£12k rainy days fund - premium bonds?

Alexland

muffinek said:

I have opened premium bonds account but still considering my options and now I am wondering if putting monetmy into Vanguard Lifestle 20 would be better option? Looking at past performance I could expect about 6% return and if I understand correctly risk to my capital would be very low as this fund is mainly bonds, am I missing anything here? Is there a scenario here where my £12k becomes £5k overnight?

These are not bonds as you might expect from fixed term savings accounts. The price you pay (via the fund) to buy into these bonds is a multiple of their eventual redemption value because their yield is so attractive. But by paying this multiple it dilutes the yield to be comparable to normal cash savings accounts. The longer the bond duration the more it's value will be sensitive to interest rate changes. The reason that bonds have done so well in recent decades is due to lowering interest rates making them more attractive. If that trend was to reverse then the bonds would be less attractive and so would have lower valuations and you would see a drop in the value of your fund units.

Here's a good article about the great bond crash of 1994 that nobody remembers but could so easily happen again if there is a pickup in activity after this virus dies down.

https://moneyweek.com/473408/heres-what-happened-the-last-time-the-bond-market-crashed

In summary emergency money should be kept in cash savings.