You probably already know that bonds offer investors a fixed rate of return. However, there is still risk involved when buying bonds. Just like with stocks or any other type of investment, like the saying goes, you shouldn’t be putting all your eggs in one basket.
Having all your money in one particular bond is a risky strategy. For instance, if the issuer of that particular bond defaults, you may not get all of your money back and you may end up losing a lot of money at one time.
Bond vs Bond Fund: Diversity
Adding a variety of different investments to your portfolio is a smart strategy. Time has shown that diversification leads to higher returns and lower risk – especially when you’re looking at things long-term. If you are planning for your future, as most of us are, and want the best returns from your investments, then diversification is an important part of deciding where to put your money.
Bond vs Bond Fund:Portfolio
Bonds are less risky than stocks but there are still risks to consider. An individual bond might give you slightly more certainty about your investment than a bond fund. With a bond, you know from the outset what fixed rate of interest rate you will be getting and over what period of time. The end-date of the bond contract is set out from the start so you can plan for the day you will get your initial investment back.
A bond fund on the other hand is a little less rigid. Most bond funds offer variable rates of performance. In addition, bond funds will typically not specify and end date from the outset. However, perhaps, the biggest difference between investing in a bond and a bond fund is that with a bond fund, there is no commitment for the issuer to return the money you invest initially.
Market conditions will determine whether you will make or lose money in both cases – however, with bonds, you know with a higher rate of probability what the outcome and duration of your investment will be.
Bond vs Bond Fund:Minimum Size
Typically, bond purchasing in Singapore has required a minimum investment of $250,000 for retail investors. However, last year the rules were changed so that smaller board lot sizes of 1,000 are available for retail investors to buy – at a price close to $1,000 per lot. Currently, there are only 11 listed retail bonds and 22 Singapore Government bonds on the SGX.
Bond funds, on the other hand, can have more manageable minimum investment sizes – starting from as low as $1000 – even though you will be getting to invest in a wider range of bonds. Again each bond fund is different and make sure you are clear on the size and the charges involved before investing your money. The bond manager will charge a fee for their services and it should not be so high that it is not worth your while.
A key advantage of buying a share of a bond fund is that if you wanted to buy lots of individual bonds separately for diversification it can get very expensive. There will also be transactions costs – so each time you buy and sell each bond you have to pay a fee. By buying a part of a bond fund you can get a small slice of performance from a lot of different bonds with a smaller investment than if you had to buy all of the range separately.
The transaction costs are lower. You can benefit from the knowledge and skillset of the managers running the fund. These managers are in a better position than you to choose fruitful investments and this can mean lower risk and higher return for your money.
Bond vs Bond Fund:Liquidity
The upside of having less rigid terms with your bond fund investment compared to bonds is that you can get out of the investment more easily if the need arose. Typically you can sell bond funds at any time you wish. Individual bonds, however, can be a bit more difficult to liquidate. As you have bought a contract that sets out the dates for interest payments and initial investment repayment both parties have in effect agreed to adhere to the terms. You may be able to exit the contract early but whether you profit or incur a loss, it will be dependent on the market price.
Selling your bonds early might come at a penalty – i.e. with a small charge to your investment. If you think you might want to liquidate during the time of your bond investment you should make sure before you purchase that you understand the charges involved should that situation occur. If the charges are too high a bond fund might be a better investment choice for you.
Overall, a bond fund can be a great choice if you want diversity for your bond investments and have a limited investment budget.
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