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Tips on investing in bonds
10 Mar 2019 (29 views)  

Someone made this observation. Investors should not assume that it is safer to invest in bonds compared to stocks. All investments need to be studied carefully. 

In the case of bonds, the investors should study the following:

a) Are the bonds rated? If the bonds are not rated, why are they not rated? The investor has to assume that an unrated bond is risky.

b) The rating of the bonds will indicate if the bonds are of investment grade. Read here. Look for a rating of BBB+ or higher.

c) If the bonds are not rated, the investor should study the financial position and cash flow of the company before making an investment. This requires some financial knowledge, which is outside the scope of the ordinary retail investors. Tip - avoid the unrated bonds.

d) Even bonds of foreign governments carry a risk. You should only invest in the highly rated ones. Even so, you have to be careful for example, in investing in US government bonds.

e) If you wish to invest in bonds, you should choose a well managed bond fund. Let the fund manager study the bonds that can be invested. You will also benefit from the diversification when investing in a bond fund. You do not take the risk of losing a large part of your investment in case of the default of a specific bond. Do take note that the fund manager expects to take away a management fee of up to 1%. This will reduce the yield of your investment considerably.

f) While it is true that it is safer to invest in the bond rather than the stock of a specific company, you should be aware that if the company goes bankrupt, all the bond and stock investors will lose their investment. It is more important to ensure that the company is financially sound.

Tan Kin Lian


 

Tips on investing in bonds
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Someone made this observation. Investors should not assume that it is safer to invest in bonds compared to stocks. All investments need to be studied carefully. 

In the case of bonds, the investors should study the following:

a) Are the bonds rated? If the bonds are not rated, why are they not rated? The investor has to assume that an unrated bond is risky.

b) The rating of the bonds will indicate if the bonds are of investment grade. Read here. Look for a rating of BBB+ or higher.

c) If the bonds are not rated, the investor should study the financial position and cash flow of the company before making an investment. This requires some financial knowledge, which is outside the scope of the ordinary retail investors. Tip - avoid the unrated bonds.

d) Even bonds of foreign governments carry a risk. You should only invest in the highly rated ones. Even so, you have to be careful for example, in investing in US government bonds.

e) If you wish to invest in bonds, you should choose a well managed bond fund. Let the fund manager study the bonds that can be invested. You will also benefit from the diversification when investing in a bond fund. You do not take the risk of losing a large part of your investment in case of the default of a specific bond. Do take note that the fund manager expects to take away a management fee of up to 1%. This will reduce the yield of your investment considerably.

f) While it is true that it is safer to invest in the bond rather than the stock of a specific company, you should be aware that if the company goes bankrupt, all the bond and stock investors will lose their investment. It is more important to ensure that the company is financially sound.

Tan Kin Lian


 

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