5 Smart Reasons to Invest in Bonds
Published: September 10, 2015 | Updated: October 5, 2020 | Posted by: Bea Bongat | Personal Finance
Don’t like risk? You’re not alone. Filipinos are risk-averse with investors keeping 56% of their assets in cash (excluding properties). As much as possible, Filipinos prefer to safeguard their earnings. That is why more people in the Philippines invest in safer, low-yielding instruments such as time deposits and bonds.
Especially with the recent drop in the Philippine Stock Exchange index (PSEi), people are worried about the possibility of losing their money in the stock market. If you want to invest but are scared of risking too much of your net worth or you are a beginner for investments, try to put your money into bonds.
Table of Contents
What are bonds?
Bonds are considered IOUs (‘I owe you’). This is because bonds are debt instruments wherein an investor (you) lends money to a borrower (government or company). There are two general types of bonds – bonds issued by the government (treasury bonds) and those issued by corporations (corporate bonds). The two differ in the risks involved, which will be discussed in later paragraphs, but ultimately, government and corporate bonds are much safer than stocks.
Why should you invest in bonds?
1. Minimal risk
Bonds hold minimal, almost zero, risk because bond issuers are obligated by law to pay the principal and the interest on the bonds back. For treasury bonds, the government can always print more money or increase taxes to pay back. As for corporate bonds, corporations are required by law to pay the bonds first before they pay dividends to stockholders.
2. Higher returns than savings accounts
Most savings accounts pay you interest at a rate of 0.25% per annum. For those offering interest at 1% or more, you would need to have at least Php 1 million in the bank. Bonds offer higher returns than savings accounts; however, the returns from treasury bonds vary. For example, 4-year bonds offered in 2005 had a yield (until maturity) of 10% while 7-year bonds offered just last year have a yield (until maturity) of only 3%. Still, the interest rates are higher than what you get from savings accounts, which is a good investment if you’re a conservative investor.
3. Regular payments
Payment on your bonds is made usually on a semi-annual basis. The percentage of the debt paid to you on a yearly basis is known as the coupon rate. If your bond was issued at Php 100,000, and the coupon rate was 10%, then you would be paid Php 10,000 yearly or Php 5,000 semi-annually. Receiving regular payments on your bond with interest is a good way to stock up your net worth.
4. Introduction to riskier investments
Once you get used to seeing your money grow with your bonds, you’re more confident in the legitimacy of paper assets (bonds and stocks where pieces of paper define ownership) as opposed to physical assets such as real estate. Now that you have firsthand experience of growing your money through investments, it should give you the courage to invest in riskier instruments. If you’re hesitant to go into stock investing with all its risks, you can buy corporate bonds, which come with a little more risk than savings accounts, but not as much as stocks.
Unlike treasury bonds, corporate bonds give you higher yields with more risk involved. Unlike the government which can print more money to pay you back, the repayment on the bond depends on the corporation’s earnings. If you’re interested in corporate bonds, it’s best to buy bonds issued by major companies since they are already well-established in their particular sectors; thus, they have the earnings to pay back the bond.
Buying corporate bonds allows you to be riskier and experience higher returns without the exposure involved in stocks. As mentioned earlier, during times of financial turbulence, the company is legally obligated to pay you the interest and principal on the bond before the dividends to stockholders.
Read more: Best Investments For Every Risk Appetite
5. Diverse investment portfolio
When it comes to investing, you always hear the quote “don’t put all your eggs in one basket”. Bonds allow you to diversify your investment portfolio.
Efren Cruz, Chairman and CEO of the Personal Finance Advisers Philippines Corporation, says in a Philippine Daily Inquirer article, “bonds present a great way of spreading the risk in investing. They are relatively safer than stocks and provide higher returns than money market instruments.”
The returns on bonds are lower than the yields on stocks, but they are safer and minimize your risk.
Are you ready to invest in bonds?
Now that you know the ins and outs of both treasury and corporate bonds, you are ready to decide which one you want to invest in. You can invest in both as well, depending on your financial goals.
For treasury bonds, check the Bureau of the Treasury’s website for the latest offerings or go to your local bank. Bank of Commerce, BDO, and PNB are three banks that offer treasury bonds and other government-issued investments. Take note though that the minimum deposits vary greatly. You can buy BDO retail treasury bonds for as low as Php 5,000, but other banks may require a minimum of Php 100,000.
For corporate bonds, you can buy from your local bank as well. CTBC, BDO, and PNB are companies that offer these products. In addition, it also pays to stay up-to-date with news on local bond offerings so you can get first slice of the pie.
If you want to start investing but are scared to expose yourself to risk, invest in bonds first. As Efren Cruz says, “bonds are in between cash and stocks in terms of their level of return and risk.”