In this article we explore everything you need to know as a retail investor in bonds. With equity markets having become more volatile, many investors are looking for a more stable home for their money.

We look at the UK government bond or ‘gilt’ market, and the corporate bond market. We also look at how to spread your bets by owning a broad mix of bonds through funds and trusts.

What is a bond?

Unlike an equity share, which is literally a share in the future of a company, a bond is a financial obligation. Companies and governments issue bonds to finance their future spending and they make regular income payments to the bondholders.

The global bond market is worth over $140 trillion today, similar to the value of the global equity market. The US is the biggest bond market, followed by China, although the Chinese market is closed to foreign retail investors

The UK bond market is worth around $4.3 trillion or £3.6 trillion. Of this, £2 trillion is in government bonds or ‘gilts’, so called because they were originally printed on gilt-edged paper.

The balance is in corporate bonds, mostly issued by UK companies to finance their operations. However, foreign companies can also issue sterling denominated bonds as part of their financing.

All bonds are issued at ‘par’, or 100, and most have a maturity of between one year and 10 years. During that time, they can trade above or below ‘par’ depending on market sentiment.

When a bond comes due for repayment, the company can hand investors back their cash and issue new bonds. However, they often buy back their bonds early and issue new bonds, especially when interest rates are falling.

Why should I own bonds?

In the past, a classic investment strategy was to put 60% of your money in stocks and 40% in bonds. This 60/40 approach was intended to provide income and stability to portfolios.

These days, investors are increasingly drawn to alternatives to debt as a way to diversify their portfolios. Gold, crypto, real estate and infrastructure have all taken the place of debt for many people.

Yet the fact remains, a steady income stream can add stability to a portfolio. In contrast, assets such as gold and crypto pay no income and can be more volatile than investors appreciate.

As a bondholder, you can receive a set level of annual interest paid at regular intervals. Moreover, in the event of a company going bust you have more security as a bondholder than an equity investor.

When companies are wound up, the first investors to be repaid are secured creditors whose debts are backed by specific assets. They are followed by preferential creditors and bondholders, while equity holders can end up with nothing.

Choose your level of risk

Government bonds are usually AAA-rated, which is the highest rating possible. That means there is a tiny risk of bondholders not getting paid their interest or their capital when the bond matures.

Some corporate bonds are also rated AAA, but ratings can range all the way down to D which is ‘sub-investment grade’. Generally, ratings from AAA to BBB- are considered investment grade and less risky than other bonds.

Most big UK companies, including banks like Barclays (BARC) and energy firms like BP (BP.), issue bonds on a regular basis. Typically, they pay a higher level of interest than gilts, which currently yield 4.5%, even though they are fairly low risk.

Generally speaking, the riskier a bond is, the higher the interest rate investors will ask in return. Some UK corporate bonds have interest rates as high as 12%, but these are really only suited to investors with a high tolerance for risk.

If you want to buy individual government or corporate bonds, most investment platforms offer a service. You will need to do your own research to decide what suits you in terms of risk and reward.

Let the experts do the work

If you are new to bonds, the best option may be to trust it to the professionals and buy a bond fund or trust. That way the manager is doing the hard work, and you can spread your money across a range of instruments.

According to Trustnet, the L&G All Stocks Gilt Index Trust was one of 2025’s most popular bond funds. The trust took in new cash, and analysts at Hargreaves Lansdown praise the team as ‘one of the most experienced’.

Another popular bond fund in 2025 was Royal London Investment Grade Short Dated Credit. The fund ended last year with assets of £3.2 billion thanks to £370 million of inflows plus positive investment returns.

Among so-called Strategic bond funds, Royal London Sterling Extra Yield Bond stands out for its impressive track record. The fund has a top-quartile rating over one, three and five years

Its investment aim is a high level of income, and the current yield is 6.3% with payments every quarter. The management team focus on bonds rated BBB or less, meaning they are higher risk, but with that comes performance.

Top trusts

The AIC (Association of Investment Companies) lists five trusts in its ‘Debt (Loans & Bonds) sector. The average dividend yield for the sector is 8%, which is considerably higher than the current government bond yield.

Average 10-year share price total returns have been 110%, which also compares favourably with 70% for the FTSE 100. Average fees, meanwhile, are 1.19% with a range from 0.89% up to 1.79% at the high end.

The highest-yielding trust using current data is CQS New City High Yield (NCYF) with an 8.83% annual payout. It has returned 119.3% over the past decade, outperforming the sector average, while fees are 1.17%.

The trust invests mostly in high-yield fixed income securities along with selected high-yielding equities, with dividends paid quarterly. To help mitigate interest rate risk, the portfolio tends to have a fairly short average duration.

The trust with the lowest annual charge is Invesco Bond Income Plus (BIPS), although its 10-year return is also the lowest at 83.4%. BIPS also invests in high-yield bonds, pays dividends quarterly and provides ‘a high level of income and capital growth’.

Monthly income

Our pick of the trusts is TwentyFour Select Monthly Income (SMIF), which wins on performance, fees and yield combined. The 10-year total return is 113.4%, while fees are 1.13% and the current yield is 8.4%.

The managers take advantage of the ‘illiquidity premium’ across the debt sector, which is largely overlooked by other investors. The portfolio is largely BB-grade, and the managers have a target total return of 8% to 10% per year.

This trust has another key feature which marks it out from the competition, in our view. Whereas most income vehicles pay dividends semi-annually or quarterly, SMIF pays monthly as its name suggests.

For investors who want to reinvest their dividends each month and compound their interest, this is a unique opportunity. We will cover the importance of compound interest in a future article.

Disclaimer: The author (Ian Conway) owns shares in TwentyFour Select Monthly Income

Disclaimer: This content is for information only and is not investment advice. Always do your own research before investing. Click here to see full disclaimer.