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Gilt funds and bondsTHIS category of specialist funds invests largely in bonds: a type of security issued by the government and parastatals like Eskom. By buying a bond, the fund effectively "lends" money to the issuing authority, which is then obliged to repay the loan on the specified maturity date and make regular interest payments. When interest rates rise, bond prices fall and when interest rates fall, prices rise. This is because new bonds issued at the higher interest rate will sell at a higher price as they are more attractive to investors than those bonds issued when the interest rate was lower. Fluctuating interest rates are the biggest risk to a gilt fund. These funds allow an individual investor to take advantage of interest rate cycles. They are suited to the investor who wants a total return (capital and income) rather than a high regular income. But beware the capital risk when the interest rate cycle turns against you. Take note that the interest earned from investing in gilt funds is taxable. Top of page
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