Hop on the BOND Wagon
Trading bonds is a bit complicated though
There are three basic asset classes for investing: cash, bonds and stocks. In the Philippines, retail investors are predominantly into cash. Loosely defined, cash investing focuses on just fixed income investments with maturities no longer than one year. This preference persists because many Filipino retail investors are not accustomed to taking significant risks with their money.
In the Philippines, stock investing has been around since the late 1950’s. However, many Filipinos are also wary of the huge volatility in stocks even though high risk can deliver potentially much higher returns. This is where bond investing comes in.
Through the Philippine Dealing & Exchange Corp. or PDEx and the support of regulators, bonds are now within easy reach of the retail investor. Bonds are in between cash and stocks in terms of their level of return and risk. The retail investor has the option of riding out volatilities in the bond market by holding his bond up to maturity. This is called passive investing. Or, the retail investor can trade his bonds on the bond exchange and perhaps reap extra profits before maturity date. Government securities, the investment with the least risk, trade actively on the bond exchange. Bonds issued by corporations are also traded.
While bonds are traded on the PDEx, retail investors still need to trade through PDEx-accredited and SEC-registered fixed income brokers. The list of brokers can be found on the PDEx’s web site at www.pdex.com.ph. Most banks have licenses as fixed income brokers. So if your favorite bank is a licensed broker, you may not need to go very far to buy or sell bonds.
Trading bonds is a bit complicated though. When interest rates move up, prices of old bonds tend to go down. Why?
Because old bonds that are paying lower interest rates will be less attractive vs. bonds that are just being offered at the current high level of interest rates.
On the other hand, when interest rates move down, prices of old bonds tend to move up. This is because old bonds that are paying higher interest rates now become more attractive vs. bonds that are just being offered at the current low level of interest rates.
Compared to cash and stocks, bonds have the added benefit of being tax-exempt provided they have a maturity of at least five years on issuance.
While the law applies only to bonds that are issued by banks, investing through an investment management account or living trust with the trust department of a bank can get you the tax exemption even if the bond you are buying was issued by an entity other than a bank.
You can ask your broker for more information about bond trading. Better yet, why not attend one of EnRich training programs or inquire about the investment advisory services of the Personal Finance Advisers Philippines Corporation (PFA). Just visit www.personalfinance.ph for more details. You may also e-mail info@personalfinance.ph, call (63-2) 216-1541 or SMS (63-917) 505-0709.
Happy investing.
Efren Ll. Cruz is a Registered Financial Planner of RFP Philippines. He is best selling book author of Pwede Na! (A Complete Guide to Personal Finance) in 2004, and is the chairman and president of the Personal Finance Advisers Philippines Corporation.
Source: http://moneysense.com.ph/financial-products/hop-on-the-bond-wagon/
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