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The benefits of investing in bonds through unit trusts

by , 07 May 2015

If you're investing for income, you can't ignore bonds.

By investing directly in bonds you gain from twice annual interest payments until the bond matures.

If you want to hold a diversified holding of bonds, an easy way to achieve this is through unit trusts. And by investing in bond funds, you can opt to invest in South African bonds or international bonds.

Let's take a closer look at how they work…

Why consider investing in bond unit trusts?

If you’re retired or depend on your investments for income, bond unit trusts can produce a regular and generous income through their dividends.

But bond funds aren’t just for income seekers. They’re also a good investment option to add diversification to your portfolio and lower its overall risk.

By investing in bond unit trusts you benefit from the interest payments the bond issuer pays out to the bond holder. When the bond matures, the bond issuer repays the face value of the bond back to the holder.

The income from bond unit trusts

But you need to bear in mind that unlike a bank where you may have money in a fixed deposit account, there is no guarantee of a bond’s yield or interest it pays.

The total return you’ll earn from investing in bond funds depends on the interest you receive and what price you get when you sell your units in the fund.

The value of bonds depends on interest rates. And this affects the funds that own these bonds too. When interest rates fall, the value of bonds rise. When interest rates rise, the value of bonds fall.

You should also bear this in mind when comparing the different yields of different bond funds. The higher the yield of a fund, the greater its volatility, maturity and overall credit risk is.

If the bond fund you invest in buys international bonds, there’s also foreign exchange risk to consider. If exchange rates work against the fund, it could lose money when converting money back into rands.

Yet, bond funds give you an easy way to invest in bonds internationally through South African fund managers without having to worry about exchange controls.

So there you have it. The benefits of investing in bonds through unit trusts.

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The benefits of investing in bonds through unit trusts
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