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Learn about the different types of bonds available and the risks involved to make smarter decisions when including them in your investment portfolio

New to the bond market? Know this before you invest!

Being aware of the risk characteristics of bonds can help you make smart decisions about including them in your investment portfolio.

Bonds are fixed-income assets that offer balance and diversification to an investment portfolio. While the entry point for bond investment can go as high as S$200,000, there may be bonds available to individual investors that have an entry point of a few hundred dollars.

As a first-time bond investor, it might help to understand the types of bonds available in the market and what to keep in mind when making investment decisions.

What are the different kinds of bonds to consider?

Type of Bond
Singapore Government Securities (SGS)
Corporate Bonds

 

Bond Exchange Traded Funds (Bond ETFs)

 

What Sovereign bonds issued by the Government of Singapore, such as Singapore Savings Bonds (SSB) and SGS, are safe and virtually risk-free investments.

 

The riskiness of corporate bonds can vary and usually depends on the company’s financial fundamentals.

For instance, if there are two corporate entities offering bonds at the same rate of interest, it is advisable to go with the company that has stronger financial fundamentals.

With a basket of bonds as their underlying assets­­, bond ETFs help diversify your investment portfolio by spreading out the risk across multiple bonds instead of parking all your monies in one bond.
How SSBs are available through local banks.

SGSs can be purchased at primary auctions through local banks or from the Singapore Exchange (SGX) through your financial advisor.

 

Corporate bonds can either be unlisted or listed. While unlisted bonds are available in Over the Counter (OTC) markets for accredited investors, listed bonds are available on SGX for retail investors. Bond ETFs are available on SGX through your financial advisor.

What do I need to look out for?

Contrary to popular belief, bonds are not 100 percent risk-free investments. So, consider the following before buying a bond.

Issuer’s creditworthiness

It is fair to say that if they are from the same issuer, bonds are typically less risky than stocks. However, if you are looking at stocks of a blue-chip company versus bonds issued by a company with weaker financials, the risk argument is skewed against the weaker company, whose bonds may carry a higher risk of default.

A valuable metric for evaluating debt issuers is credit rating. A credit rating helps investors decide how risky it is to invest money in a certain security by providing independent, objective assessments of a company’s creditworthiness. While AAA is the highest possible credit rating for a bond, any investment rated below BBB is considered a junk bond and hence, risky.

Liquidity

Compared to stocks, bonds tend to be less liquid. Therefore, do evaluate the trading capacity of a bond – how quickly can you sell this bond in the market should you need the cash?

Also note that while both the principal amount and the liquidity of Singapore government bonds are assured, the sale value of corporate bonds might fluctuate more based on market conditions. So, pay attention to the financial fundamentals of the company issuing the bonds to ensure that you can get your principal back.

Maturity period

Unlike stocks, bonds usually have a fixed term. Hence, it’s wise to define your investment time horizon before investing in a bond to ensure it is in sync with the maturity period. For instance, if your investment time horizon is 10 years, then you don’t want to be caught holding onto a bond with a 20-years maturity period.

In conclusion, an optimal investment portfolio is one which has exposure to both debt and equity. While an equity investment can spike your returns during good times, debt can offer you stable returns during bad times. Therefore, choosing the right bonds (the debt part) can give you a more balanced investment portfolio.

Interested to find out more? We can help to arrange a session with our financial advisor, who will help you with the information you need. Chat with us now.

This article is brought to you by Standard Chartered Bank (Singapore) Limited. All information provided is for informational purposes only.

Disclaimer:

This article is for general information only and it does not constitute an offer, recommendation or solicitation to enter into any transaction. This article has not been prepared for any particular person or class of persons and it has been prepared without regard to the specific investment or insurance objectives, financial situation or particular needs of any person. You should seek advice from a licensed or an exempt financial adviser on the suitability of a product for you, taking into account these factors before making a commitment to purchase any product. In the event that you choose not to seek advice from a licensed or an exempt financial adviser, you should carefully consider whether the product is suitable for you. You are fully responsible for your investment decision, including whether the investment is suitable for you. The products/services involved are not principal-protected and you may lose all or part of your original investment amount.