Don't discount bonds as an investment choice

Fixed-income securities a way for investors to manage portfolio risks and boost returns

- Angela Tan

Investors have often been told to diversify their portfolios and add bonds to their baskets of stocks.

This is because bonds are often considered less risky than stocks and can help manage risks and enhance returns.

Lamented a friend over dinner recently: "I have been putting my spare cash in short-term Treasury bills, but some friends said I must consider other ways to make money and suggested longer-term bonds. That's where it gets confusing for me.

"I have to learn the different bond terminology, the correlation with interest rates, risks."

Stocks and bonds are two different asset classes.

When you buy a company's stock, you become a part-owner. You make money if the company does well or lose money if it does not. Most of the money you make will come either through share price appreciation or through dividend payments.

When you buy a bond, you are essentially lending money to the issuers, either governments or companies, for a fixed period of time. In exchange, you are paid a regular stream of income, or coupon, and on maturity, the bonds are redeemed and you are paid back the face value or par value. For instance, if you buy a bond with a par value of $5,000, a coupon rate of 3 per cent and a maturity date of 10 years from issuance, the issuer would pay you $150 annually for a decade before returning the $5,000 principal on maturity.

Given that the coupons are paid at fixed intervals, quarterly, semi-annually or annually, bonds are often referred to as fixed-income securities because they provide a predictable income stream.

Before investing in bonds, it is important to be familiar with the bond terminology. To help kick-start your journey, The Sunday Times asked Mr Chris Wong, investment director of fixed income at Schroders, and other experts for a beginner's guide to bond investing, and key things to note.

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