There are various types of Unit Trusts - one of which is a Bond Fund. These funds offer individuals a unique opportunity to partake in dynamic financial markets while benefiting from the expertiese of professional fund management.


Our take? Unit Trust Bond Funds represent a compelling and accessible type of investment option for Malaysian investors seeking stability, income generation, and diversification within their investment portfolios. In this article, we will dissect what they are, along with the pros and cons so you can best decide whether they're right for you.



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Basics of Unit Trust Bond Funds

What are bonds?




Before diving into what Unit Trust Bond Funds are, let’s start by first getting a clear picture of what bonds are. 


Bonds are debt securities issued by governments, corporations, or other entities to raise capital. When you buy a bond, you are essentially lending money to the bond issuer for a specified period, receiving regular interest payments (coupon payments) during this period. At maturity, you get back the face value of the bond, known as the principal.


What are Unit Trust Bond Funds? 




Unit Trust Bond Funds serve as a structured investment vehicle that pools money from multiple investors to create a diversified portfolio of bonds.

When you invest in them, you own a proportional share of the fund's entire bond portfolio, which grants you exposure to a broad range of bonds without needing to manage individual bond holdings. Professional fund managers oversee and make strategic investment decisions to optimise returns and manage risk.





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Benefits of Unit Trust Bond Funds

Stability and Fixed-Income Nature

Unit Trust Bond Funds offers a more stable source of returns compared to equities.


They're known for their consistent income generation through regular interest payments, making them appealing to investors looking for a steady income stream.

Risk Mitigation

By investing in a mix of bonds, you can spread the risk across various financial instruments, reducing the impact of any single asset's poor performance on the overall portfolio.


Accessing individual bonds can be challenging for those with lower investment ticket sizes.


Investing in Unit Trust Bond Funds offers the advantage of diversification without the need for substantial capital, enhancing accessibility and broadening investment opportunities.

Professional Management and Expertise

Fund managers conduct rigorous credit analysis to assess the creditworthiness of bond issuers, reducing the risk of default.


Entrusting investments to experienced professionals allows you to benefit from their expertise, research-driven strategies, and market insights.





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Risks and Considerations

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Impact of Interest Rate Fluctuations on Bond Prices

Bond prices are inversely related to interest rates. When interest rates rise, bond prices tend to fall, and vice versa. This interest rate risk can influence the value of the bond fund's portfolio.


However, holding bonds until maturity can mitigate this risk as you will receive the face value of the bond upon maturity, regardless of interim price fluctuations.


Assessing the Creditworthiness of Bond Issuers

Credit risk is the risk of the bond issuer defaulting on interest payments or failing to repay the principal at maturity.


Fund managers conduct thorough credit analysis to select bonds with higher credit ratings, minimising the risk of default and enhancing the overall credit quality of the portfolio. This involves assessing the financial health of bond issuers, analysing factors such as their financial statements, credit history, and market reputation.





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Understanding Liquidity Challenges in Bond Markets

Bond markets can experience lower liquidity compared to equities. Liquidity challenges can affect the ability to buy or sell bonds at desired prices promptly, especially in times of market stress.
However, investing in Unit Trust Bond Funds can provide greater liquidity and flexibility in bond markets, as fund managers are equipped with the expertise to manage liquidity requirements, mitigate risks through diversification, and actively monitor market conditions.
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Performance Metrics and Analysis

To assess the performance of Unit Trust Bond Funds, investors can consider key metrics such as: 

  1. Maturity: Refers to the duration until a bond reaches its full face value, influencing investment horizon and potential returns 

  2. Yield to Maturity (YTM): Measures the total return anticipated on a bond investment if held until maturity, with all payments scheduled and reinvested at the same rate

  3. Coupon Rate: States the annual interest rate that a bond pays to its bondholders, typically expressed as a percentage of the bond’s face value 


While historical returns offer valuable insights, you should also evaluate the fund's investment strategy and credit quality to make informed decisions.







This article is part of Hong Leong Bank's educational series, called 'Fresh Take'. Here, we seek to present you a fresh, unbiased perspective of all matters financial. We'll be uploading more educational content moving forward, so do watch out for the next piece.


In a world that's awash with information that may be either true, false or anywhere in between, Fresh Take aims to cut through the clutter, and help you on your journey as an investor who's seeking to build a strong financial future.


Please reach out if you need to know more or need personalised help.







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