Tuesday 02 December 2014 by FIIG Securities FIIG Securities Education (basics)

Busting the seven key myths about bonds - Part 5

Over the last 15 years, the FIIG team has had thousands of conversations with investors who are considering investing in bonds and other fixed income investments.

We’ve come to recognise some key concerns that investors quote when discussing a potential investment, most of which are based on false assumptions. So, if you’re still unsure about bonds, this series of articles which delves into the “Seven Key Myths” may help.

Myth #5 You need a lot of money to buy bonds directly so go for a managed fund instead

Reality #5 The minimum investment in direct bonds is $50,000 which is much lower than it used to be, enabling broader access to the asset class.

Retail and wholesale investors can now invest in the over-the-counter, institutional bond market from $10,000 per bond with a minimum upfront investment of $50,000. If you invest direct you have control over which companies you invest in, when you buy and sell bonds that may influence tax, the benefit of knowing when interest will be paid to you and how much will be paid and you can take advantage of the natural maturity of bonds to have capital returned to you.

Unlike managed funds where you pay ongoing management, performance and entry or exit fees, the cost to invest in the over-the-counter bond market is built into the rates of return a broker shows you.

The bond market works much the same as the foreign exchange market. If you go into a bank wanting to buy New Zealand dollars for a trip overseas, the bank will display a buy and a sell price on the notes. They take the margin in between. I can’t speak for other brokers but at FIIG Securities, we only take a margin when we trade bonds. There are no other management or ongoing fees or at the moment, no fees to open an account and set up a custodial service. Our service includes ongoing education and research and if you only ever buy one bond and hold it until maturity then we only make a small margin on that one transaction.

You can also invest direct through the ASX which offers mostly hybrids but does contain a small number of corporate bonds. In 2013, Commonwealth government bonds became available through the ASX.

If you invest in managed bond funds you lose many of the benefits of direct investment. Importantly, most managed funds only disclose their top 10 investments, so you don’t know what they’ve invested in. Your investment is in a unit based fund where you have to decide to sell the unit to recoup your funds so you lose the natural maturity that bonds provide.

Some investors mistakenly classify mortgage or property funds as fixed income investment. They may provide a regular income but they do not provide the same protective elements as bonds.

The minimum investment in direct bonds of $50,000 is higher than managed funds, many of which are from $20,000, but the gap is much smaller than it used enabling many to access the asset class.