Bonds are an important part of every well-diversified investment portfolio. When you invest in bonds you can benefit from capital gains and receive annual interest payments, in the form of so-called coupons. Bonds are also considered as a safer investment than equities and offer diversification away from the stock market.
However, investing in bonds is not always as simple as investing in stocks. Many bonds are tailored towards institutional investors and can therefore only be bought with minimum denominations of, for example, $100,000. Having said that, there are ways in which you can invest in bonds. The three most common ways to invest in bonds as a small investor are through investing in ‘retail-friendly’ bonds, bond mutual funds and bond ETFs. We will discuss these three in this post.
‘Retail-friendly’ bonds refer to bonds that are issued with a low minimum denomination, usually $1,000 or $2,000 so that they are accessible to retail investors. As mentioned previously, many bonds come with a high minimum investable size of $100,000 or $250,000, which prevents small investors from purchasing them. Hence, corporations regularly issue retail offerings with private investors in mind, so that they can diversify their investor base. Examples of popular issuers of retail-friendly bonds would be large multinationals such as BMW, VW, Total, and Coco-Cola. Banks also regularly bring retail-friendly bond offerings to the market. These types of bonds can easily be purchased using your online brokerage account.
The second way you can invest in bonds is by investing in bond mutual funds. Bond mutual funds pool investors’ funds together and invest in a range of bonds and other fixed income securities, such as Treasury bills. Bond funds tend to specialize in certain sectors of the bond market. Examples would be government bond funds, corporate bond funds, high yield bond funds or emerging markets bond funds. You can also invest in global bond funds that give you a well-diversified portfolio of a range of different types of bonds across the globe.
The benefits of investing in a bond mutual fund are that you can invest smaller amounts in a well-diversified bond portfolio and you are able to gain exposure to bonds that mainly are targeted at institutional investors. However, when investing in mutual funds of any kind always keep an eye on the fund fees, as they will affect your overall returns.
The third way to invest in bonds would be to purchase bond ETFs (exchange-traded funds). Bond ETFs offer the same exposure to a diversified portfolio of bonds as bond mutual funds. However, they generally carry lower fees than mutual funds, as they tend to be passively managed index-tracking funds that track specific bond indices, such as the MSCI Global Total Bond Index or the MSCI Euro Credit Index for example. Also, bond ETFs are traded on exchanges and can be bought and sold as easily as stocks. This makes ETFs a very liquid financial security, which means you can easily liquidate your holdings should you need the cash.
If you want to learn more about how to invest in bonds, sign up to my e-learning course Bonds for Beginner – A Guide to Investing in the Fixed Income Market today!