What You Should Know
Should I invest in…?
- Individual bonds?
- Bond funds?
- Unit trusts?
- Fixed Income Exchange-Traded Funds?
There are several ways to invest in bonds. You can buy individual bonds, bond funds, unit investment trusts, fixed income exchange-traded funds.
Your choices will depend on the amount of money you have to invest in order to achieve diversification, the degree to which you want professional management of your portfolio and your willingness to pay for professional selection and portfolio management.
If you decide to invest in bonds, you need to decide what kinds of bond investments are right for you. Most people do not realise that the bond market offers investors a lot more choice than the equity market.
There are many types of bonds-- and various ways to classify them:
- What market is the bond in? -- the Eurobond market, a foreign bond market, a domestic bond market
- Who issued the bond? -- a central Government, a sub-sovereign entity, a corporation, etc.
- How does the coupon rate work? --such as fixed rate, zero-coupon, floating rate, etc.
- What kind of maturity does the bond have? --such as short term, medium term, long term
- What currency is the bond issued in? --domestic currency, foreign currency, etc.
- What options does the bond have? --call, put, convertible, etc.
- What rating, if any, has been made for the issuer and/or the issue, AAA, AA, A, BBB, etc.?
Bonds can be broadly categorised in bond market sectors: government, sub-sovereign, corporate and mortgage-backed or asset-backed collateralised bonds. Within each market sector you will find bonds with different issuers, credit ratings, coupon rates, maturities, yields and other features. Each bond offers its own balance of risk and reward and your choice of which bonds to invest in will depend on your investment goals, your risk tolerance, and financial considerations.
Consult a financial advisor for more information.