Contrary to popular belief, bonds are not 100 percent risk-free investments. So, consider the following before buying a bond.
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.
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.
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.
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This article is brought to you by Standard Chartered Bank (Singapore) Limited. All information provided is for informational purposes only.