Bonds vs money market funds

[MrFoolish]

The chap on the PensionCraft youtube channel has just put out a video talking about the benefits of bonds as a short-term "safe" investment. I recall previously he talked about money market funds serving a similar purpose.

Can anyone explain the relative pros and cons?

I do have a small amount in a money market fund (Vanguard) but I could not tell you the current yield on it.

Thanks.

[Lootman]

Money market funds invest in short-dated bonds, typically debt instruments with less than a year to maturity. And so essentially it is the same debate you might have between buying an equity fund and buying individual shares.

The yields will be similar. There may be some tax differences, as for example there is no CGT on holdings of gilts. But other than that I am not sure why someone would advocate buying individual instruments if you can get, say, 5% on a money market fund. All debt instruments trade similarly, other than any perception of credit risk.

[Aminatidi]

It depends on amounts but if you're investing outside a tax wrapper money market fund income is taxable as interest (pretty sure it's treated as interest rather than dividends).

With gilts the income is taxed but the capital gain isn't so a low coupon gilt is incredibly tax efficient outside a tax wrapper.

Simply put say you have £100K to invest.

With a MMF you might make £5200 return but it's all subject to tax like any other interest would be.

With a 0.125% coupon gilt the gain from what you buy the bond and what you get when it matures is entirely tax free.

The only taxable income on £100K worth of that bond would be each £125 coupon.

[GeoffF100]

The chap on the PensionCraft youtube channel has just put out a video talking about the benefits of bonds as a short-term "safe" investment.

That is his take. Bonds outperformed equities over a thirty year period in the US on one occasion, so they are not necessarily a short term investment. Gilts should be safer than most money market funds, but corporate bonds, no. Gilts can have tax advantages outside a tax shelter. Bonds can be a good diversifier for equities, but not recently. Money market funds can be useful for money awaiting investment, or because you believe that they are currently good value. You seem to be putting the cart before the horse. What is the big picture? What are you trying to achieve?

I have been investing for 50+ years. I sometimes use index linked gilts. I sometimes use bond funds. I also sometimes use money market funds. They all have their uses. Learn about them all. They all might be useful for you at some time. They can all be rotten investments too.

[dealtn]

Can anyone explain the relative pros and cons?

Can you provide his definition of "safe"?

[Aminatidi]

Known return by a known date with zero (in practical terms) chance of default and if the UK Government default we probably have bigger things to worry about.

Sounds pretty safe to me.

[dealtn]

Known return by a known date with zero (in practical terms) chance of default and if the UK Government default we probably have bigger things to worry about.

Sounds pretty safe to me.

Not even close to my definition of "safe" then, and seems strangely disconnected from the other investment time horizon of "short term".

[MrFoolish]

Can anyone explain the relative pros and cons?

Can you provide his definition of "safe"?

Here's the video. I wouldn't want to put words in his mouth.

https://www.youtube.com/watch?v=2EgUzuabUJk

Let's face it, nothing is entirely safe now is it? We could get another Liz Truss or we could get run over by a bus tomorrow.

[Aminatidi]

Known return by a known date with zero (in practical terms) chance of default and if the UK Government default we probably have bigger things to worry about.

Sounds pretty safe to me.

Not even close to my definition of "safe" then, and seems strangely disconnected from the other investment time horizon of "short term".

Fair enough.

What would you call "safe" in todays environment?

[dealtn]

Not even close to my definition of "safe" then, and seems strangely disconnected from the other investment time horizon of "short term".

Fair enough.

What would you call "safe" in todays environment?

Bank accounts, the extreme short end of the Gilt curve, TBills, possibly cash but even then they aren't safe from inflation. Gilts as an asset class aren't even close as a chart of the majority of then over the last year or so capture visually.

[Aminatidi]

Fair enough.

What would you call "safe" in todays environment?

Bank accounts, the extreme short end of the Gilt curve, TBills, possibly cash but even then they aren't safe from inflation. Gilts as an asset class aren't even close as a chart of the majority of then over the last year or so capture visually.

How are you defining safe with a UK Government gilt?

To me it would be a known and guaranteed return and guaranteed return of principle.

A long(er) dated gilt might be massively volatile but arguably by that definition it's still "safe" isn't it?

Has the UK Government ever defaulted on a gilt? Genuine question as I don't know the answer but I assume they haven't.

[dealtn]

Bank accounts, the extreme short end of the Gilt curve, TBills, possibly cash but even then they aren't safe from inflation. Gilts as an asset class aren't even close as a chart of the majority of then over the last year or so capture visually.

How are you defining safe with a UK Government gilt?

To me it would be a known and guaranteed return and guaranteed return of principle.

A long(er) dated gilt might be massively volatile but arguably by that definition it's still "safe" isn't it?

You have explained it exactly. That isn't the definition I would (ever) use for being "safe". You are exposed to duration risk, event risk, inflation risk. If safe simply means you will (eventually) get back your (nominal) money and never be concerned about its value, or wht is happening in your life throughout its lifetime, then fine.

I don't hold that opinion, which I suspect is a much more "real world" view.

[Aminatidi]

Yeah this is where I struggle with what exactly the right word is tbh.

Risk v volatility, safe v sensible etc.

Fully take the point though by your meaning of the word.