Bonds in 2024: An Investment Option Often Overlooked - Advantages, Disadvantages, and How to Choose

Currently, many investors are stunned by the environment of uncertainty. They have money but don’t know where to put it. Stocks are too volatile, gold appreciates slowly, and bank interest rates have fallen so low that they can be overlooked. In this situation, bonds gradually emerge as a new option that some investors are starting to pay attention to. But the question is, what are bonds and are they truly suitable for us?

What are bonds and how do they raise funds?

Let’s imagine simply: if a private sector or government needs money to build a project, they will issue bonds for sale, similar to a loan agreement with clear rules. Investors buy these bonds, becoming creditors, and can receive regular interest payments. When the bond matures, they get their principal back. What makes bonds different from deposits is that they offer higher returns, but also come with risk-sharing.

Key features and popular types of bonds

Bonds are not one-size-fits-all; they vary depending on the environment and sales objectives.

According to the issuer

Bonds issued by the government or public agencies carry low risk because they are under guarantees, resulting in relatively low interest rates. Conversely, bonds from private companies carry varying risks; companies must offer higher interest rates to attract investors.

According to the method of return payment

Some bonds pay regular interest throughout the term, some defer interest payments until maturity and pay a lump sum, and others are bought at a discounted price and yield returns from the price difference.

According to interest rates

Interest rates can be fixed throughout the term or floating according to market conditions. Often, the choice depends on investors’ outlook on future interest rate trends.

Hidden risks that are often overlooked but are actually different types of risks

Claiming that bonds are risk-free is not true; they just carry other risks.

Risk #1: The issuer may not have enough money to pay the debt
Some companies borrow from investors but have unstable financial health. When the maturity date arrives, they may fail to pay the principal or interest in full.

Risk #2: Fluctuations in interest rates
When market interest rates rise, investors who have fixed-rate bonds lose the opportunity to earn better returns.

Risk #3: Difficulties in selling before maturity
Bonds do not have a stock-like market. If you need cash urgently, finding a buyer may take time.

Risk #4: Inflation eroding returns
If inflation rises sharply, the interest received may lose value, resulting in little to no real profit.

Risk #5: Reinvestment risk after maturity
When the bond matures, investors may need to reinvest, but may not find good options, especially if the market is in a downturn, forcing them to accept lower returns than before.

Hidden rights often overlooked

Some bonds come with special rights that can favor one side over the other.

Companies may have the right to redeem bonds early. If market conditions change, investors lose potential future benefits. Sometimes, investors have the right to sell the bond back to the issuer if circumstances change. Bonds with convertible features can be converted into shares instead of receiving principal, which can be an opportunity or a risk depending on the stock price movement.

How to buy and sell bonds and make them profitable

Understand how to calculate returns

For example, an investor invests 10,000 THB in a bond paying 8% annual interest, paid semi-annually, with 400 THB each time. After 4 years, total interest earned is 3,200 THB plus the original principal, totaling 13,200 THB.

Where to buy: primary and secondary markets

Primary market involves purchasing directly from the company or commercial bank when the bond is first issued. The issuer sets the terms, interest rate, and duration clearly.

Secondary market ( called BEX in Thailand ) involves trading between investors through financial institutions. If an investor holds a bond and needs cash before maturity, they can sell it to others. Clearing takes about 2 business days, and the bond is stored at the Securities Depository Center of Thailand.

Investing in bonds in 2024: should you?

Pros to consider

Choose the duration from 1 day to 20 years, depending on your needs.

Cash flow: Regular interest payments help maintain liquidity.

Higher returns than deposits: Especially when market interest rates are low, bonds may offer better yields.

Lower risk than stocks: Creditors are paid before shareholders.

Sufficient liquidity: The secondary market allows trading if urgent sale is needed.

So, what really differentiates bonds from stocks?

Returns: Stocks have high potential but no guarantees; bonds are guaranteed but offer lower returns.

Volatility: Stock prices can move up to 3 times more than bonds.

Valuation methods: Stocks are valued based on profits and growth; bonds are valued based on debt repayment ability and interest rate trends.

Expert advice

• If you are young and willing to accept risk, focus on stocks.
• If you are older, risk-averse, or dislike volatility, bonds are more suitable.
• The best approach is a mix of stocks and bonds tailored to your age and personal situation, to grow returns without excessive volatility.

Conclusion: Bonds are not magical, but they are useful

In the 21st century, where financial markets are interconnected, what are bonds that remain? They are one of the tools accessible to the general public. The key is to study thoroughly, understand, and choose what suits your goals and risk appetite. Bonds are not meant to generate enormous wealth but serve as a fog of “explosions” that help prevent your portfolio from collapsing during market crashes.