Protect your portfolio against inflation

With signs of inflation mounting, risk-averse investors should keep in mind the option of index-linked gilts that is, government bonds that shield investors from inflation.

With index-linked government stock, both the income and the price at which it will be redeemed are adjusted to take account of movement in the retail price index (RPI).

But the price paid for this protection is a lower coupon, so if you buy it after it has been issued (in the secondary market), your yield will also be lower than that of a conventional gilt.

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The index-linked gilt maturing in 2009, for instance, pays a coupon of 2.5%, and currently yields 1.7%.

There are currently index-linked gilts with redemption dates ranging from 2006 to 2055 in existence. Index-linked gilts can be bought in the secondary market through brokers, though if you want to guard against a price fall, you should buy at issue and hold to maturity.

Bonds are issued in auctions by the Debt Management Office, where investors need to join the Approved Group' of investors to participate.

See the guide to gilts at the UK Debt Management Office website for more information on index-linked gilts.