Would like to add a bit. I am currently 46 and retired early at 42. I have owned direct bonds before but currently have moved to bond funds.

In my personal opinion what asset classes you have in your investment portfolio depends on your cashflow requirements, risk capacity and risk tolerance.

Bonds are bought for fixed income, high liquidity and low risk to capital (that is if you buy portfolio of investment grade bonds ).

If you're young and have a steady job it might make more sense to have a higher percentage of your investments in more high risk assets like equity as you have steady income and lots of time to accumulate more wealth and higher capacity to recover from a huge lost.

If you are older and retired bonds it make more sense to allocate a bit to bonds as you are no longer in the accumulation phase you can't take a big loss and have no more income.

For me I keep my spare cash basically 1.5 years spending in a bond fund. And 6 months in FD giving me a 2 year buffer.

In Malaysia bond ratings are down by either MARC or RAM. I wouldn't buy any bonds which are unrated or perpetual as the risk is too high for me. Having a ladder of diredt bonds is a great way to have a secured income but not really practical in Malaysia.

It is almost impossible to buy 5 to 6 direct investment grade bonds with different maturities as the supply is quite limited hence I would feel buying a bond fund would be easier and more practical. After bank charges for their markup etc it is not that cheap also.

One thing for us malaysians who were employed and are retiring we don't really have to keep that much in bonds as we have a huge chunk of money in our epf which has a guaranteed return of 2.5% and a rolling target of 3.5% above inflation which is better then any bond so it would be better to just leave your money in epf acting as some sort of bond allocation in your portfolio.

This post has been edited by mmweric: Sep 4 2020, 11:00 AM

There are a lot more investment options and better banking services in Singapore that's why most rich people in Malaysia have their money in Singapore.

Government Bonds and Investment Bonds denominated in local currency are a bit different compared to sovereign bonds. Singapore (same as Malaysia) has a fiat currency meaning it's currency is not tagged to gold so it is impossible to default as the government can just print more money. Companies can't so there is still a possibility of default (but unlikely for the banks in Singapore as I am sure the government would come to their rescue (like in 2008 in the US) as so many retirees money is tied to OCBC, UOB and DBS in Singapore).

Bond prices depend on the current interest rate, credit risk, it's term and its options like whether it is callable or convertible. It looks like the banking bonds you bought are perpetual and callable. Perpetual bonds give you a higher coupon rate compared to non perpetual as it is more sensitive to interest rate changes (the longer the term the more sensitive it is).

In my opinion you have to be careful with perpetual bonds as if interest rates rise you would have a capital loss and unlike a non-perpetual bond you can't hold it to maturity to get back the original amount. If you want a constant income in a more secure way using direct bonds it would be better to buy a ladder of bonds with different maturity dates for example 5 bonds with maturities of 1-5 years (you would have to most probably start with 3-8 years) and continue to buy a new bond eveytime one matures.

That would ensure even if there was an interest rate increase you wouldn't really be affected as you would still be able to hold the bond to maturity . It's not possible to have a ladder of bonds in Malaysia as a retail investor here we don't have access to many direct
bonds.

Perpetual bonds are bonds which are which can't be redeemed hence called perpetual bonds. Perpetual bonds are quite common they even sell Singapore perpetual bonds here in Malaysia. My banker has been trying to sell me some too.

https://www.moneysense.gov.sg/articles/2018...%20call%20dates.

Personally I would rather go through a bond fund as a good bond fund manager sometimes can make a few more points return through trading of bonds and besides that they also reduce risk through the diversification by owning a larger pool of bonds. Bonds are quite technical with a deterministic return not like equity which can be exploited by a good bond fund manager.

In Malaysia the investment grade bond funds I own has quite consistently performed better then investment grade bond returns for the last 10 years. I am sure there are similar bond funds in Singapore.

When you buy a bond fund you can check it's prospectus on what type of bonds they buy and whether they buy only local or overseas bonds. So you do have a bit of control over the types of bonds they have. Bond funds do of cause have an advantage of getting to purchase bonds at a significantly lower price then retail investors. The bond fund I own charges a 0.52% management fee with 0% sales charge. If a bond fund charges something like 1% management fees and you buy it from a bank which charges you another 1% sales charge then it might not be worth purchasing it.

But with the current drop in interest rates in the near to mid term direct bonds might start to make more sense as if bond yields drop to 1-2% the management fees of 0.52% might not be justifiable.

The reason why they are called perpetual is due to them not having a maturity date for the buyer. A bond can be perpetual or of fixed maturity with an option to be callable (convert to cash) or convertible (convertible to shares).

If interest rates fall the issuer would call it back as it would be cheaper to refinance the debt. The perpetuity part is more on perpetuity for the buyer if the issuer does not call it. If interest rates had gone up your bonds might not have been called and the bond price would go down so if you sell it at that time you would make a capital lost.

Interest rates fluctuate depending on a government's monetary policy if inflation suddenly went up and the singapore economy was overheating interest rates would go up. Same as if the economy was depressed and inflation was too low interest rates would drop.

Singapore interest rates can be viewed here.
https://tradingeconomics.com/singapore/interest-rate

An interesting fact is some of the oldest perpetual bonds are consols which was issued by the UK govt in 1751 originally at 3.5%. The government continued to pay interest on it till 2015 when they decided to redeem all of it (make a call). That is 264 years.

There are pro's and con's of buying perpetual bonds so whether perpetual bonds are right for you is of cause a personal decision and depends on your own personal financial situation

Pros
-----
1. Steady, predictable source of income with payments on a set schedule

2. Some perpetual bonds increase interest at predetermined points in the future

Cons
-----

1. Investors are subject to perpetual credit risk exposure

2. Issuers may be able to recall some perpetual bonds

3. Rising general interest rates could diminish the value of the perpetual bond

source: https://www.investopedia.com/articles/inves...ds-overview.asp

This post has been edited by mmweric: Sep 5 2020, 05:46 PM