What are Bonds? Should I invest in Bonds?
Bonds, loans, debt. They have the reputation for being very safe with minimal returns. Is this true? What are Bonds? Should I invest in bonds?
What is a bond?
Bonds, loans, and debt are a type of investment where you buy the debt of a company, institution, municipality or government. The return earned is on the rise in value of the bonds, as well as the yield/ interest rate paid. Think of it as you acting as the bank, you loan the money to Joe and he pays you back plus interest.
Government Bonds are often considered the safest option as a government is very unlikely to default or not pay their debts. Companies or corporate bonds are often considered a higher risk as they could go bankrupt.
What is a bond market?
A bond market is similar to the stock exchange where bonds are traded. These markets bond markets are often available only to wealthy individuals and institutions.
Where do I invest in Bonds?
The Bond Market
We know what the stock market is, but what is a bond market? To buy bonds directly, one would need a lot of money to invest. In excess of R1 mil. It is thus often only available to wealthy individuals and institutions.
Bonds Etfs and Unit trusts
For the likes of you and me, we can look at Bond Etfs and Bond Unit trusts. These are Etfs and Unit Trusts that are invested in bonds directly. Giving you access to top-quality bonds managed by seasoned investors and fund managers.
What are government bonds?
Government bonds are bonds issued by the government of a country. They are great options for investments and savings. But only once you understand what are government bonds.
Locally we can invest in Government Savings bonds directly from the Government at RSA Retail Bonds. They are good returns but your money is locked in for a specific period.
What is a bond yield?
Local bonds offer very good yields in the form of interest. As of May 2020, the RSA Retail bonds offered a 5 year bond yield of 10%. This means you will earn 10% per year back on your money.
Should I buy bonds?
That is up to you and your advisors. But Warren buffet, Benjamin Graham, and many other investors recommend keeping between 10 – 30% of your portfolio in cash/ bonds. Bonds are also good for shorter term investments and do offer a safer option for those nearing retirement.
Bonds, Debt, and Loans can be a good investment, depending on your goals and should be considered. The yields locally can offer great returns with little risk. Speak to your advisor about bonds or do some research and decide yourself.
Keep Safe and Keep Investing