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Bond fund unit trusts: How to make money from government spending

by , 20 March 2014

If you're as sick as taxes as most South Africans are, you'll love that unit trusts give you the chance to make money from this. How? By investing in the right unit trust of course. And in this case, it all comes down to something called a bond fund unit trust…

What is a bond fund unit trust?

As The South African Investor’s Leon Kok explains: Bond funds are fixed interest funds tailored for investors seeking a higher tolerance of risk than money market funds or income funds that aren’t correlated to equity funds. What this means is that if share prices rise, bond prices tend to decline, and vice versa.

And bond fund unit trusts usually invest in bonds by large constitute government or parastatal debt, or alternatively loans from the public.

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Revealed: Three benefits of investing in a bond fund unit trust

1. Easy access: It’s almost impossible for the average South African to invest directly in good quality bonds (the minimum investment is usually upwards of R100 000), so the great advantage of a bond fund is accessibility.

2. A steady (accessible) income: Another advantage is that being fixed-interest investments, the investor can draw a regular income from a bond fund. This is usually paid out quarterly.

3. Higher yields: Bond fund managers are resorting increasingly to corporate (private company) bonds in South Africa to drive up yield. The perceived quality of the corporate bond issuers is determined by rating agencies. Typical of a paper issue was Barloworld’s recent R1.5 billion seven-year bond rated AA-minus and priced above the then R153 bond that was the main source of liquidity in the market.

Important unit trust investing tip:
When it comes to investing in bond fund unit trusts, don’t regard them as stand-alone investments. They need to be balanced with other investments to smooth out risk. Naturally, because of the higher risk factor, the potential returns and losses are considerably higher as well.

Bond fund unit trusts: How to make money from government spending
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