What are bonds and how do I invest in them?

As an investor, if you buy a corporate or government bond, you are lending money to those entities in return for regular interest payments and the return of your capital on the maturity date. Bonds are also referred to as debt investments or fixed-income investments.

Three different types of bonds

There are various types of bonds. These include:

1. Goverment or treasury bonds

Government bonds are issued by governments on behalf of the respective country. Almost all countries offer government or treasury bonds to investors. Government bonds are generally considered the safest debt because they are backed by the faith and credit of the country repaying the loan. Although it can happen, it is extremely rare for countries to default on government bonds, even those experiencing political and economic turmoil.

2. Corporate bonds

Corporate bonds are issued by companies and are guaranteed by the borrowing company, meaning the company issuing the bonds. The risk depends on the company's ability to pay the loan at maturity. This means that investors are exposed to the credit risk of the company they are investing in.

3. Municipal bonds

Municipal bonds are issued by local governments and agencies and are sometimes subject to certain tax preferences, such as being exempt from local taxes.

What are bond funds?

A bond fund is a collective investment scheme that invests in various underlying bonds and debt instruments. The exact type of debt the fund invests in will depend on its focus, but investments may include government, corporate, municipal, and convertible bonds. Bond funds are often referred to as fixed income funds.

Bond funds usually pay periodic payments (dividends) that include interest payments on the fund's underlying bond holdings, plus periodic realised capital appreciation. Bond funds usually pay higher dividends than money market accounts, and most bond funds pay out dividends more often than bonds bought individually by investors.

This makes bond funds more suited to investors looking for a low-risk investment and wanting to earn a monthly income from their portfolio, giving them financial security. This is why those approaching retirement or in their retirement years often choose bond funds or fixed income funds as part of their portfolio.

4 advantages of investing in bond funds

• Higher interest rates are paid to investors than on money market funds and bank accounts.
• Diversification of the underlying assets in the portfolio as a range of bonds are held within a single portfolio.
• Professional management of the fund, maturity dates, and trading of the bonds.
• Ease of investment because you only need to invest in one fund rather than a variety of individual bonds to get diversification and access to different bonds.

How do I get started?

If you're interested in investing in bonds or just want to learn more, speak to a financial adviser about the different fixed income funds available in South Africa, and what the best approach is for your individual needs. Learn more about other asset classes like equities, property, and cash.