Having considered whether to invest in low-risk investments, this week Gary Kleyn considers some of the options.
THE depth and scale of investment products continue to expand, yet when the chips are down or as the level of uncertainty increases, nothing looks surer for many investors than bonds or cash in the bank.
There are a number of funds that can offer this to the investor, while providing some diversification and opportunities also exist for people to trade individual securities on the Australian Stock Exchange.
Cash funds, or cash management funds, for example, invest in money market instruments, which are primarily securities issued, guaranteed or supported by governments, banks or companies. These securities include cash, bank bills, treasury notes and promissory notes.
Only last week, Treasurer Peter Costello indicated that the Federal Government was considering issuing $3 billion in government bonds to finance government activities.
A cash management fund takes the pooled capital of many investors and puts them into the short-term money market.
Maturities are normally short-term such as 30 to 90 days, and interest is calculated daily. According to Chris Lavers, author of Australia’s Top 100 Managed Funds 2003, returns for these funds are normally in line with those available in the short-term money market minus the expenses incurred by the fund manager in operating the fund.
Often cash management trusts come with a chequebook or ATM access.
According to a post-budget report by ANZ, the Federal Government has indicated that it would continue to issue bonds in future years to maintain the liquidity of the bond market, despite projections of continuing surpluses and lower levels of net debt. Treasury estimates that this will mean issuing around $5 billion in T-bonds every two years.
Governments issue bonds to pay for things such as defence spending, while large companies may issue bonds to fund expansion programs. For companies the issue of bonds or debentures may be attractive because they do not dilute the shareholder’s equity in the business.
The greater the risk that the borrower might default, the higher the rate of interest normally offered to make the investment attractive. For this reason, bonds issued by the Australian Government offer lower returns than bonds offered by developing countries or companies.
The advantage for bondholders is that many bonds are secured against the assets of the issuing company. Bondholders come before shareholders when it comes to being repaid from a collapsed company.
Most securities, apart from debentures can be traded on the ASX in the interest rate market. Debentures are similar to bonds and secured against assets but tend to be riskier than bonds.
According to advice from the ASX an investor should consider a number of things before deciding which interest rate security or bond to invest in such as when the security reaches maturity.
Other questions to ask are does it have early redemption features and what is the credit quality, the rating, the coupon, the prices and the yield to maturity? However, perhaps the most important consideration is the yield.
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