facebookHow do you choose between all the different bond instruments? What's the criteria that you use to make your choice? - Seedly

GSCC

09 Apr 2020

General Investing

How do you choose between all the different bond instruments? What's the criteria that you use to make your choice?

Theres so many different bonds out there and even bond ETFs. How exactly do i start investing in them? Are unit investment trusts offered by banks safe?

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Hariz Arthur Maloy

09 Apr 2020

Independent Financial Advisor at Promiseland Independent

Great qn!

Firstly when introducing bonds to your portfolio, there are usually 3 main reasons, to introduce negative correlation to your portfolio, to provide income, and to provide capital preservation when investing in individual securities held till maturity.

This has to be decided at the start. Because each of them would help you decide what bonds to choose.

Now, when choosing bonds there are 2 things we need to look at.

Credit quality/rating. And credit term.

Lower credit quality and higher credit term should reward investors with higher returns, due to more risk taken and a longer time to regain capital. This means a higher coupon naturally.

But low quality longer term bonds aren't the best in providing negative correlation and capital preservation due to default risk. Inflation also erodes coupons paid over many years.

Due to the many strategic decisions bond investors can make, it is almost always better to get active management in your bond holdings using a Fixed Income Mutual Fund after you have chosen the credit quality and term you want.

The only time I'd recommend investors hold individual bonds would be for high quality Govt bonds like US Treasuries and our SGS. Off the shelf corporate bonds shouldn't be held by the average retail investor in my opinion.

https://www.etf.com/etf-education-center/etf-ba...

Here's an article to understand more about active and passive bond funds.

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