There comes a point in every investor’s lifetime when their strategy will need tweaking. Investors who are approaching capital preservation or asset drawdown periods could benefit from introducing bonds to their portfolio. For some investors, particularly those who rely on investment income to fund day to day life, bonds are the bread and butter of their portfolios. By nature, bonds provide a reliable and safe income compared to other investment opportunities. For this reason, bonds are a popular choice for those wanting to invest in a lower risk opportunity to receive regular returns.
How do bonds work?
In simple terms, a bond is an instrument for a borrower to raise capital and an opportunity for investors to earn interest on their capital. Investors can buy bonds and the money is lent to an issuer. This money will be repaid back over time, plus interest. In short, businesses and the government issue bonds to raise funds from investors. Investors typically receive interest at a pre-determined rate. Interest on The Wellesley Property Bond, for example, is paid monthly.
For example, if an investor subscribes £100,000 to a 3 year bond with a fixed interest rate of 3.00% the issuer is essentially saying to the investor ‘in three years I owe you £100,000 and every year until then I will pay you £3,000 in interest’. If interest is paid monthly, £250 will be paid into an investors account each month.
Key features of fixed rate, listed bonds
- Fixed interest – receive the advertised return as long as there’s no default on the loan
- ISA eligible – tax free saving on interest earned on first £20,000 when held in an ISA
- Regular payments – receive regular and planned interest payments
Bonds and risk
Each investment opportunity will have an associated level of risk. Investments that are high reward are usually high risk too. Typically this can be equity investments such as stocks and shares that offer little in the way of protection. At the other end of the spectrum there is low risk / low reward products which usually offer FSCS (Financial Services Compensation Scheme) protection. Bonds are widely considered to balance risk and reward.
Investing in our bonds
While a bond itself is a simple investment instrument, the process of investing in one is often complex and can be difficult to access and manage for investors. Typically, bonds are distributed via third party investment houses or stockbrokers meaning that investors are not investing directly with the bond issuer. This both adds an additional layer to the process and there is usually a financial cost that is passed onto the investor – something that may be overlooked when comparing different products and their rates.
At Wellesley, we wanted to simplify this process to make bonds accessible to retail clients without charging fees that will eat into an investor’s earnings.
We have invested in developing technology that can achieve this by enabling customers to invest into Wellesley bonds directly with us. This means that investors aren’t charged for our service and that they can manage their investment directly with Wellesley for a more seamless process.
Should I invest in bonds?
As with any financial decision, you should educate yourself as best as possible before investing in bonds. Arm yourself with as much information as possible and spend some time getting to grips with what your personal appetite for risk and reward is. Our blog ‘Six Questions to Ask Yourself Before You Invest’ can help you with this.
Ultimately, it’s a personal decision and while bonds are the ideal solution for some investors, they’re not for everyone. Many find that they can help diversify a portfolio and provide a level of stability and regular income.
At Wellesley, we recognised this so have worked hard to develop bond products that are to satisfy our clients’ appetites. Wellesley bonds are listed on a regulated exchange, Euronext Dublin (is ranked No.1 for bond and investment fund listings worldwide and has over 36,700 securities listed.), ISA eligible and best of all, can be accessed and managed with simplicity.
As with any investment, your capital is at risk. Seeking the expertise of an independent financial adviser it recommended for investors who need investment strategy help.