Gilts cast a gleam of hope on the world's markets

Government stock are currently more than just a safe bet, advises Harvey Jones

STOCK MARKET uncertainty has sent many an investor searching for a safe haven for his or her money, and gilts are proving a popular destination. Gilts, also called Government stock, are particularly appealing when interest rates are on their way down.

They promise a fixed rate of interest (known as the coupon and paid twice yearly) for a set term - say five, 10 or 15 years - in exchange for lending money to the Government. At the end of the term your initial investment is returned. The Government uses gilts to raise money and, although you cannot expect a spectacular return on your investment, your money is secure. The Government has never defaulted on interest and capital payments on gilts.

But security is not the only reason why gilts are getting more popular. They are traded on the stock market and their value rises and falls as interest rates fluctuate. In times of rising interest rates, the value of gilts falls. But if interest rates fall, then the price of traded gilts will rise because the coupon interest will be higher than the rate offered on newer issues of gilts and bonds.

Another factor in favour of buying gilts is that falling inflation makes fixed-interest investments more attractive - a point worth considering now that the Government is hitting its 2.5 per cent target for inflation and economic growth is expected to slow.

Until July this year gilts were sold through National Savings, but they are now sold by the Bank of England. They can also be bought through stockbrokers. An important thing to remember is that independent financial advisers (IFAs) do not get commission from gilts, and although a good adviser should still recommend them, don't bet on it.

Philippa Gee, managing director of fee-based IFA, Gee & Company, recommends gilts as part of a portfolio because they are less susceptible to interest rate movements than money and provide a lower risk investment than equities. Gilts can be bought individually or as part of a fixed-interest collective investment comprising a range of different gilts.

"You can buy an individual gilt and simply hold it to the fixed maturity date and collect your interest, which will prove a safe investment and can be useful, for a specific purpose such as school fees," she says.

"However, a fixed-interest collective investment such as a unit trust gilt fund, which has no set maturity date, will allow you to spread your investment through a number of funds and keep it going as long as you like. These also have low initial charges and low management fees and will help to further balance your portfolio."

An alternative to gilts are corporate bonds, which work on much the same principle but are issued by large quoted companies. You can invest in corporate bonds through a PEP, and the fund is allowed to hold half of its assets in gilts, so you will be getting good exposure to gilts as well as commercial bonds, which pay higher interest rates than gilts.

Brian Dennehy, a Kent-based IFA, says bonds have been overpriced recently and yields have been disappointing, but he is now recommending UK corporate bonds with greater enthusiasm. "We have been suggesting them for a year or so. If you assume that the UK participates in EMU, then we will see interest rates fall very sharply, which means the value of the capital will rise. Interest rates are likely to fall anyway over the next two years because of the slowing economy, which reinforces the arguments in favour of fixed-interest investments," he says.