It used to be so simple. The brain power of most private investors was put to work deciding which shares to buy. Asset allocation took up some time, but homeowners had the property part pretty much covered and it is not hard to work out that 5 per cent or 10 per cent of an investment portfolio should be kept liquid, in cash.

That left debate about how much should be in bonds, but the choice was simple enough. Bonds meant only one thing: gilts.

Older, more risk-averse savers might have allowed bonds to soak up rather more than half of a personal investment portfolio. Younger savers, conscious of the evidence suggesting that shares give long-term growth and better insurance against inflation, preferred to weight portfolios towards shares.

The response to changing economic and stock market climates was also relatively straightforward. When the going got tough, bonds reduced the risk of capital loss. In the good times, the emphasis went on shares. More risk, yes, but more potential for reward, too.

These rules of thumb still apply but decisions about what bonds to buy now requires much greater knowledge. Gilt-edged government bonds are far from the only option. Corporate bonds are much more common and big bond issues occur frequently. It emerged this week, for instance, that GlaxoSmithKline, the pharmaceuticals group, is in the process of raising £4.6 billion of new capital via corporate bonds.

Corporate bond investment funds have also ballooned in number. They were relatively unknown 15 years ago. Now, however, Moneyfacts, the data specialist, lists 110 corporate bond unit trusts. They outnumber gilt funds two to one: there are 34 general gilt unit trusts and 15 that focus on index-linked government bonds.

Moneyfacts also lists 50 “global” bond funds. That the Brazilian Government has attained a premier-league credit rating for its bonds is another reminder that realistic investment opportunities lie overseas, though the financial wounds inflicted by previous emerging market disasters gives good reason for caution.

In the UK, as the chart above shows, the performance of gilt-only and corporate bond funds has diverged sharply in the past year. As the credit crunch has bitten, gilts have fared considerably better. This is partly because the risk is inherently lower, but gilt prices have also been supported as scared investors have taken refuge in quality. Corporate bonds have not done as badly as might be inferred from some of the recent commentary about the finances of our leading companies, notably the banks. But it is clear that corporate bonds funds behave differently, and have suffered in the past year.

If the credit crunch persists, it is likely that gilts will continue to give the better returns. Corporate bonds are much more comparable with equities and may continue to struggle against cold economic headwinds. Puneet Sharma, an analyst at Barclays Capital, says that corporate bonds could be knocked if a US recession becomes a reality. He also says that historical data on defaults could be misleadingly rosy. Defaults may disappoint holders of good-quality corporate bonds only rarely, but goodquality bonds tend to turn to junk before going sour and defaults on junk leave less room for complacency.

However, if the worst of the credit crunch is in the past, and it may be, corporate bonds values may surge.Companies that hit further financial difficulty will protect bondholders if they bolster balance sheets with rights issues. The prospect of gains on corporate bonds is certainly better than with gilts, but the risk is higher.

Safety-first investors should avoid bonds issued by financial companies such as banks. Meanwhile, investment funds, rather than individual bonds, may be a better way in for most private investors. Past performance figures suggest that funds managed by engage Mutual, Rothschild PIC, Invesco Perpetual, Schroder, M&G and Fidelity are the ones to look at first.

robert.cole@thetimes.co.uk

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