Bonds: The Overlooked Asset Many New Zealanders Don’t Invest In
FMA releases investor guide to bonds as market volatility continues
The Financial Markets Authority (FMA) has published a new investor guide to bonds, designed to help novice investors find out more about an asset class that only 6% of Kiwis invest in directly.
Bonds are loans from investors to governments and companies for a fixed length of time, or term. Although bonds typically do not have the high returns of other financial investments, they are seen as essential to any portfolio, including KiwiSaver.
Gillian Boyes, FMA Manager – Investor Capability, said bonds aren’t limited to big institutional investors – everyday investors can use them to diversify their portfolios and spread their risk.
“New Zealanders are taking a greater interest in their finances due to COVID-19 and with low interest rates, many are looking at the sharemarket and managed funds. But retail investors should still try to build a portfolio with assets of varying risks and returns and high-grade bonds can be a useful defensive investment.”
Ms Boyes said the FMA guide cuts through the jargon to help novice investors understand what bonds are, how they work, what kind of investment they are and the different types.
“Globally, the bond market is bigger than the sharemarket, yet relatively few New Zealanders invest in bonds directly,” said Ms Boyes.
The FMA’s 2020 Investor Confidence Survey found just 6% of surveyed New Zealanders held government or corporate bonds directly, compared to 3% in 2019 and 10% in 2018. In contrast, 30% had term deposits and 20% had shares. However, most New Zealanders will indirectly hold bonds through their KiwiSaver. For example, even KiwiSaver growth funds could hold between 10-37% in fixed income assets, which include bonds.
The guide – Bond voyage - complements previous FMA investor guides to shares (Share this) and managed funds (Funds for Everyone).
“Bonds pay regular interest, can be traded during their term, and pay back capital on maturity,” said Ms Boyes. “High-grade bonds are generally a predictable investment, so they’re ideal for anyone who is investing for a relatively short time or looking to balance their portfolio with lower-risk investments.
“Bonds are also much simpler to buy and sell than many people realise – you can buy them through a broker or invest in a fund consisting of bonds.”