10 Tips for Successful Bond Investing for Beginners

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Great tips for bond investing in bond funds and individual bonds in Kenya. 

We all rush looking for easy ways to riches and happiness. Humans are constantly on the search for hidden opportunities or some special information that will suddenly lead them to success. Thus, in our quest for success, we often overlook the most powerful tools available to us: time and the magic of compound interest. It is imperative to invest often, avoid unnecessary financial risk and let your money do the work for you to amass significant assets. 

Bonds are a great alternative to achieve some of your basic financial goals and amass significant assets for you. Here are 10 tips to consider before you invest in a bond fund or individual bond: 

#1 Define Your Objective

Why are you investing in bonds?

Before you embark on any investment activity, seek to highlight what you intend to achieve i.e. live comfortably in retirement, educate your child through college etc. Whatever the goal is, layout everything and be precise if you can. 

#2 Assess Your Risk 

How much risk can you accommodate comfortably?

Understand your own risk profile. Have it written down in plain language so that you may understand what you can or cannot handle. Understand that different bonds and bond funds, just like other investments have their own risk profiles. Always know the risk of any investment before you invest your hard-earned money. 

#3 Don’t Look At Yield

Yield is one of the many factors that an investor needs to consider when buying bonds. Remember: Higher yields, come with higher risk and lower credit quality – and vice versa. Therefore, don’t make the mistake of reaching only for those high yields.

Right now with interest rates capped at 12%, many of us feel like we aren’t earning a good rate of return considering what we had in the periods prior to the interest rate cap. We were looking at 14% and more. Higher yields will only mean a lower credit quality and a high risk for you. So, don’t get tempted. 

#4 Don’t Time The Market

Don’t try to time the market by speculating on interest rates. With bonds, it isn’t wise to make decisions based on rates. Instead, simply stick to an investment strategy that will best help you achieve your investment objectives. 

#5 Do Your Homework

Ensure that you have read widely about bond investing. Look up information on the internet and newspapers beginning with the fixed-income commentaries on local dailies. Ensure that you understand all the math that goes with bonds. 

#6 Note the Price

Before purchasing any bond on the Nairobi Stock Exchange (NSE), ask the broker, when and at what price, the bond last traded. This will give you an idea about the bond’s liquidity. An illiquid bond may not have traded in days or even weeks. Also, you will gain insight into the competitiveness of the pricing offered by the firm. 

#7 Consider All Costs

Ensure that you understand all the costs associated with buying and selling a bond. For instance, if you are investing with an investment firm, take note of the commission fees and any initial fees deducted. 

#8 Study The Prospectus

If you decided to buy into a bond fund than ensure that you read the bond fund prospectus closely. Pay close attention to the parts that discuss the bonds in the fund and the fees. 

The individual bond, on the other hand, derives information from the bond’s indenture, which is basically a legal document that defines the agreement between the bond buyer and the bond seller. Thus, ask for a copy of the prospectus or indenture from your broker. 

#9 Check Broker Credentials

If you choose to buy individual bonds from the Nairobi Stock Exchange (NSE), make sure your broker is up to par. Also, your broker should also be able to advise you based on your objectives and risk tolerance. 

#10 Reinvest Coupons

Reinvesting your coupon so that the power of compounding works on your behalf. Thus, instead of making coupon payment to the investor, some bonds have the option where an investor can reinvest the coupon into the bond, so it grows at the stated compound interest. 

Final Thoughts

Investing in the bond market is a great opportunity to build asset value for those willing to be consistent savers, make the necessary investment in time, manage risk, exercise patience and allow the magic of compound interest to work. The earlier you start investing, the greater the final results – just remember to learn to walk before you begin to run.

What additional tips can you suggest for successful bond market investing? Let us know.

Happy Investing!

Image credit: Top via Rawpixel by Pexels

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Irene Makanga
Irene has an MBA in Finance and is an avid businesswoman, passionate about financial literacy.

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