Philippine bonds for beginners: Everything you need to know about this low-risk long-term investment
Investments are a great way to increase your sources of income. Investments like stocks and mutual funds are popular investment options that many finance-savvy Filipinos are adding to their portfolio. While there is always some amount of risk in investing, many find the chance of getting higher returns as worth the risk.
But it’s that same risk that makes many other Filipinos hesitant about investing. After all, when you have a family to look after, or a financial goal to aim for, you don’t want to put these on the line for income that isn’t a hundred percent guaranteed.
Many Filipinos may not know about Philippine Bonds, which are one of the safest investment instruments in the financial markets. If you’re interested in low-risk but high-return investments, here’s a guide to bond investments and why it may be the best investment option for the shrewd investor who wants to play it safe.
What are bonds?
Bonds are a passive investment asset. It serves as proof that its issuer (either the government or a private corporation) has borrowed money from you and they will pay you what you’re owed plus periodic interest payments over the period indicated on your bonds’ terms.
Let’s say that the government has an infrastructure project that will cost them 50 billion pesos. After the government exercises all their possible options for funding, they may find that they’re still short of 5 billion pesos. One solution is to issue multiple bonds totaling to that amount, but promising to pay it back after several years plus interest.
Individuals, organizations, and even foreign governments can buy these bonds in exchange for the money the government needs, and will be known as creditors or debt-holders. After the specified bond tenor has passed, the bond matures, and creditors can claim their debt plus the interest that they’re entitled to.
Types of bonds
Bonds in the Philippines can be classified into two: government bonds and corporate bonds.
Government bonds,also known as sovereign bonds, are either placed up for auction with institutions that have the capacity to distribute it further to the retail investors, or sold directly to the general public.
Corporate bonds are those issued by private corporations listed on the stock exchange. Corporations may issue bonds to investors to expand their business or sustain their operations.
Bond investment risks
Compared to investments like stocks and mutual funds where you risk incurring a loss depending on market conditions, sovereign bonds are considered as relatively risk-free, as the risk of the government defaulting is relatively low.
With the country’s steady economic growth, it’s unlikely that the Philippine government would be unable to pay its bonds when the time comes.
However, take note that this isn’t an investment that guarantees 100% safety from risk. Major events like a revolution or a country defaulting due to its huge foreign debt is possible. However, this is unlikely to happen in the Philippines where growth is relatively stable.
As for corporate bonds, if the issuing company ever goes bankrupt, it will be liquidated to pay off any remaining debt. Because bonds are considered debt, holders of its corporate bonds will be prioritized – even put ahead of those holding its stocks.
Advantages of buying bonds in the Philippines
Relatively less risk- Whether you buy Philippine sovereign bonds or corporate bonds, it is a relatively safer option, because it is much less volatile compared to other forms of investments that can fluctuate depending on the market trends.
Portfolio diversification- As the saying goes, don’t put all your eggs in one basket. If you’re planning on investing in multiple investment products, the low-risk features of bonds can offset potential losses that high-risk investments may incur.
Fixed income- Depending on the type of bonds you buy, interest can be paid periodically, giving you fixed passive income on top of your other sources of income or revenue.
Better interest income- Other low-risk, interest-based options like savings accounts and time deposits offer lower interest rates. The income you receive from bonds is much higher compared to the other two.
Disadvantages of buying bonds
There is still risk of default- As mentioned earlier, buying bonds is not 100% risk-free. It’s unlikely that the Philippines may undergo a scenario wherein economic growth suddenly plummets and it defaults due to its debts, but the chance of it happening exists, albeit being remote at this point. As for corporate bonds, creditors are prioritized over stockholders, but that doesn’t guarantee that you’ll be paid in full depending on the corporation’s amount of debt upon liquidation.
Opportunity costs- Bonds are the relatively safer option, but there’s no guarantee that it will do better than the high-risk, high-reward investments. In many cases, the gamble investors take on stocks can greatly pay off. For bonds, the smaller profits (interest payments) are steadier as committed by the issuer. Typically in normal markets, stocks generally perform better in the long run. But in case of a recession or a decline in the market, bonds are the better option for those who want to play it safe.
How do bonds work?
To start investing, you will need a tax identification number (all profits from your bonds are subject to 20% tax), a bank account, and at least P10,000 in capital to buy bonds. You can buy bonds through different means:
Directly from the Bureau of Treasury’s authorized selling agents (you can find announcements of new bond offerings within the business sections of newspapers when they are issued or announced)
Through brokers in the secondary market (this will entail additional brokerage fees on top of your withholding tax)
Bond funds. These aren’t exactly bonds, but pooled investment funds by authorized financial institutions and companies. Your profits come from bond investments, where the investors’ pooled money was invested in. Examples of these funds include mutual funds and unit investment trust funds.
Should I invest in bonds?
Bonds are the best choice for conservative Filipinos who want safe investments, as opposed to taking a gamble on the stock market. Bonds are not directly affected by the highs and lows of the stock market, so it’s less likely that you will incur losses. It is the better option for people who prefer the predictable passive income from the periodic interest that their bonds receive. This makes it a good investment option for.
- First-time investors who want to start safe
- Investors looking to add safe long-term options to offset their riskier investments
- People who want periodic income to help their household’s expenses
- Retired individuals who want additional periodic income
Contact your Investment Specialist or Relationship Manager to invest today.
