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

23 April 2021

Question by Natalie

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

Answered by Boring Money

Hi Natalie

Without knowing the purpose for your cash holdings, i.e., short-term access or long-term growth. All funds have an inherent risk associated with them ranging from value volatility to liquidity; if you require access to the asset at a moment’s notice then cash/cash deposits are your only option. Should you wish to try and beat cash returns and are willing to lose some of the investment and are happy to leave the asset untouched for the medium term then funds can be a good idea.

The Vanguard Long GILT fund is looking to replicate the Bloomberg Barclays 15+ UK Government Bond indexes performance by investing in UK Government debt. Government Bonds are traditionally considered to be very low risk investments, as they are a loan to the government.

The main risks associated with GILTs and funds investing in them are:

  1. Inflation, i.e., the rise of prices and fall in purchasing power over time.

  2. Interest rate or yield rises, for example when yields are low a moderate rise can cause a fall in prices. A 1% increase in yields could cut a 10-year bond price by 9% or a 30-year one by more than 22%.

  3. Defaulting on the debt, this is however very low due to the fund holding multiple bonds and the government backing of GILTS.

  4. Volatility of the funds price, as with all investments the price will vary, and you have a chance of losing money.

By necessity, this briefing can only provide a short overview and it is essential to seek professional financial advice before applying the contents of this article. This briefing does not constitute advice or a recommendation.

Answered by

Boring Money