British investors poured money into bond funds in September, with UK Gilt (government bond) and UK Index Linked Gilts the best-selling fund sectors according to industry body Investment Association (IA).
In total £614 million flowed into the two sectors, with UK Gilts taking around two-thirds of that money.
At the same time, interactive investor, the UK’s second largest investment platform for private investors, reported that a money market fund had made its top 10 fund buys in October 2022. This is a first in ii recent corporate memory.
Royal London’s Short-term Money Market fund was the eighth most-bought open-ended fund on interactive investor in October, perhaps reflecting the rising interest rate environment. That’s because money market funds offer a return on cash, which gradually increases as interest rates rise.
Sam Benstead, Deputy Collectives Editor, interactive investor, says: “It’s not surprising to see bond funds becoming more popular as interest rates rise. With bond funds, interest rate rises will gradually feed through into higher yields as new bonds are added to the portfolio – don’t expect an instant hit like you would get with buying a bond directly.
“In September and October, an increasing number of sophisticated retail investors were buying direct fixed income securities on the interactive investor platform, to take advantage of higher yields following their sharp sell-off. But this strategy isn’t for everyone, it requires a lot of knowledge and research, so it’s easy to see why bond funds have become a popular alternative.
“For investors looking for a diverse portfolio of bonds with very little credit or interest rate risk, money market funds are an option, even if the income will be lower than on a regular government or corporate bond fund. But it’s also important to have a broadly diversified portfolio, including equities.”
interactive investor has been increasing its bond editorial output for customers since July 2022. Lee Wild, Head of Equity Strategy, interactive investor, explains:
“Launching our bond project in July, our rationale was simple: bond markets, sensitive to high inflation and interest rate hikes, had fallen in value and yields had risen, making the asset class more attractive. We wanted to ensure there is relevant, engaging and responsible content to guide investors through the often-complicated world of fixed income. We have always covered the bond market, but recognised that we are in a rising interest rate environment where there may well be an increase in private investor interest in bonds. And recent events, in particular, is a case in point.”