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WHAT is a bond?
A bond is a debt security issued by an issuer (otherwise known as the borrower) to raise funds as an alternative to borrowing directly from banks. By "lending" money to bond issuers, buyers of bonds (or bondholders) are paid periodic interest returns called coupon payments.
Similar to loans, which carry fixed tenures, bonds too have fixed maturity dates for bondholders to ge back their principal.
Bond issuers could be domestic or foreign corporations, domestic or foreign state/federal governments and even central banks
What are bond funds?
Bond funds are portfolios which "pool" money from different investors to invest in bond instruments. These funds are established and managed by fund management companies. They invest mainly in government bonds as well as corporate bonds, depending on an established investment guideline.
It would be difficult for individual investors to access the bond market directly as there is a need for minimum standard trading lots.
In Malaysia, this standard trading lot is RM5 million. By "pooling" money from a wide spectrum of investors, bond funds provide avenues for individual investors to invest in such instruments, in smaller amounts.
As at February 28 this year, there were 75 bond funds in Malaysia with a total net asset value (NAV) of RM10 billion. This asset class made up 15.65 per cent of the total unit trust industry with a NAV of RM64 billion.
The different types of bond funds in the market include local currency bond funds, global bond funds, emerging markets bond funds and Asia-Pacific bond funds. Among the different categories of bond funds, local currency bond funds constitute the largest share with 59 funds at a total fund size of RM9 billion as at February 28 2009.
Why invest in bond funds?
Some of the key advantages of investing in bond funds are:
* Professionally managed
Bond funds are managed by professional fund managers who are well-trained and have a proven track record in analysing the interest rate outlook and creditworthiness of bonds. Large bond fund managers usually have in-house economics and credit teams to assess macro outlook and credit standings of the various bonds in the market.
* No fixed maturity date
While individual bonds have fixed maturity dates, open-ended bond funds do not have fixed maturity dates as fund managers constantly rebalance the portfolios. Thus, unlike placements in fixed deposits with fixed maturities, investors need not worry about reinvesting their money.
* Regular income
Most bond funds offer investors regular income distributions derived from the coupon income generated by the underlying bonds in the portfolio. Thus, bond funds give investors a stable, regular income.
* Automatic income reinvestment
Investors who are not in need of regular income could opt for automatic income reinvestment. This option allows income distribution from the bond funds to be reinvested automatically in the fund which gives the investor more units.
* Liquidity
In terms of liquidity, investors are free to redeem units of a bond fund at the current net asset value (NAV) of fund. Bond funds provide liquidity and convenience as investors could buy or sell their units every day. The investors could redeem their units without having to wait for each bond to mature.
* Diversification
Bond funds provide diversification to investors as they invest in a wide spectrum of bonds. For example, AmBond invests in Malaysian Government Securities, corporate bonds, Cagamas bonds/notes and money-market instruments. This reduces the risk of over-exposure to any single bond.
Conclusion: Investors are strongly encouraged to consider bond funds as a feasible investment option due to many advantageous features. As bond funds are generally less volatile compared to funds linked to equities, currencies or hedge funds, this category of funds appeals to those with lower risk tolerance and prefer regular income distribution.
This article is contributed by the Funds Management Division of AmInvestment Bank Group
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