My Name is Bond

There are three main categories of investments available to the general public; namely real estate, equities, and bonds.

For Malaysian investors, real estate is usually the most familiar. Most would have (or would like to have) investments in at least one unit of real estate. The attractiveness of real estate lies in the ease by which one can make sense of the investment. The asset is physical and there for all to see, and the returns by way of rental or resale is easy to understand. Furthermore, real estate allows leverage; meaning we can borrow money to invest in them thus stretching the power of our ringgit. This makes real estate popular.

Equities are mostly viewed as high risk investments, even though there are numerous defensive stocks available to the cautious investor. Usually, only the more adventurous investors ‘stray’ into equities. Unlike real estate, equities are not as intuitively understandable. One would need some background in accounting and finance to do a good job investing in equities.

But the focal point of today’s article is on Bonds. The average Malaysian investor does not have a very good idea on what bonds actually are. Those who do understand tend to write them off as ‘low-return’ investments no different from Fixed Deposits.

When we talk about bonds, there are a few basic points we have to know.

·  A bond is a debt issued by a large company (such as Genting or YTL) which pays an agreed interest each year.  For example, Genting may issue a RM 100 million bond which pays 5% per year. Investors will be invited to purchase chunks of this bond.

·  The money you can make from bonds is not from the interest alone. You can buy and sell bonds.

·  If the general interest rate (on bank loans and deposits) rises, bonds tend to fall in value because their interest rates have been fixed prior to the rise. The only way the bond can now offer the same interest is if you can buy it for a lower price.

·  If the general interest rate falls, bond prices will rise, due to the same reasons stated above.

·  It is difficult for small investors to directly invest in bonds. In the example above, small investors may find it hard to directly buy a chunk of Genting’s Rm 100 million bond.

·  The best way for small investors to invest in bonds is by buying into Bond Unit Trust Funds. The Bond Fund, having accumulated large amounts from numerous small investors, will have enough money to go shopping for quality bonds.

·  Bond Funds have very low service charges compared to equity funds.

·  Typically, a bond fund in Malaysia would have returned you an average of 6%-8% per annum in the last ten years.

Bonds are considered as safe investments, and with returns of 6-8%, are a really viable (and in my opinion, superior) alternative to Fixed Deposits.

Bonds as an investment category are under-appreciated in Malaysia. They actually serve very well as the defensive/safe portion of your asset allocation. Most financial plans created by professional wealth planners would have bonds in them, but for the general public, there is still much room for improvement in awareness of bonds.

Posted in: Investment