Gilts and bonds

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14. Unit trusts and bond funds

An alternative to buying gilts or bonds yourself is to invest in a unit trust which specialises in gilts or corporate bonds.

The advantage is that the portfolio will be professionally managed, and you get the benefits of diversification, because the fund will spread its money among lots of bonds.

The disadvantage is that costs can be high - as much as 6% on entry and 1.25% annually. These charges mean that your yield will be lower than the yield of the underlying gilts.

When looking at bond funds it's important to note whether they deduct their charges from fund income or take it from the capital. The normal practice is to take it from income, but if a fund takes it from capital, its yield will look artificially high.

A list of gilt funds can be found on the website of the Investment Management Association.

1. What are bonds? 2. Different types of issuer 3. Different types of bond 4. Bonds compared to shares 5. Bonds as tradeable instruments 6. Nominal yield 7. Calculation of current yield 8. Capital gains on gilts and bonds 9. Calculating the redemption yield 10. Factors which affect bond prices 11. Are bonds for you? 12. Selecting gilts and bonds 13. How to buy gilts and bonds 14. Unit trusts and bond funds 15. Keeping track of your bond investments 16. Tax 17. Conclusion

• First Steps in Bonds
• Beating the Dow with Bonds
• Pricing Convertible Bonds