Bonds

For more information on the financial terms used in this page, please consult the glossary.

What are bonds?

Depending on your plans for your money − as well as how happy you are to take on investment risk for the possibility of better returns − you may be looking for investments which can offer you a more predictable income than riskier asset classes like equities. Under these circumstances, bonds may be just what you're looking for.

Bonds are usually considered more predictable and less risky than equities. When you buy a bond you're effectively giving a fixed-term loan to the government or company that's issuing it:

• Government bonds are usually issued in order to raise money for public spending on projects like new roads and schools.
• Corporate bonds are a good way for companies to raise funds for new business opportunities. Bonds normally pay a fixed rate of interest (in other words, an agreed amount of money in return for the loan of your cash) over a certain length of time, and the loan is repaid to the lender at the end of that period.

How do bonds work?

When you invest in bonds, you'll receive an income in the form of regular interest payments (these payments are known as the 'coupon') from the government or company which issued the bond. The coupon amount is agreed when the bond is first issued, and won't usually change.

On the day that the bond expires, known as the 'redemption' or 'maturity' date, you'll usually get your original investment back. But just because you buy a bond, it doesn't mean you need to hold it until the redemption date.

Just as a company's shares can be bought and sold on the stockmarket, bonds can also be traded throughout their lifetime, and their prices will change as they're bought and sold on the open market.

When you invest in a bond fund, your money is pooled with other investors, and you're also invested in a wide range of bonds with different coupons and redemption dates. This diversification helps to reduce your investment risk, because you're not relying on the fortunes of a single government or company.

Reasons to invest in bonds with myM&G

The M&G Fixed Income team is one of Europe’s largest bond investors, with a strong track record of active management across fixed income assets globally.

While each fund differs in terms of its specific investment strategy, they can be grouped into different categories, according to their characteristics.

Investments in bonds are affected by interest rates, inflation and credit ratings. It is possible that bond issuers will not pay interest or return the capital. All of these events can reduce the value of bonds held by a fund.

High yield bonds usually carry greater risk that the bond issuers may not be able to pay interest or return the capital.

Choosing a fund

Like any investment, you should carefully consider if investing in bonds fits with your personal aims and objectives before investing. Importantly, you should also check that the profile of the funds match your own investment timeframe and appetite for risk and reward. You can find out more about the risks you need to consider before investing in our KIIDs.

Our bond funds are what we call ‘building block’ funds – funds that you should hold only as part of a wider investment portfolio. You should also consider creating what’s called a ‘diversified portfolio’, meaning an investment portfolio that is spread across a blend of asset classes like equities and bonds. As different asset types are likely to perform well at different times and in different market conditions, investing in a good mix means you won't have ‘all your eggs in one basket’ and could mean more consistent returns over the long term too.

Find out more about diversification in our handy M&G Guide.

To see our full range of bond funds, click here and select Fixed Income in the Asset class filter.