Low risk investment
We’ve touched on these before, but bonds are like a kind of fixed-term loan that you make to a government or company. There’s an interest rate established going in, which you’re paid throughout the duration of the bond. At the end of that time, the bond ends and you get your money back.
Bonds (sometimes called gilts when they’re from the government) have a reputation as a relatively low-risk type of investment, with the trade-off being that they usually offer fairly modest returns. They have a rating system to give you an idea of what to expect from them, running from AAA to D. The higher the rating, the safer the investment is expected to be. The name of the bond will usually also give you some basic information and expectations. For instance, a “4% RIFT 2028” bond will pay out 4% interest per year, then expire and return your money in 2028. You’ll often, but not always, find that you’ll be offered better interest rates on longer-term investments.
To get started in bonds, you can use the government’s Debt Management Office to invest in gilts directly. For corporate bonds, the London Stock Exchange has a Retail Bond Platform. To start investing there, you’ll need to have at least £1,000 to front up. Remember that you’re not buying shares in a company here. As we mentioned already, this is more like a loan you’re making. That doesn’t kill off the risk altogether, though. If the business goes under, for example, you could still be looking at some losses. You probably won’t stand to lose everything like a shareholder can, though. You’ll count as a creditor if the business becomes bankrupt, for example, so you’ll stand a decent chance of getting at least a good chunk of your money back.
If investing individually in fixed-income options sounds like too much work, you can opt for a collective fund like a unit trust. Collective bond funds work pretty much the same way as the other mutual funds we talked about above. Instead of your money going into one or more individual bonds with a fixed term, it gets spread out over potentially hundreds of different bonds and/or gilts. Generally speaking, you’re going to have to pay a fee for someone to manage all of this for you, which will drag your returns down, but you’ll be cutting back on the risk factor and won’t be tied to any specific expiry dates on your investments.