Do this before you buy into bonds

BUYING business debt is becoming mainstream as investors seek secure places for their money that pay incomes well above bank interest.

Corporate bonds are largely immune to tax changes, house prices and share volatility, and a recent report by Deloitte Access Economics says the market has grown strongly but still flies “under the radar of most investors”.

Many people buy bonds through managed funds, listed income trusts or exchange traded funds, but before diving in ask yourself these questions.

1 HOW DIVERSIFIED AM I? FIIG Securities director of education and research Elizabeth Moran said corporate bonds were a more defensive asset class that offered exposure to different companies, countries, currencies and credit qualities.

Dixon Advisory managing director Nerida Cole said bonds generally performed best at different times than shares.

2 HOW MUCH RISK? Bonds are riskier than cash. Ms Moran said returns varied from around 2 per cent a year for government bonds to 8 per cent on high-yield unrated corporate bonds.

“You must decide on the amount of risk you are prepared to take,” she said.

FIIG recommends about 70 per cent in low-risk investment grade bonds and about 30 per cent in high-yield stuff. 3 HOW MUCH TO INVEST? Ms Moran said one approach was investing your age – so a 60-year-old would have a 60 per cent allocation to cash and bonds: “the theory being as you age you need to be more defensive as you don’t have the time to make up losses from more volatile growth assets”.

But other advisers say this can be too conservative.

4 OUTLOOK? INTEREST RATE Ms Cole said future interest rates affected bond returns. Fixed-rate bonds lose value when rates rise, and increase when rates drop. Floating rate bonds – such as many corporate bonds – don’t have those spikes and slumps.