Individual gilt vs. Gilt fund

chinadolltj

Hi all,

Could I please ask what are the main factors which drive the rise/fall of a gilt fund? I'm a bit indecisive of whether to buy an individual gilt or a gilt fund.

Many thanks for your answer in advance.

masonic

The price of a gilt fund will depend on the coupon and duration of each holding, vs the yield demanded by the market. If investors require a higher rate on their investment, then the price will fall to accommodate this, with the caveat that all gilts tend towards par as they approach maturity.

A gilt fund would be more suitable as a hedge against movements in annuity rates, since the latter depends on long duration gilts, or to reduce the volatility of equities. Individual gilts give a risk free return over a fixed term if held to maturity, potentially including a tax exempt capital gain, so are suitable for those who cannot take risk and/or are investing over a limited timeframe.

zagfles

Individual gilts can also be used as an alternative to fixed term savings accounts, eg in a SIPP/ISA where you can't generally access fixed term cash savings, or unwrapped for those who want to reduce tax compared to savings accounts (gilt capital gains are tax free, the coupon is taxable, so low coupon gilts priced below par best for this).

Also index linked gilts can be used (these days) to get a guaranteed real terms return, if held to maturity.

JohnWinder

https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund
Your choice largely depends on when you want to cash out your bond money. If you want to cash out a lot of it, at a time you now know, a bond rather than a fund is a suitable choice. If you’ll dribble the cash out over a long period, a bond fund is a good choice because it’s simpler than managing individual bonds.

aroominyork

JohnWinder said:

https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund
Your choice largely depends on when you want to cash out your bond money. If you want to cash out a lot of it, at a time you now know, a bond rather than a fund is a suitable choice. If you’ll dribble the cash out over a long period, a bond fund is a good choice because it’s simpler than managing individual bonds.

Interesting bogleheads link, partly for discussion of the "interest-on-interest" issue: "If you put the coupon money in a bond, because the date you are buying a bond is not the same as the date you bought the main bond, you are subject to current market rates." Hence the yields quoted on useful links like https://www.dividenddata.co.uk/uk-gilts-prices-yields.py assume - I think - that you reinvest the coupons in the same bond and that the bond price moves on a straight line towards par on redemption.