How to buy and sell corporate bonds: direct investing vs bond funds
Typically retail investors have bought corporate bonds through funds. These invest in a number of different firms and help spread risk accordingly, you will end up paying fund manager fees though.
A bond fund manager aims to take advantage of swings in the markets and deliver a return based both on the income from the bonds held in the fund and the extra boost from buying traded bonds below par, or selling them above par.
The problem with a corporate bond fund is that its value depends on its varied holdings and dealings and can be affected by the market’s view on what will happen to interest rates.
Buy in as interest rates are rising and the value of the bonds it holds may fall and so will your holding in the fund. Likewise, if the manager makes a bad call on buying bonds in companies that fold, or if his view that a certain company’s below par bonds will bounce back is wrong, the fund can lose money.
Manager’s ability to trade bonds can give a fund a turbo-charge along with its income return.
But if you bought into a bond fund now and sold out in five year’s time you could also find that you do not get back the capital that you put in if it has not done well. Whereas if you bought an individual bond you will get back your capital in full, as long as the issuing firm doesn’t go bust.
On the flipside, a good bond fund could rise in value thanks to some nifty trading and deliver a solid income return and capital growth. Holding a bond fund also spreads risk among many different companies.
By comparison if you just buy a corporate bond from one individual firm you are putting all your eggs in one basket and not spreading risk, but you will also know that if you hold it to maturity (and the firm doesn’t go bust) you will get your money back.
Please remember that corporate bonds might sound safe but they are an investment not a savings product. If you are an inexperienced investor or do not understand the market, then do get in touch with us to get the best financial advice.