Importance of asset allocation when it comes to getting the best returns on bond investments

BONDS are fixed-income investments, but don’t assume it’s impossible to lose money.

Asset allocation is important when it comes to managing your investment portfo l i o .

Financial planners recommend that anyone with a long-term, aggressive investment strategy invests between 7% and 13% in low-risk investments.

For illustrative purposes, we’ll be working with 10%.

There are several ways you could access bonds.

The direct way to access bonds as a retail investor is through retail savings bonds. Buy retail bonds at the Post Office or www.rsaretailbonds.

Retail bonds give you fixed-rate or inflation-linked bonds with the option of investing over two, three or five years. Interest rates vary.

Interest fixed-rate offered on bonds are minimum investment of R1 000. If you want to invest this amount every month, you must open multiple accounts – and they will each have a new date of maturity and possible interest rate.

Early withdrawals are allowed only one year from the date of your investment. You will be penalised for withdrawing earlier.

Also think of tax imp l i c at i o n s .

For those younger than 65, the first R23 800 you make in interest is tax exempt. Over 65, the threshold is slightly higher, at R34 500.

If you are looking for more flexibility, exchangefunds might offer you the exposure you need, and you can make monthly contributions.

ETFs, such as the Satrix ILBI and NewFunds ILBI, offer you exposure to inflationlinked bonds. The Ashburton Government Inflation ETF also offers you exposure to the inflation-linked bonds index.

NewFunds GOVI ETF tracks the SA Government Bond Total Return Index. Coupons, paid out monthly, are reinvested, increasing your investment’s capital value by the yield return.

This is on top of capital gains or losses of the bonds it tracks.

You also don’t have to worry about early withdrawal penalties, but if you’re invested in a tax-free vehicle – don’t forget that annual and lifetime limits apply and withdrawals do not reduce those.

When it comes to tax, think carefully about your portfolio. If you decide only 10% of your tax-free investment account will be invested in an inflationor governmentETF, you will invest R3 300 a year in bonds (10% of your annual tax-free contribution limit of R33 000). Compare that with the tax savings offered by a normal retail bond. Your R3 300 investment in the first year will come up to R6 600 in the second year, and so on.

Always think about the real return of your investment. If your money is growing at a lower rate than inflation, you need to find a better investment option.

But remember, bonds are fixed-income investments, but it’s not impossible to lose money. Next week we ’ ll look at how you might incur losses. ● Tsamela is the

founder of pigg . Follow

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