To The Moon

Bond investments should bepart of your overall portfolio?

Comparing to equity, bonds often represent a less volatile investment instruments.Why so?Because Bonds are less likely to fluctuate with the company’s earnings and forecast, and they usually (not all) pays out regular coupons, which is a regular cash flow that investors can expect.

Behaviour of Bonds, in araisinginterest rate environment:

The coupon of a bond is typically fixed. For example a 3% couponbond,will naturally pay out 3% interest to investors at a regular interval, and at maturity, pay out the face value of $100 as thepprincipalrepayment.

In situation where interest rate is raising, for example in today’s environment,the risk-free rate is already around 4%. This means that investors will no longer receive a 3% coupon bond anymore, because they can get better rates with bank deposits. Is this true?

Scenario 1

So naturally the price of the bonds will drop, to say $97.30. So that investors while continue to receive only 3% coupon, will also receive $1.70 ($100 - $97.30) as capital gain, thereby giving them atotal return of 4%. This is known as the Yield to Maturity (aka YTM).

Scenario 2

Correspondingly, if the interest rate dropsdown,the bond price will increase. In the same example above, if interest rate drops to 2%, the price will be at $102.85. essentially investors continues to receive 3% coupon, but will suffer a capital loss of $2.85 at maturity, bringing their YTM to 2% overall.

Bonds and interest rates are known to have an inverse relationship, ie when interest ratesgoup, bond prices will come down, and vice versa. Market forces will adjust the price of the bond (because the coupon is fixed) so that bond investors will not be shortchanged.

Is it a good time to buy bonds today?

With interest rates at an all-time high (at least over the last 14 years), it is not the wrong time to invest in bonds.

Question is will interestrate go up higher?There is that possibility for sure. But say if you are building a portfolio to receive 4% of interest on your investment. The YTM is already 4%, why not start deploying some resources intobonds.

How to access the bond market?

Basically 3 ways:-

1. Call your bank now and tell them you wish to invest in bonds. However, you need to prepare to allocate at least $250,000 as initial investment amount, into 1 bond. This means that you need to be very sure of the quality of the issuer. Because there is no diversification.If the issuer default, you will lose all your money.Read here
2. Buy SGX Listed Bonds. There are a couple of bonds that are listed on SGX and you can invest there like how you would buy stocks. For example SIA, Temasek and Aspire are some of the companies that have listed retail bonds on SGX. You can achieve some diversification with these few names, but not by much. Do note that retail bonds are not very liquid in Singapore, so investing or sellingdoes affectthe price quite a bit. The cons are that there is a limit to how much you can order, without affecting the price.
3. Buy a bond fund. A bond fund is professionally managed, usually there are many bonds within the portfolio, and most can be started with $1,000 initial investment amount. This represents a good opportunity to cover the negative points mentioned above. It allows for diversification, it allows for deployment of investment less than $250,000, and most of all it is professionally managed, by experts whose job is to help you grow your money and get reward by doing that. That is why you pay a management fee.

Now, if you look at the$UNITED FIXED MATURITY BOND FUND 1 "A" (SGDHDG) INC(SGXZ80611742.SGD)$ launched by UOB Asset Management and Tiger Brokers Singapore, you will find something that not only checks the boxes above, but also it does not have any management fees at all. Crazy idea? Leave you to decide.

Click Here for more details about the United Fixed Maturity Bond Fund 1

Also worthwhile reading about how Tiger Brokers and UOB Asset Management came out with the idea of United Fixed Maturity Bond Fund 1, click here.