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When you buy a corporate bond you effectively lend that company money. In return you receive interest and the company promises to pay back the loan on a specified date. By buying a gilt you are lending to the Government rather than a company. Bonds and gilts generally sit between cash and shares in terms of risk. Shareholders in effect own the company, whereby bondholders require the company to have enough cash to repay the loan and service the debt. Profits could halve, the ordinary dividends could be slashed but, as long as the company can meet its obligations to bondholders, they should continue to receive a fixed rate of interest.

These fixed interest markets can be complex therefore investing through a fund can be much easier and diversifies your investment across a number of bonds or gilts. It also leaves the choice of fixed interest vehicles to a professional manager. These investment instruments are regularly bought and sold within a fund with the aim of maximising returns. Some fund managers will try and maintain a fairly consistent level of income, others will move between bonds offering varying income depending on where they feel the best overall returns are available.