A Brief Guide To Government Gilts

When investing your money, investors often want to find the most reliable investments possible. This means that it is important to learn about a variety of investment types, including stocks, shares, properties and businesses.

One type of investment that new investors might not know much about is called gilts. In this article, we will explain what gilts are, how gilts work, and explore some of the benefits and limitations of gilts for investors.

What Are Gilts?

When the UK Government needs to raise money, perhaps for new schools, hospitals, or infrastructure, they ‘borrow’ it from investors via the financial markets.

When you (or an organisation like ourselves, on your behalf) buy a government bond, you are essentially acting as the lender. In return for your support, the government agrees to two things:

• Regular Interest: They will pay you a set amount of interest at regular intervals. In the investment world, these are often called ‘coupon payments.’
• Your Money Back: At the end of a set period, the government pays back the original amount you invested (known as the ‘principal’).

In the UK, these bonds are managed by the Debt Management Office. They offer a variety of options to suit different needs. Some bonds are short-term (lasting just a few years), while others are much longer-term, spanning 20 or 30 years.

Because these are backed by the UK Government, they are traditionally seen as a more stable way to grow money over the long term. This is why we often include them in our diversified investment mix, helping us provide that steady, ‘smoothed’ return our members look for.

Why Are They Called Gilts?

These types of government bonds are referred to as ‘gilts’ for two reasons.

Historically, the paper certificates issued for these bonds featured a gilded (golden) edge, a physical mark of their value and prestige. Today, the name remains a symbol of the security and reliability they offer as an investment. In fact, the UK Government has a long-standing track record of reliability and has never failed to make its repayments.

This sense of stability is why we include government gilts within our own diversified With-Profits fund, helping us to manage risk while aiming for steady growth for our members.

While the UK Government is the most well-known issuer of bonds, they aren't the only one. Bonds can also be issued by regional or local governments in certain countries to fund community projects.

Furthermore, many larger, established companies issue their own bonds (often called ‘corporate bonds’) as a way to raise money for business growth. Whether they come from a government or a corporation, bonds essentially act as a loan from you to the issuer, typically paying a set amount of interest over a fixed period.

How Do Gilts Work?

Let’s look at a quick example to see how the numbers add up.

Imagine the government issues a two-year gilt for £100, with a set interest rate of 4% per year.

• The Start: An investor buys the gilt for £100. The government now has a £100 loan to use for two years.
• The Journey: Over those two years, the investor receives interest payments every six months, known as ‘coupons’. At 4%, that’s £4 each year, meaning they’ve earned £8 in total interest.
• The Finish: After the two years are up, the government pays back the original £100 loan.

By the end of the term, the investor has their original £100 back, plus the £8 they earned in interest. It’s a straightforward way of putting money to work, often seen as a lower-risk option because it’s backed by the UK government.

What Are The Advantages Of Gilts?

One of the primary advantages of investing in gilts is their reliability. The British Government has never failed to make repayments on gilts it has issued, either coupon payments or capital repayments. This means that gilts are often considered extremely reliable investments and become more popular during periods of economic difficulty.

In addition, gilts can be sold or traded after purchase. This means that an investor could theoretically purchase a £100, 2-year gilt and then sell it for £120, pocketing the £20 difference. However, once the gilt has been sold, the original lender will no longer be able to receive the coupon payments or receive the capital investment back.

However, the ability to buy and sell gilts when needed gives investors flexibility if their circumstances change.

What Are The Limitations Of Gilts?

The primary limitation of gilts is their fixed value. However, the reliability of gilts makes them an attractive prospect during times of economic uncertainty; they may become less attractive to investors when other areas offer higher yields.

For example, if interest rates were to increase sharply, this might make gilts less attractive, as holding them as cash might yield the same amount or more. In these circumstances, an investor might choose to sell their gilt to free up cash and reinvest in a product offering a higher rate of interest.

Other factors also affect the value of gilts, including the value of investing in similar products (e.g., if US Treasury Bonds provide a higher rate of return for a similar investment) and the perceived risk of an investment. Although gilts are frequently considered very low-risk investments, if Government borrowing increases or the economy weakens, investors may demand a higher return to offset the increase in perceived risk.

Are There Different Types Of Gilt?

There are two types of gilt that an investor is most likely to come across:

• Conventional Gilts: The most common type of gilt on the market. A conventional gilt has a set value and rate of interest, meaning that the value of the coupon payments and the capital repayment are understood when the investment is made.

• Index-Linked Gilt: Index-Linked Gilts are slightly rarer than Conventional Gilts. Instead of having a fixed rate of interest and a guaranteed return on capital investments, the value of Index-Linked Gilts goes up or down automatically in line with inflation.

Do Other Financial Products Invest In Gilts?

Gilts are a fundamental investment for a wide variety of different funds and investment products. At Sheffield Mutual, products like our Regular Premium Investment ISA and Single Premium Investment ISA are partially invested in gilts, helping us create a balanced approach to investing.

Find The Right Investment For You At Sheffield Mutual

At Sheffield Mutual, we work hard to find investment opportunities that help our members grow their money.

Whether you are investing a lump sum for yourself, starting on a Children’s Savings journey, or looking to create a long-term financial plan, our range of investment options allows our members to choose the product that is right for them.

If you are interested in becoming a member of Sheffield Mutual but aren’t quite sure which product is right for you, consider using our product selector to find an investment that suits your needs.

If you have any questions about our products, please contact us, and a member of our team will be happy to assist with your enquiry.

This article provides generic information and the writer's opinions and should not be relied upon for investment decisions. Sheffield Mutual has provided no advice. If you doubt whether a savings or investment plan suits you, consider contacting a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk or www.vouchedfor.co.uk. Advisers may charge for providing such advice and should confirm any costs beforehand.