Thinking of UK Index Linked Gilts

st182

i think the OP needs to take a step back, and perhaps read up on investment funds as a whole subject rather than funds which invest in bonds specifically. That may help the whole idea click.

A fund is a collection of investments, which you buy a portion of at the time of purchase and sell at time of sale. There is a daily (usually) valuation on the entire fund, and you, as an investor, buy a portion of that value at a given time.

As for your prices, it doesn't matter.
If you buy £100 worth of a fund at a unit price of £100, and it rises 10% in value, you will sell and get £110.
If you buy £100 worth of a fund at a unit price of £500, and it rises 10% in value, you will sell and get £110.
Its all about ratio.

HTH in some way

[Deleted User]

Linton wrote: »

But you arent buying bonds you are buying a bond fund. If the bond fund happens to hold 1M bonds with a face value of £100/ market value £120 or 2M bonds with a face value of £50/market value £60 why does it matter?


As it happens corporate bonds (bonds issued by companies rather than the Government) which is what your example fund invests in will mostly be £100.

It matters massively because, all other things being equal,
Fund 1, average face value £50
Fund 2, average face value £100

Fund 2 is obviously more attractive.

The fact that the factsheet doesn't show the face value is very weird. The fund should show the face value to market value.

Apodemus

st182 wrote: »

i think the OP needs to take a step back, and perhaps read up on investment funds as a whole subject rather than funds which invest in bonds specifically. That may help the whole idea click.

A fund is a collection of investments, which you buy a portion of at the time of purchase and sell at time of sale. There is a daily (usually) valuation on the entire fund, and you, as an investor, buy a portion of that value at a given time.

As for your prices, it doesn't matter.
If you buy £100 worth of a fund at a unit price of £100, and it rises 10% in value, you will sell and get £110.
If you buy £100 worth of a fund at a unit price of £500, and it rises 10% in value, you will sell and get £110.
Its all about ratio.

HTH in some way

Yes, forget about the individual bonds! Look on it as buying the contents of a closed box. You are choosing a box labelled “Bonds” rather than one labelled “smaller companies” or “UK Growth” or “Asia/Pacific” or whatever. Each share is valued on its proportion of the value of the box.

masonic

newbinvestor wrote: »

It matters massively because, all other things being equal,
Fund 1, average face value £50
Fund 2, average face value £100

Fund 2 is obviously more attractive.

Not necessarily. The yield of fund 1 could be 3%, with an average duration of 30 years, whereas the yield of fund 2 could be 0.1% with and average duration of 3 years.

to_jackie_too

newbinvestor wrote: »

Face value is the most important thing IMO but for ones like this, it doesn't even say. How is that possible.

https://www.fidelity.co.uk/factsheets/?id=F00000SXB3&idCurrencyId=&idType=msid&marketCode=

With a bond fund, you do not need to poke under the hood to look and the individual bonds. But it doesn't hurt to think about the value of an individual bond in theory.

You're suggesting that, if an individual bond has a face value of £100, you'd rather pay £80 for it than pay £100, and rather pay £100 than pay £120.

What you're missing is that, although the price paid compared to the face value does matter, so does the interest rate that the bond pays.

For instance, perhaps the going rate for this type of bond is now 4%. So a bond that pays £4 interest per year, and will (after a number of years) be repaid with £100, will also have a current market price of £100.

But suppose another bonds pays £6 interest per year, and will eventually be repaid at £100. That would clearly (if there are no other differences between the bonds) have a current market value of more than £100 — perhaps of £120. Compared to the first bond, you get £2 more interest per year, but lose £20 capital value in the end. If the time before the bond is repaid is approximately 10 years (let's not worry about the exact number of years), those effects would cancel out. So the average return on your money, taking into account the total effect of the £6 interest received per year and the £20 capital loss, would be 4% per year.

This kind of average return per year, which is usually called "yield to maturity", and Fidelity (in your link) seem to be calling "underlying yield", is a better measure of what value you're getting from a bond fund, because it takes into account both what you're paying compared to the face value of the bonds and how much interest the bonds are paying.

In the above example, the bond priced at £100 is not better value than the one priced at £120. They are both equally fairly priced.

Apodemus

to_jackie_too wrote: »

With a bond fund, you do not need to poke under the hood to look at the individual bonds.

And with the Fidelity Fund mentioned above, there are 326 components “under the hood”, only one of which is worth more than 1% of the fund and the top 10 worth less than 9% of the fund. Even if all the detailed, individual bond information was listed, it would be far too much information for most mortals to make sense of!

[Deleted User]

to_jackie_too wrote: »

With a bond fund, you do not need to poke under the hood to look and the individual bonds. But it doesn't hurt to think about the value of an individual bond in theory.

You're suggesting that, if an individual bond has a face value of £100, you'd rather pay £80 for it than pay £100, and rather pay £100 than pay £120.

What you're missing is that, although the price paid compared to the face value does matter, so does the interest rate that the bond pays.

For instance, perhaps the going rate for this type of bond is now 4%. So a bond that pays £4 interest per year, and will (after a number of years) be repaid with £100, will also have a current market price of £100.

But suppose another bonds pays £6 interest per year, and will eventually be repaid at £100. That would clearly (if there are no other differences between the bonds) have a current market value of more than £100 — perhaps of £120. Compared to the first bond, you get £2 more interest per year, but lose £20 capital value in the end. If the time before the bond is repaid is approximately 10 years (let's not worry about the exact number of years), those effects would cancel out. So the average return on your money, taking into account the total effect of the £6 interest received per year and the £20 capital loss, would be 4% per year.

This kind of average return per year, which is usually called "yield to maturity", and Fidelity (in your link) seem to be calling "underlying yield", is a better measure of what value you're getting from a bond fund, because it takes into account both what you're paying compared to the face value of the bonds and how much interest the bonds are paying.

In the above example, the bond priced at £100 is not better value than the one priced at £120. They are both equally fairly priced.

Thanks. Although "underlying yield" appears to be
"Underlying yield
Reflects the annualised income net of expenses
of the fund as a percentage of the market unit
price of the fund as at the day shown"

Which makes sense. Eg a 4% bond priced at £125 = 4/125 = 3.2%. Not 4%.
But what if that bond matures in 2 years. Face value of £100. You also lose £25.

The only figure that really matters is yield to maturity IMO

Prism

You seem to be confusing individual bonds, where you think about bond price and yield to maturity, and bond funds where you don't think about those things at all. Bond funds buy and sell individual bonds on the market constantly which you have no control over. With funds you should be looking at average credit quality and effective duration as indicators of risk

masonic

newbinvestor wrote: »

The only figure that really matters is yield to maturity IMO

Which is impossible to calculate for a bond fund, even an index tracker, because these funds will change their composition in response to unknown future events, such as new bond listings.

[Deleted User]

That's assuming there are new bonds in the future to invest in, which isn't guaranteed.