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In our last article on bonds, we covered how bonds work, and whether they are a suitable investment for you. This article will give you an overview of the different types of bonds along with how to buy them.
There are several different types of bonds in Singapore, and choosing the right one for you depends heavily on your investment objectives and risk appetite.
Often considered the safest investment instrument, government bonds are issued when the government requires funds to support their spending. These bonds are fully backed by the government and the risk of default is highly unlikely, which gives you the assurance that there’s a lower risk of losing your principal.
However, because of this lower risk, interest rates on government bonds are generally lower than those issued by other parties. Investors can purchase Singapore Government Securities (SGS), and there are 3 types:
To invest in any of these SGS instruments, investors must have an individual Central Depository (CDP) account.
The first requires a minimum investment amount is S$1,000 and the government currently only offers 1-year T-bills. SGS bonds are longer-term debt securities that pay interest every 6 months until its maturity, which ranges from 2 to 30 years.
Investors can choose to hold these two instruments until maturity, or sell them before then on the secondary market. You can purchase them when they are initially issued at a primary auction, or off the secondary market.
The SSB is unique because its funds are not used for government spending, you cannot trade it, and your capital is fully guaranteed. It was introduced as a long-term savings tool targeting retail investors and has a maturity of 10 years. You can apply to purchase SSBs through your bank’s ATM, and the minimum investment is S$500.
These bonds are issued by businesses that need funds for things like improving their infrastructure, expanding their product reach, pay off debt, or any other expenditure that they feel will help their business. Corporate bonds usually offer higher interest rates compared to government bonds because they are usually riskier.
You are exposed to capital and credit risk, and if the company that issues the bond goes bankrupt and is forced to default, you stand to lose everything you have invested.
There are 10 bonds listed on the Singapore Exchange (SGX), and you are able to buy them after opening a brokerage account and paying the requisite trading fees. They are usually sold in lots, where 1 lot is 1000 units. You can check the price per unit for a particular bond by going to SGX’s website.
Bond funds are an easier way for retail investors to gain access to the fixed income market, while providing them the opportunity to diversify their holdings. There are several types of bond funds including global, regional, country-specific, sector-specific, and high-yield bond funds.
Each type has its own investment objective and their interest can vary depending on market conditions. Investors should do adequate research to gauge the fund’s performance, and are encouraged to look at its total returns which include income generated by the bonds as well as how much it has gained or lost over a period of time.
Bond funds are a more practical way of investing in bonds, as you get access to several different bonds within the fund. Without using a fund, the capital you would need to invest in all these bonds would be incredibly high.
Furthermore, you do not have to manage your bonds portfolio, as that task would be given to your fund manager. Do keep in mind that this service will incur some fees, and if you prefer to actively manage your portfolio you can choose to do so as well.
Finally, bond ETFs are exchange-traded bond funds that track the performance of bond indices. To do so, they may invest in a portfolio of bonds, or replicate its performance with other instruments like derivatives or swaps. Like bond funds, different bond ETFs have different strategies and goals, and provide access to different bonds at a lower cost while allowing diversification.
Regardless of which type of bond you decide to invest in, researching its benefits and drawbacks while keeping your goals in mind is key. Being clear about your own risk appetite and the purpose of your investment (eg. diversification, retirement savings, high yields) will help you to decide on the best bond for you.