A new way for savers to beat inflation from M&G?

Late last month, National Counties Building Society plugged the gap with a cash Isa that guaranteed to deliver a return above inflation, but such was the demand that it was fully subscribed within days.

But now there could be another alternative. M&G is looking to woo savers with a revolutionary new corporate bond fund – a bond fund that aims to keep pace with inflation, reports the Daily Telegraph.

Inflation is normally the nemesis for bonds – when the inflation rate rises, the price of a bond tends to drop, because the bond may not be paying enough interest to stay ahead of inflation.

The M&G UK Inflation Linked Corporate Bond Fund will aim to counter the effect of inflation by investing in inflation-linked corporate bonds offered by blue-chip companies, together with derivatives that mimic the performance of index-linked bonds’’ (the above extracts are from Emma Wall’s article in the Daily Telegraph, the full article can be found here)

Understandably this announcement has caused a lot of interest particularly from those living off the income from their investments/savings. With interest rates at an all time low, and inflation high by comparison, savers are seeing their income, as well as the purchasing power of their savings, dwindle.

So should savers pile in to protect themselves against inflation?

Now while any innovation in finance is a good thing, a few words of caution if you are thinking of investing in this fund.

• M&G are using the Consumer price index (CPI) as its measure of inflation, currently at 3.1%, as opposed to the higher Retail Prices Index (RPI) which sits at 4.7%. RPI is often used as the inflation measure in wage negotiations and some pension increases. So be warned that the target inflation measure could still be well below that which you may be anticipating or indeed experiencing (for more on inflation and how to calculate your own personal inflation rate click here).
• Investing in corporate bonds carries additional investment risk over and above that of cash on deposit. There is a chance that you may get back less than you originally invested as returns (and indeed your original capital) are not guaranteed.
• This fund invests in index-linked corporate bonds which in itself is a fledgling market. So M&G’s investment choices are going to be limited which is not ideal.
• If inflation doesn’t rear its head and we see deflation instead then this fund will likely lag behind traditional corporate bond funds.