Are bonds the right investment for me?
15 July 2021
Question by Arty
I want to invest £25000 for 3 years, low risk. Bonds I think are the best option for me. How do I buy them and which do you recommend?
Answered by Chris Hill
“Bond” is one of those terms in financial services that is used to mean different things in different contexts. I assume that you are referring to Government and corporate bonds as opposed to fixed term savings accounts (which are also often referred to as bonds).
Unlike company shares, there is no exchange for Government and Corporate bonds, so buying them is a little more tricky. However, there are a number of stockbrokers and investment supermarkets that will enable you to buy specific issues.
For most investors, they will invest in bonds via some form of collective investment. There are several forms available – Unit Trusts, Open-Ended Investment Companies and Investment Trusts. This allows you to invest in a portfolio of different investments in a cost efficient manner because the collective investment pools all of the investor’s money and the manager is buying the investments in bulk. These are also available via a stockbroker or investment supermarket, who also often provide research on the different funds available.
The main risk associated with investing in bonds is the credit worthiness of the organisation that you are buying the bond from. This is because you are effectively lending that organisation money and their ability to pay you the interest that they owe you and your original investment is an important factor. The worse the credit rating of the organisation lending the money, the higher the interest rate that they need to offer to entice investors to lend them money.
During the time that they are in issue, the bonds can be bought and sold. As with other forms of investment, the price that they can be sold for will depend on the demand, in this case for investing with that particular organisation and for the interest rate. The price of bonds are sensitive to interest rate changes. It is therefore possible to lose money by investing in Government and Corporate bonds and the risk of loss should be weighed up carefully against the potential returns.
Chris is a Director at WBW Chartered Financial Planners and winner of Certified Financial Planner of the Year 2019. He has a real passion for helping people understand their money and what it can do to help them. This has led him to working with people for many walks of life.