Every investment carries risk... but if you want lower risk, bonds are often the first choice. Wealthy investors typically include bonds in their portfolios to manage risk. Recently, there was a major sell-off causing bond yields to surge, which means bond prices fell, leading some to call it a bond loss.
If buying bonds can still lead to losses, why do wealthy people keep them in their portfolios? And for those just starting with bonds, what should they do? This article provides the answers.
Bonds are debt securities issued by governments or public agencies to raise funds for national development. The issuer offers "interest" to bond buyers and returns the principal at maturity.
In simple terms, buying a bond means you are a creditor to the government. Thus, the risk of default is considered very low (depending on the country you invest in).
Government bonds come in various types and are issued by many countries like the U.S., Japan, Germany, and Thailand. The Ministry of Finance issues Thai government bonds, and sometimes the Bank of Thailand issues bonds. These bonds have clearly defined terms and annual interest rates—for example, a 10-year savings bond with an average interest rate of 2.49% per year.
Of course, if you hold bonds to maturity, you get your principal back. So, even if prices fluctuate along the way, bondholders still receive their principal (unless there is a default). Therefore, government bonds are suitable for those with low risk tolerance or who want steady, reliable returns.
Additionally, investors should know that not only governments issue debt securities; companies can issue bonds too, known as corporate bonds. These specify terms and interest rates clearly, but risk depends on credit ratings. For example, AAA-rated bonds have the lowest risk, while B-rated bonds have higher risk.
Primary Market
This is buying newly issued bonds directly from the issuer, such as the government or issuing agency. In Thailand, retail investors can subscribe and buy through commercial banks, often starting at 1 - 1,000 baht per unit. Each bond issue may have specific conditions or purchase limits depending on the issuer. The advantage of buying in the primary market is purchasing at face value.
Secondary Market
This involves trading bonds that have already been issued among investors, not directly from the issuer. Typically, this is selling before maturity, so bond prices fluctuate based on market value or negotiated prices. You can buy through licensed securities companies. The advantage is more price flexibility and opportunities to profit from price differences, such as buying below face value. It also offers liquidity if you need to sell.
In investing, wealthy individuals often include bonds or debt instruments in their portfolios to diversify risk or meet specific personal goals. The 2023 Wealth Report shows ultra-high-net-worth individuals (UHNWIs) hold an average of 17% in bonds.
Although bonds appear less risky than other assets, they can still carry risks or losses. For example, if someone holding bonds needs cash and sells in the secondary market when prices are down, they may incur a loss.
So, what factors should be planned before buying bonds? Thairath Money summarizes key points from Yuanta Securities for you.
1. Choose bond maturities that fit your life goals.
2. Assess credit ratings before buying.
Also recommended is the Ladder Strategy—rather than buying a single long-term bond, spread purchases across bonds with different maturities, like 2, 5, and 10 years. When shorter-term bonds mature, reinvest in longer-term bonds to reduce volatility risk.
Bonds are an attractive investment option, but financial planning must start with understanding your goals—what you want to achieve, why you invest, and when you need the money. Understanding this will help you build a portfolio that suits you better.
References: SET, Yuanta Securities, CIMBT, KTB, KBank, Bualuang Securities