Let’s talk about bonds

In the simplest terms, bonds are a loan, made by you, to a government or company when they need to raise additional capital to help finance new business opportunities.

The easiest way to invest in bonds is to invest in a bond fund. Rather than invest in bonds directly, many people prefer to invest in a bond fund.

For many years, Malaysian investors have become comfortable with one form of investment; buying and selling shares. However, the risks of losing money in the share market is also high. Bonds have become a viable way of investing with lower risks and it has become more popular through bond unit trust funds.

Shares are a way of owning part of a company and sharing in its success and failure. When equity markets fall, the value of equity investments fall. So spotting a good company at the right time is part of the excitement, but it is also part of the risk.

Bonds, on the other hand, are generally affected by changes in interest rates and inflation rather than fluctuations in the stock market. And their prices move less sharply than equities. So they are often regarded as a safe haven from stock market turbulence.

However, as neither bonds nor equities are free of risk, it makes sense to reduce the risk to your investment by diversifying you portfolio to hold a combination of bonds and equities. That way you can add some degree of stability stock markets fall.

Generally, though, equities have grown more than bonds. So, if you are looking to grow your capital at a higher rate, your portfolio would probably lean more towards equities.

If, however, you aren’t at a stage in your life where you want to take risks, you may want to increase the percentage of bonds you hold.

Here is a quick way to roughly work out what percentage of bonds you should hold in your portfolio.

Your age is the approximate percentage of bonds you should have in your portfolio. For example, if you’re 38 years old, about 38% should be in bonds. 65 years represent 65%. And so on.

When you invest in a bond fund (or fixed income fund as they are sometimes known), your money is pooled with other investors’ money and invested in a wide range of individual bonds.

This way, any risk to your investment is reduced, since you aren’t reliant on the fortunes of a single company or government.

What’s more, you also benefit from having a professional bond fund manager to watch over your investment.