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.
Benefits of Unit Trust Bond Funds
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.
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.
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.
Risks and Considerations
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.
Understanding Liquidity Challenges in Bond Markets
Performance Metrics and Analysis
To assess the performance of Unit Trust Bond Funds, investors can consider key metrics such as:
Maturity: Refers to the duration until a bond reaches its full face value, influencing investment horizon and potential returns
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
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.
The information provided above is for reference and education purposes only. It does not constitute an offer, invitation, or solicitation by the Bank for the subscription or purchase of Unit Trusts by any party. While all reasonable efforts have been made to ensure that the information provided is accurate and up-to-date, the Bank does not warrant or guarantee the accuracy, completeness or timeliness of the information or data provided. Neither the Bank nor its information providers shall be held responsible or liable for any errors, delays or inaccuracy of the price, data or information provided herein nor for any loss or damage arising directly or indirectly from any action taken in reliance on the information provided herein. Unit Trust Schemes are not protected by Perbadanan Insurans Deposit Malaysia (PIDM). Money withdrawn from your insured deposit(s) is no longer protected by PIDM if transferred to a non-deposit account. eg. Unit Trust, Bond Dual Currency Investment (DCI), Negotiable Instrument of Deposit (NID) and Floating Rate Negotiable Instrument of Deposit (FRNID), Structured Investment, ASNB, Investment Account-i etc.
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.
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