Investing in Bonds
To no one’s surprise, there has been renewed interest in government bonds in recent months which are considered safe havens during these troubled times.
While no investment is completely risk-free, in comparison to other investment options like shares and property, government bonds are regarded as one of the safer investment types in the market, second only to cash at the less-risky end of the risk spectrum.
How bonds work
When buying bonds, such as those issued by the Australian or US government, you’re essentially lending them money for a fixed period of time at a set value. In return, these governments pay you regular interest, and at the end of your bond term, they’ll also refund your original investment.
If you decide to sell your bond before its term has ended however, you’ll receive the market value of your bond — what someone is prepared to pay for it — which could be less than your original investment.
Key benefits on investing in bonds
- Reduced risk – Bonds are classed as a defensive asset class. They can provide a stable source of income while reducing your portfolio’s vulnerability to volatility in the share or property market. However, with any bond, you are relying on the strength of the underlying borrower. Australia is an excellent borrower, so lending to our government is a relatively safe option. You can also buy bonds from large companies like Australia’s big banks. With corporate bonds, while you have the potential to earn higher returns, you face higher risk compared to government bonds.
- Diversification – Having defensive asset classes like bonds in your portfolio can provide stability during volatile markets.
- Regular income stream – Bonds pay regular interest (or coupon payments) which can serve as a stable income stream. How much you are paid depends on whether the interest rate is:
- Fixed: the rate is established when the bond is issued and remains the same throughout the term of your bond
- Floating: it can go up and down over the term of the bond. If interest rates increase, your payments will also increase.
- Indexed: payments reflect the Consumer Price Index.
How to invest in bonds
- Corporate bonds: One option is to buy corporate bonds directly from a company when they issue a public offer. A prospectus is then provided containing all the information about the bond such as the minimum amount required to invest, bond price, the bond term etc. You can also buy corporate bonds directly from a stock exchange like the Australian Securities Exchange (ASX) or through a broker or managed fund.
- Government bonds: You can invest in government bonds via the ASX, through a broker or a managed fund.
Important information and disclaimer
This article has been prepared by NULIS Nominees (Australia) Limited ABN 80 008 515 633 AFSL 236465 (NULIS) as trustee of the MLC Super Fund ABN 70 732 426 024. The information in this article is current as at September 2020 and may be subject to change. This information may constitute general advice. The information in this article is factual in nature and does not take into account personal objectives, financial situation or needs. You should consider obtaining independent advice before making any financial decisions based on this information. You should not rely on this article to determine your personal tax obligations. Please consult a registered tax agent for this purpose. Opinions constitute our judgement at the time of issue. In some cases information has been provided to us by third parties and while that information is believed to be accurate and reliable, its accuracy is not guaranteed in any way. Subject to terms implied by law and which cannot be excluded, NULIS does not accept responsibility for any loss or liability incurred by you in respect of any error, omission or misrepresentation in the information in this communication. Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market.