is it always £100?

Disclaimer btw, I do not consider any message as financial advice and I am solely responsible for my investments.


The Acc version of this bond fund is priced higher than the Inc version. Just doesn't make any sense Argh.
https://www.fidelity.co.uk/factsheets/?id=F00000SSSO&idCurrencyId=&idType=msid&marketCode=
https://www.fidelity.co.uk/factsheets/?id=F00000T343&idCurrencyId=&idType=msid&marketCode=

Thrugelmir

newbinvestor wrote: »

The Acc version of this bond fund is priced higher than the Inc version. Just doesn't make any sense Argh.

Clue is in the title.

Accumulation - income received is added to the fund and reinvested. Thereby increasing the value of a unit in the fund.

Income - income is paid out to unit holders on a predetermined basis, i.e. monthly, quarterly, half yearly or annually.

masonic

newbinvestor wrote: »

I understand they're priced at the bond's value. But the bond value/price is relative to the initial £100 "face value" when the bond was issued. Eg a bond fund price of £120, 110, 150, 200, you will still only get £100 back if held to maturity. Or is there a different value you will back if held to matury. If a bond fund is priced at £130, do you get £110 back at maturity? Or is it always £100?

At maturity, you always get the face value back. That's what the Government (or company) issuing the bond borrowed.

By way of example, consider a theoretical 4% bond, issued a couple of decades ago at £100 face value. At that time, interest rates were relatively high, so that's the going rate of borrowing. However, some time later, interest rates fell sharply, so people are willing to pay more than £100 for a bond with a 4% coupon, perhaps as much as £200 if the bond has a long enough maturity date. So instead of buying for £100 and getting a 4% yield, then repayment of the £100 at maturity, they are buying at £200 and getting a 2% yield, followed by a loss of £100 at maturity. A fund already holding such a bond would increase in value and existing investors would make a profit, but a new entrant would not. If interest rates were to rise again, the market price and yield might revert back to something near the original values for someone who bought this bond. A fund holding such a bond would fall in value and existing investors would make a loss, but a new entrant would not.

The Acc version of this bond fund is priced higher than the Inc version. Just doesn't make any sense Argh.
https://www.fidelity.co.uk/factsheets/?id=F00000SSSO&idCurrencyId=&idType=msid&marketCode=
https://www.fidelity.co.uk/factsheets/?id=F00000T343&idCurrencyId=&idType=msid&marketCode=

It makes complete sense, the Acc version is reinvesting interest, so is growing in value faster than the Inc version, which is paying out interest. Price rises as the value of the assets held within the fund increase, and falls when the assets fall in value. In this case the assets are identical, but the reinvested income is generating better performance in the Acc units.

[Deleted User]

Thanks, I do understand it a bit better.
I disagree withe Acc/Income different prices though. They hold the same assets. The price should be the same. Are you basically paying an extra 15% so the fund manager can reinvest your interest payments. That's what it looks like to me.

Alexland

newbinvestor wrote: »

I disagree withe Acc/Income different prices though. They hold the same assets. The price should be the same. Are you basically paying an extra 15% so the fund manager can reinvest your interest payments. That's what it looks like to me.

There is nothing to disagree with - the reinvestment of dividends would cause the fund investor who bought an ACC unit to have a more valuable unit than the fund investor who bought an INC unit and took a distribution from the unit.

Over time this causes the ACC unit valuations to rise above INC units. As a new investor buying an ACC unit is more expensive but you get more underlying asset value as the other investors' dividends plus your higher unit purchase price goes into the fund. So it all balances out.

Alex

masonic

newbinvestor wrote: »

Are you basically paying an extra 15% so the fund manager can reinvest your interest payments.

You are still fundamentally misunderstanding what a fund price represents. It represents the historical performance of the fund. If a fund starts at a £100 price and over 10 years its holdings increase in value by 50% and generate 2% income per year, then the Inc version of that fund will be priced at £150, while the Acc version will be priced at about £172 (because it still has the income and didn't pay it out).

That doesn't mean you pay a penny more for the assets in the Acc version. As explained in a previous post: "it reflects how many units in the fund you will end up owning and is calculated using the total net assets the fund currently holds divided by the total number of units that currently make up the fund. Such that when your units are created they are equal in value to the rest of the units in the fund owned by other investors."

Only the ratio of the sell price and the buy price matters, and both will increase or decrease by exactly the same percentage going forward if no further income was received.

[Deleted User]

Thrugelmir wrote: »

Because the underlying investments are priced at today's values.

That makes sense, but could there ever be a premium or discount of the fund?
Eg underlying assets are priced at £120 but fund price is £125? Or is that only if it was an ETF?

[Deleted User]

And also, is it ever possible to buy a bond fund at the start when it's just released? Because over time the price of it seems to increase, but if you got in earlier, you would save alot of money compared to buying it down the line.