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Gilt funds: how to invest in them

Moneymagpie Team 21st Oct 2019 No Comments

Reading Time: 8 minutes

Gilt funds are an alternative way to invest in gilts (government bonds). It’s actually quite easy to invest in individual gilts as we showed here, but many people like to invest in funds of gilts. Funds can give you a good spread of different types of gilts in your portfolio but can also potentially cost you a little more in management fees.

What are gilts?

Put simply, gilts are government IOUs, typically sold in units of £100 (the par price) which pay out a set interest rate or ‘coupon’ every year until maturity. Gilts are traded on the stock market just like equities, with their price fluctuating above and below the par price according to supply and demand.

Gilts can be a useful way to add some diversification to your portfolio (in other words, something different for you to invest in). They are less volatile than equities and pay a fixed income depending on the price you first paid for them. Gilts are generally considered a risk-free investment because the UK government has never defaulted.

The main benefits when investing in gilts is that you can make a low-risk return on your money and they are often thought of as a good place to shelter your money when markets are looking volatile.

Gilts offer a fixed interest rate for the agreed term. This means you can get a better return on your investment when interest rates on savings are low – but you could miss out on higher savings interest rates.

However, you can sell your gilt bonds on the open market at any time (although you could get a lower price than you paid for them if you do this and you may face additional fees). Gilt prices and the Bank of England base rate are inversely tied together. If the base rate falls, gilts rise, and when the base rate rises, sellers will drop gilt prices in an attempt to make them more appealing.


Buying gilts directly

As with shares, you can buy and hold gilts directly. Options include both conventional gilts and index-linked gilts which can be bought from the government’s Debt Management Office or through brokers (the secondary market) such as TD Direct Investing.

The main advantage of buying gilts directly is that you don’t need to pay annual management fees (as you would with a fund). There are still trading costs, but once you’ve given these to the stockbroker there are no more charges to worry about as long as you hold it to maturity.

The other big benefit is that these are fixed-income investments – you know exactly what income you’ll get every year – which makes financial planning much easier. Finally, when you pick individual gilts, as opposed to a fund, you do not have to pay capital gains tax.

The problem, however, is that investing directly requires a certain amount of knowledge and understanding about the way the (rather complicated) gilt market works. Websites such as the FT and Fixed Income Investor can help you find bond prices and yields so that you know which gilts you want to buy.

We have an article showing you how to invest in gilts directly but if you decide that you want to invest in a gilt fund instead, read on!

Investing in a gilt fund

Gilt funds are generally less popular than individual gilts for investors. This is largely because the point of investing in a fund for most people is to spread the risk of individual investments, and as gilts are one of the safest investments you can make, it seems a little pointless to spread such a small risk.

However, the returns that gilts offer can depend on interest-rate movements and inflation. If you buy just one or two long-dated gilts (more than 15 years), for example, and interest rates move against you, your returns could be hit hard. Investing in a fund protects you against this potential loss. This is because a gilt fund manager can manage what is called ‘duration risk’ (that’s the sensitivity of the group of gilts to interest rate movements) by investing in a range of long, medium and short-dated gilts.

(N.B. short-dated gilts are 0–7 years, medium-dated gilts are 7–15 years and long-dated gilts are 15 years+.)

The downside is that gilt funds and gilt ETFs are both subject to capital gains tax on the profits and income tax on the income, unless you buy them through an ISA or SIPP.


Actively managed funds

Skill level – beginner to intermediate

An alternative to buying gilts or bonds directly is to invest in a unit trust which specialises in gilts. You can find a list of gilt funds on the website of the Investment Association.

The advantage of investing in a fund is that your money will be spread across lots of gilts and you have a manager who uses their expertise to develop investment strategies according to their in-depth market knowledge.

“With a gilt fund, such as the City Financials Strategic Gilt fund, the manager can switch between different types of gilts depending upon the market,” says Danny Cox of IFA Hargreaves Lansdown.

The disadvantage, as usual, is that costs can be high – as much as 6% to set up your investment and 1% annually. These charges mean that the yield on your investment will be lower than the yield of the actual gilts in that fund, i.e. the fund managers are creaming off a chunk of the profit. Some funds take their charges from the income and some take it from the capital. Be careful. The normal practice is to take it from income, but if a fund takes it from your capital, its yield will look artificially high.

These funds can be purchased via stockbrokers (although you’ll typically pay a dealing charge and possibly an initial commission on the fund) or via a fund supermarket who will waive the commission. Read all about fund supermarkets below.


Invest passively through an ETF

Skill level – beginner to intermediate

One of the cheapest options when you’re looking at gilt funds is to invest through an Exchange-Traded Fund (ETF). We explain what Exchange-Traded Funds are and how they work here. They’re often the cheapest way to invest in shares, commodities, bonds and gilts.

With a gilt ETF, you’re buying a basket of gilts and tracking the performance of the asset class.

What makes ETFs different from other types of fund (such as mutual funds) is the fact that they’re traded on major stock exchanges i.e. you can buy ‘shares’ in them in the same way that you can buy shares in a company. If you decide to invest in them you go through a broker in the same way as you would if buying company shares.

Most ETFs will track an index. They also differ from mutual funds in that they don’t have an expensive fund manager at the helm. Therefore, they’re cheap and, generally, they work better than managed funds. Gilt ETFs are a good option if you want a solid investment that will give you a steady income at regular intervals. It’s not exciting, but it’s pretty reliable. There aren’t a great deal of UK government bond exchange-traded funds out there, but you could look at the following:

  • iShares FTSE All Stocks Gilt (LSE: IGLT)
  • The shorter duration FTSE Gilts 0-5 (LSE: IGLS)

Both charge just 0.2% a year. iShares also offer a Gilt ETF (INXG-LSE) that is linked to the UK government bonds index, and therefore would offset the risk of inflation.

Invesco launched two new UK government bond gilt ETFs in 2019 – at a very competitive rate of 0.06%. Lyxor also runs a competitive 0.07% gilt fund.

These funds focus on short-term gilts – which are growing in popularity as the future of the Bank of England base rate remains up in the air in the current economic and political climates. ETFs can be bought easily through an online stockbroker such as TD Direct Investing and Barclays Stockbrokers. You simply sign up for an account if you haven’t already, find the fund you want to invest in, add that to your account and tell your broker how much money you want to spend on a particular fund.


  • Dealing costs:This is the cost of placing an individual buy or sell order. Be warned that cheap dealing offers may have high admin charges.
  • Transfer costs:You also need to know how much it will cost to transfer in and out shares.
  • Admin charges: These are typically charged every quarter so when you’re comparing charges, work out how many deals you’re likely to make each year and add to this the admin charges.

Gilt index-trackers

Skill level – beginner to intermediate

We’ve already covered index-tracking funds in a few articles – see this guide to investing in trackers – and the ones we’ve looked at are generally funds that track stock market indices.

Gilt index trackers work in a similar way, but by tracking the progress of the gilt markets. They provide a mix of gilts and stay in line with inflation. Whether the economy is growing or shrinking, gilt index-trackers are fairly solid, reliable investments. In fact, they’re the only option if you want government-backed inflation-proofed investments.

Although initial fees are relatively low, minimum investments can be high (as much as £100,000). It’s worth finding out which trackers are of interest to you, based on which index they’re tracking and the companies that comprise the fund; contact the issuer for more details if needed.

Once you’re positive about your chosen tracker, the most cost-effective way to invest is through a fund supermarket. Vanguard’s UK Government bond index, for instance, is offered through investment dealer Alliance Trust with an annual management charge of just 0.15%, compared to the 1% to 5% or more that managed bond funds would charge. The minimum investment is also substantially lower through this platform, and there are no entry or exit fees either.

Here are some examples of gilt index-trackers that are available:

  • Legal and General All Stocks Gilt Index Trust
  • Aviva BlackRock Aquila Over 15 Years Gilt Index Tracker
  • Zurich Aquila Index-Linked Over 5 Year Gilt Index ZP
  • Scottish Widows Index-linked Gilt Tracker Fund (charges just 0.25%)
  • Vanguard UK Government Bond Index (charges just 0.15%)


How to buy your fund cheaply

Fund supermarkets

Skill level – intermediate

A fund supermarket provides a broad selection of all sorts of funds sitting next to each other, vying for your business by reducing fees and offering deals. There’s also information relating to each fund that you can read as part of your selection process.

Be clear, though, that this is where you must be prepared to do that reading as well as other research. You don’t have a fund manager making the selections for you, but then you don’t end up paying the fund manager loads of money in fees for that help.

Fund supermarkets are good places to buy ALL types of funds. There’s a plethora of fund supermarkets but here are some of the ones we like:

  • Cofunds (Legal & General)
  • Vantage (Hargreaves Lansdown)
  • Garrison
  • Fidelity’s Funds Network
  • Alliance Trust
  • Cavendish Online

Gilt funds are an alternative way to invest in gilts. It can give you a good spread of different types of gilts in your portfolio but it can also potentially take away some of your money in management fees. However, having a managed fund is a great way for beginner investors to start their investment strategy as they learn more about funds and the stock markets.

Just remember that you need to look at your entry, transfer, and exit fees, as well as the ongoing management fees, to decide which funds (and fund managers) suit your personal needs best.

Are gilts a good investment now?

In July 2023, the UK government issued a gilt that will pay investors an annual return of 5.668% over a two year period. Since then, gilts have received a spike in interest from investors.

In response to the increase in demand, the UK government recently announced that it will give UK investors access to newly issued gilts for the first time. This will open up more opportunities to add fresh gilts to your portfolio.

The healthy demand for these assets suggests that gilts could be a good investment opportunity in 2024. However, whether or not gilts are a ‘good’ investment comes down to your individual goals, risk appetite and strategy.

As always, it is important to conduct your own research before making any financial decisions.

Useful links

*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.

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Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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