If the stock market is not performing too well, pension funds and other institutional investors look for alternative places to put their money and bonds are one choice.

A bond is guaranteed by the issuer which could be the government or a company.

They are issued to raise additional money for the government or company concerned with the aim of paying back the face value plus interest.

Government or corporate?

A government bond, also known as a gilt, carries less risk than that of a corporate bond as it is guaranteed by the government which is unlikely to go bust.

The downside to a corporate bond is that the companies who issue them may not be able to meet their repayments.

Plus there is an interest rate risk which can affect the value of the investment.

The risks

There are two types of risk to watch out for.

Credit risk, is the possibility that companies who issue corporate bonds may not be able to meet their repayments.

Interest rate risk, is where interest rate changes are likely to affect the capital value of your investment.

Many financial service companies will offer products that invest in bonds either wholly, or include them as part of their investment mix.

Clients will pay a lump sum or fixed monthly investment and their money will be pooled together with other clients so the company can invest in a range of bonds including corporate and Government gilts.

With these products, investors should view them as a medium to long term investments.

Collectively pooled bonds

When choosing a bond product, it is important to understand where the money will be invested and over what term.

Some bonds last a year, others as long as 40 years.

With a collectively pooled bond, while the majority of the investment may be in actual bonds, some of it may still be in shares which could affect the performance overall.

A poorly performing share within the product may impact on the return.