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Vanguard long gilt fund suggested as an alternative to cash. What are the risks?

14 October 2021

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Question by Jake

Vanguard long gilt fund suggested as an alternative to cash. What are the risks?

Answered by Chris Barry

The important thing to consider when using the Vanguard Long Gilt fund rather than holding cash is that, even with a low risk fund like the Vanguard Long Gilt Fund, there is still an element of risk. If you want access to the money at short notice then typically having this money in a cash account rather than a fund is the best option and you should always hold an element in cash for those unexpected emergencies. That’s just good planning!

The Vanguard Long Gilt Fund is tracking the Bloomberg Barclays 15+ UK Government Bond Index so is investing in UK Government debt.

This debt is a loan to the UK Government who provide a rate of interest, or coupon, for loaning them the money. This investment is seen as a low risk on the basis that we would expect the UK Government to pay the loan back as well as making the coupon payments. If the UK government didn’t pay the debt back it would be seen as a ‘default’.

However, low risk is not no risk and some risks to consider with the Vanguard Long Gilt Fund and Gilt funds in general are:

Inflation – Rising inflation, or prices, means that over time the purchasing power of the amount invested falls.

Interest Rates – Interest rates influence the price of a Gilt. A rise in interest rates will see the price of Gilts fall its important to be aware of this relationship as this impacts your return.

Default – This is a risk but on UK Government Debt this is seen as low risk. We don’t think the UK Government will go bust so won’t be able to repay the debt or the coupon they have promised.

Volatility – As with any investment the price can go up but also down and there is always a chance of losing money.

An alternative fund that investors could consider is the Vanguard Sterling Short-Term Money Market Fund. This is lower risk than the long-dated gilt fund primarily because it is holding much shorter dated investments including cash and high quality bonds. However, it is still an investment with an element of investment risk and should not be seen as a direct alternative to cash.


Answered by

Chris Barry

Financial Planner

I have worked in wealth management and financial planning for 17 years helping a variety of clients achieve their goals and aspirations through great financial planning.