The fund manager Vanguard recently launched the Vanguard UK Inflation-Linked Gilt Index Fund – a passive fund designed to track an index of inflation-linked bonds issued by the UK government.
This type of government bond offers a potential guard against rising inflation by providing a level of yield in line with the rate of inflation over the term of the bond held.
The Vanguard tracker fund holds a number of bonds and attempts to mirror the performance of the Barclays Capital UK Government Inflation-Linked Bond Index.
Head of savings and investment at Fair Investment Company, Nick Scarrett said: “Investing in inflation-linked bonds guarantees a real rate of return above inflation and takes away some of the risks involved when investing in fixed-interest securities.
“Accessing this market through a passive fund is good value for money.”
Vanguard has also launched a long term gilt fund to help investors extend the duration of the bond investments in their portfolio. The Long Duration Gilt Index Fund will aim to track the performance of the Barclays Capital UK Government 15+ Years Bond Index, offering exposure to long-term government bonds maturing after periods greater than 15 years.
The funds have a 0.15 per cent annual management charge, while on investing in the inflation-linked gilt fund a fee of 0.4 per cent is charged and a 0.15 per cent fee for the long-duration gilt fund, so individual investors bear the costs of their transactions, protecting existing investors from charges associated with new investors in the fund.
Index-linked gilts pay coupons (interest) linked to the rate of inflation measured by level of the Retail Prices Index (RPI) and can outperform other fixed-interest assets if inflation does continue to rise.
The real terms yield of individual bonds can vary if bonds are bought and sold after they are issued by the government, as they are bought and sold at a market value.
In a letter to the Financial Times earlier this month, Professor Zvi Bodie of Boston University and others described inflation-linked bonds as ‘the only financial instrument which guarantees a known return, even after inflation’.
Although inflation-protected bonds may not offer high returns on initial capital, they offer lower risk to capital than investments in the stock market.
See Vanguard Inflation-Linked Gilt Index Fund and Vanguard Long Duration Gilt Index Fund for more information about these funds.
To view the range of investments available through Fair Investment visit the Investment section.
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