Sizzling yields may be too hot for wary savers
SAVERS tempted by a batch of new “mini bonds” offering sizzling yields of up to 8 per cent have been urged to size up the risks before sinking their teeth into this tasty return.
The Burrito Bond 2, issued by Mexican restaurant chain Chilango, attracted more than £1million within a day of launch, showing that there is a massive appetite for high-interest bonds as returns on cash continue to disappoint. It is just one of a growing number of bonds that offer a far superior return to savings accounts and will tempt those who are struggling to maximise their retirement income.
However, they may be too spicy for most savers. HOT OPPORTUNITY Chilango raised £2.1million from 700 investors through its first Burrito Bond in 2014 and now wants to raise funds to open further outlets in the UK.
The mini bond pays a fixed rate of 8 per cent a year with a minimum investment of just £500, while those who invest £10,000 can claim a free meal at a Chilango restaurant every week for the bond’s four-year term.
Other options include the Wellesley Property Mini-Bond, which invests in UK residential property, and an ethical mini bond, Equfund’s Sanctuary Bond, which yields up to 5 per cent and aims to raise £5million to renovate properties for the homeless.
Mini bonds are not listed on the stock market, which means there is little regulation and you cannot trade or transfer them during their fixed term.
As a result, they differ slightly from a similar high-yielding investment called retail bonds, which are listed and can even be held within a tax-free Isa. FOOD FOR THOUGHT Michael Dyson, managing director of consultancy Bond Advisors, said: “The Burrito Bond 2 is best-suited to investors whose lifestyle will not be affected if things do not work out.”
The Sanctuary Bond is available over terms ranging from three to 15 years, but it is unlisted and unsuitable for those wanting guaranteed income or maximum return. “Stay away if you are not prepared to risk your money or capital, or don’t want to lock your money away for a set period,” Dyson said, adding there is nothing wrong with putting money into these products provided you understand the risks and invest as part of a balanced portfolio.
Dyson is behind another bond, a 10-year retail bond issued by residential property firm Heylo Housing Group, which pays 1.625 per cent a year with inflation protection. So, if inflation averaged 3 per cent then someone investing the minimum £2,000 would get £2,680 back after 10 years, plus interest totalling £380.
Patrick Connolly, certified financial planner at Chase de Vere, cautioned against comparing bond yields with savings rates: “You do not have protection under the Financial Services Compensation Scheme (FSCS), which covers cash up to £85,000.”
Investing in a single company is risky and you should never invest more than 5 per cent of your portfolio this way, Connolly added.
He said the Burrito Bond 2 will tempt some and the first issue paid investors in full and on time: “However, this does not guarantee success as the restaurant business is very competitive and faces rivalry from home delivery services.”
The TV-advertised Wellesley Property Bond pays up to 6 per cent with your funds secured a g a i n s t r e s i d e n t i a l p r o p e r t y. He said: “People believe that property is ‘as safe as houses’ but again, your capital is at risk and there is no early access to it.” DIVERSIFY MoneyToTheMasses.com founder Damien Fahy said most investors should spread their risk by investing in a corporate bond fund, which may hold hundreds of bonds from a range of different companies.
“Schroder High Yield Opportunities has a yield of 6.20 per cent and has consistently increased its payout for the last five years, outperforming its competitors,” he said.