You don’t have to start running away with your arms flailing at the mention of bonds. Refresh your memories with Bonds 101.
Investing in Bonds
When you talk about bonds, you’d hear terms like fixed income or fixed interest – this is because bonds pay investors a fixed rate of return. There are many benefits to be had from investing in bonds – including reduced risks to your overall portfolio, and an improved chance of higher returns to your money.
Investing in bonds gives you a pre-specified rate of return on your money. You invest your money by buying a bond and this gives you a contract which states that your capital will be returned and also includes a schedule of interest payments with a specific rate, which will also be stated on the contract.
Investing in Bonds: Minimum Size And Where To Buy
Currently, there are only 11 listed retail bonds and 22 Singapore Government bonds on the SGX. In Singapore retail investors are able to purchase bonds six months after they have been offered to institutional investors – when they have become “seasoned bonds”.
Typically bond purchasing in Singapore has required a minimum investment of $250,000 for retail investors however the market has recently increased accessibility to meet growing demand.
Each bond is different not just in size but also in terms of what you are getting for your money – speak with your broker or bank to get the specific details of each bond so that you can better understand the risks and return involved. You can buy nearly every type of bond either at your bank or through your brokerage and in some instances for corporate bonds they are available to buy direct from the company itself.
What To Look Out For When Buying Bonds?
Remember there are charges involved – you may be charged a small commission based fee on the bond purchase value or the bank/ broker might mark up the bond price directly. Make sure you understand the fees fully before deciding what bonds you want to buy.
Also keep in mind that bonds, even government bonds – typically the safest choice – have risk. This means you are not 100% guaranteed to get your initial investment back. The best indicator of risk when selecting a bond to buy is the credit rating given to the bond.
Bonds given a credit rating from AAA to BB are called investment-grade bonds – these are less risky. With these you have a high likelihood of receiving your initial investment and interest payments in full and on time. However, bonds rated BB to D are known as high-yield bonds (also as junk bonds). These pay a higher rate of return but are also much riskier. Make sure you do your research before investing your money.
In Singapore, retail bond issuers who want to sell seasoned bonds must have an investment credit rating of at least BBB, a market value of at least $1 billion, a listed stock or bond for at least five years and an initial minimum principal amount of $300 million for the bond offering. These criteria are the reason there are a limited number of bonds on offer in the Singapore market currently.
Alternatives To Bond Investing?
If you have a portion of your portfolio that you want to put into something except stocks or bonds, a high interest savings account can be a safer route. This will pay a lower rate of return but will be protect your money from losses. This is a good choice when the stock and bond markets are swinging up and down a lot – this is known as volatility. In this scenario you may want to keep your money in a safe place until things stabilise and you can make a better decision.
Also investing in just one bond can be a bad idea as if the issuer of the bond goes bankrupt you can lose all your money in one failed investment. To prevent against this risk an alternative is to invest in a bond fund rather than in individual bonds. This means you invest your money into a fund. Knowledgeable and experienced finance professional will manage the investment over a range of bonds given you a piece of returns from a wider range. This will give you better returns and lower risk. There are different types of bond funds which involve different types of bond investment. For example, some focus on investment-grade bonds and some focus on high-yield bonds.
Summary of Investing in Bonds
Before you buy any bonds check out their credit ratings and also consider your investment goals and timeline. If you are going to need that money for something specific in a few years putting it into a risky bond is not a good idea. However, if you have a little spare and want to diversify your portfolio a risky bond might be a good addition to a range of other safer investments.
Read more on Bond Investments.
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