Chang believes that the popularity of bond investments has grown over time and that they are a core component to an investor’s portfolio. That said, the weightage of the bond component depends on age and individual risk appetite: “If you’re in your 20s, you probably have a higher risk appetite and that might mean an 80/20 allocation – 80% being equities and 20% in fixed income.”
“In your 30s, that might change to 60/40,” Chang says. He adds that in your 40s or 50s, it might even be 50/50 or 40/60 (60% in fixed income). “For personal investments – I would recommend a diversified portfolio consisting of government bonds, corporate bonds, equities, and cash to minimise risk and to ride favourably on any asset market cycle,” he advises.
How to earn returns from bonds
Fixed income investments such as bonds offer stable returns and Chang says there are two ways to go about obtaining them. “The first is in the form of accrued interest, which can be higher than what you earn from a fixed deposit or savings account,” he reveals.
Unlike a fixed deposit – where the interest is only paid at maturity – bonds typically carry coupon payments paid semi-annually. Depending on the tenure and rating of the Ringgit bonds that you invest in – for example – coupon payments could range from 4-5% for a three-year corporate bond.
“That 4-5% only applies if you bought the bond at primary and hold it to its maturity,” Chang explains. “Three years of holding bank bonds might give you 4% per annum, so if you generate 4% every year for three years – that’s a total of 12% cumulative returns,” he adds. That 4% for a bond is also on the safer side of an investor’s risk appetite.
Chang reveals that the second way to earn returns from investing in bonds is through capital gains – when you buy and sell bonds. Unlike a fixed deposit, investments in bond at times allow you to trade on it; either for capital gains or liquidity. “This is particularly fruitful when you go in at bond auctions or primary issuances or even when there is a bond sell-off,” he says.
Additionally, with the added advantage of bonds being tradeable, you do not lose the interest by selling prior to its maturity. This is unlike a fixed deposit investment, which penalises you in terms of the interest you are entitled to receive in the event you uplift your fixed deposit prior to its full maturity.