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Not all bonds are equal – FMA survey

Not all bonds are equal – FMA survey

Over 1 million New Zealanders have more than $15 billion invested in conservative or default KiwiSaver funds, mostly invested in fixed-interest assets, including bonds. However, only four in ten KiwiSaver members surveyed by the FMA knew that that most funds invest in bonds.

“This year’s Money Week is about what debt can do for you. We thought we’d take a different angle and look at investing in bonds, which is essentially getting a return for lending your money to a government or company,” said Paul Gregory, FMA Director External Communications and Investor Capability.

“Some people invest directly in bonds, while most of us are invested in bonds through KiwiSaver. So we wanted to check to see whether New Zealanders realised this, and how much they knew about bonds.”

Most people are confident they will get their money back when they invest in a bond. Fewer of us are certain about some of the key risks associated with that investment. Two thirds of people know about interest rates and maturity dates, but there is plenty of uncertainty about other features of bonds that investors should understand.

• 61% of people who invested in bonds knew its interest rate, and 64% knew the maturity date

• two-thirds (67%) said they were certain the company or government issuer would pay their money back, but only 44% knew the credit rating of the bond

• only 52% of all respondents knew that bonds were investing in a form of debt (even among people who had bought bonds this was 64%)

• only 38% knew that bonds are not guaranteed

• just 39% knew that bonds don’t keep their original value if you sell them before the maturity date.

“Investing in bonds is often associated with greater certainty and lower risk, but that’s not always the case,” Mr Gregory said. “We recognise in our Strategic Risk Outlook that after a long period of lower interest rates, it is inevitable they will rise again. When that happens, bond values tend to fall and there may be negative returns for conservative and default funds.

“It is important investors are not unnecessarily surprised if that happens to their bonds in those conditions. Don’t panic. Don’t sell or switch out just because you have some negative returns. Think about whether you’re still on track for your longer-term goals before making any decisions.”

69% of those surveyed thought that Conservative funds are low-risk investments, almost the same as the rating for term deposits. This is not always true, however; conservative funds contain a mix of different bonds, with different maturity dates and credit ratings, and may include some shares.

“Improve your knowledge about the risk of your investments. Reduce your potential to be surprised or take hasty action which harms your ability to achieve your goals. Do your own research about what might happen to them in different market conditions. Get some help from your provider or some professional advice,” Mr Gregory said.

The survey can be found here

Video: https://youtu.be/YOWxxvwsCF4

ENDS


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