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This is part II of Understanding Bond Funds. You can view part I of understanding bond funds to find out what type of bond available.

What are bond funds?

Bond funds are portfolios which “pool” money from different investors to invest in bond instruments. These funds are established and managed by fund management companies. They invest mainly in government bonds as well as corporate bonds, depending on an established investment guideline.

It would be difficult fot individual investors to access the bond market directly as there is a need for minimum standard trading lots. In Malaysia, this standard trading lot is RM5 million. By “pooling” money from a wide spectrum of investors, bond funds provide avenues for individual investors to invest in such instruments, in smaller amounts.

Why invest in bond funds?

Some of the key advantages of investing in bond funds are:

1. Professionally managed

Bond funds are managed by professional fund managers who are well-trained and have a proven track record in analysing the interest rate outlook and creditworthiness of bonds. Large bond fund managers usually have in-house economics and credit teams to assess macro outlook and credit standings of the various bonds in the market.

2. No fixed maturity date

While individual bonds have fixed maturity dates, open-ended bond funds do not have fixed maturity dates as fund managers constantly rebalance the portfolios. Therefore investorts need not worry about re-investing their money.

3. Regular income

Most bond funds offer investors regular income distributions derived from the coupon income generated by the underlying bonds in the portfolio. Thus, bond funds give investors a stable, regular income.

4. Automatic income reinvestment

Investors who are not in need of regular income could opt for automatic  income reinvestment. This option allows income distribution from the bond funds to be reinvested automatically in the fund which gives the investor more units.

5. Liquidity

Investors are free to redeem units of a bond fund at the current net asset value (NAV) of fund. Bond funds provide liquidity and convenience as investors could buy or sell their units every day. Investors could redeem their units without having to wait for each bond to mature.

6. Diversification

Bond funds provide diversification to investors as they invest in wide spectrum of bonds. This reduces the risk of over-exposure to any single bond.

We at Pro Trade Shares hope the last two articles on bond fund were beneficial.

Related Posts:

• Understanding Malaysian Bond Funds – part 1

This is an extract from an article that was published in BTimes that we think will be beneficial to Pro Trade Shares visitors.

What is a bond?

A bond is a debt security issued by an issuer (otherwise known as the borrower) to raise funds as an alternative to borrowing directly from banks. By “lending” money to bond issuers, buyers of bonds (or bondholders) are paid periodic interest returns called coupon payments.

Similar to loans, which carry fixed tenures, bonds too have fixed maturity dates for bondholderws to get back their principal.

Bond issuers could be domestic or foreign corporations, domestic or foreign state/federal governments and even central banks.

A. Government Bond

Issuer
Malaysian government (facilitated by Bank Negara)

Type of Bond
1. Malaysian Treasury Bills (MTB)
2. Malaysian Government Securities (MGS)
3. Government Investment Issues (GII)
4. Monetary Notes

Issuer
Bank Negara

Type of Bond
1. Bank Negara Monetary Notes (BNMN)
2. Bon Simpanan Merdeka

B. Corporate Bond

Issuer
Cagamas (national mortgage corporation that issues asset-backed securities)

Type of Bond
1. Cagamas notes
2. Cagamas bonds
3. Islamic Cagamas bonds

Issuer
Khazanah Nasional (investment holding arms of the Government of Malaysia)

Type of Bond
1. Khazanah Bonds

Issuer
Corporations (such as Tenaga Nasional and others)

Type of Bond
1. Commercial Papers
2. Medium Term Notes
3. Corporate Bonds/Private Debt Securities

Related Posts:

• Malaysia key interest rate raised
• Bank Negara approves Hong Leong to talk with EONCAP
• Understanding Bond Funds – part 2
• Zeti: Ringgit in line with other currencies
• Bank Negara to issue RM2b Merdeka bonds

Although PRO TRADE SHARES provide mainly news on share trading in Bursa  Malaysia, we also would like to update our readers on the latest investment opportunity.

Business Times Online today (15 July 2008) printed an article that should be of interest to Malaysian wanting to invest in foreign unit trust.

According to the report, the Securities Commission of Malaysia has given the go ahead to FUNDSUPERMART.com, the largest online unit trust distributor in Singapore, to offer its services to Malaysian.

I quote:

The website is expected to go live around September this year. At that time, retail investors can buy unit trusts from various fund houses at significantly lower prices, sources said.

“Close to 100 funds, invested in different asset classes and geographical areas, from several fund management companies are expected to be available when the website is launched,” a source said.

The portal is operated by iFAST Capital Sdn Bhd, a joint venture between OSK Investment Bank Bhd and Singapore’s iFAST Corp Pte Ltd.

It is talking to about 10 fund management companies here and has already signed on a few major players to distribute their products online, the source added.

The concept of online fund supermarkets is very popular in more advanced economies where retail investors are more sophisticated.

Investors can compare the charges and performance of various unit trusts from different providers, before picking the best deals that suit their requirements. Their investment decision is helped by the editorial and investment planning tools provided by the online operator.

However, this business model is fairly new to most Malaysians. Investors are likely to take years to warm up to this concept.

“It’s a learning curve. Even in Singapore, it took them a few years to break even and for the business to really take off,” a source said.

The arrival of fundsupermart.com will give Malaysian investors even more choices as another online financial products provider, Tune Money Sdn Bhd, may also sell unit trusts on its website soon.

In Singapore, fundsupermart.com started operations in 2000, and has grown to have S$1 billion (RM2.38 billion) worth of assets under administration as at May this year. The operation has since expanded to Hong Kong last July.

Although the upfront sales fee that will be charged to Malaysian investors have yet to be decided, it will be much lower than the usual charges for equity funds of between five per cent and six per cent. In Singapore, for example, fundsupermart.com has brought down sale charges to around two per cent, from three per cent that are generally charged by fund management companies.

Internet distributors can cut sale charges because this distribution model incurs lower operating expenses as it does not need to hire agents to promote products.

Although it is good news to investor, it is not so good news to Malaysian unit trust agent. Due to the ‘direct’ investment by investor without going through an agent, FUNDSUPERMART.com can afford to charge lower fees. Eventually, investors will opt for online investment rather than through an agent. Of course, we are talking about a few years down the road.

We foresee that very soon, in not distance future, a local version of online investment in unit trust will appear. Tune Money already is in the process of introducing a similar service.  We also think that the smaller unit trust companies will also venture into the foray in order to reduce their cost / fees. With the reduction, more Malaysian will invest in their unit trust rather than those managed by larger unit trust companies.

The larger unit trust companies will probably approach this online sales method more cautiously in order not to upset their large number of agents. Large unit trust companies have relied on large agent base for their sales for a long time and they could not afford to upset their agents lest their agent quit on them.

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