Deposit account or invest in bonds (funds)

fredz

Hi,

Reading about Vanguard Life Strategy funds where you can choose the relative mix of bonds and equities got me thinking about how I save and invest.

I hold enough cash to cover most eventualities, with any extra invested in funds which are almost 100% equities. What would be the advantages of moving cash into funds with a high ratio of bonds?

I guess the return on bonds may be a little higher than the best cash rates, and within ISA limits I could potentially put more in bonds than cash (depending on what was also invested in equities) as cash ISA is limited to 50% of allowance.

Any other reasons for bonds (within funds) rather than cash?

Thanks.

latecomer

Research what will happen to bond prices when interest rates finally increase. My understanding is that they will drop and hence keeping cash is a better option short term.

fredz

I thought I had read that bond rates were very low at the moment (when interest rates are also low.)

If they're expected to drop further than why have any bonds in a portfolio, instead of equities for the long term and cash on deposit for short term?

I'm not particularly thinking of changing my own plans, just wondering why someone would opt for a fund of funds that was e.g. 40% bonds, 60% equities.

guymo

I am a newcomer to investing and have spent a bit of time researching and thinking about this issue too.

The upshot of my research has been the discovery that, in the long run, return from bonds derives almost entirely from the coupon payments (the interest). In the short term, bonds gain and lose capital value as they are bought and sold, but this tends to even out in the long run. So, as far as I can tell, holding bonds is done for stability, liquidity, and interest payments.

At present, bond yields are low, and if you are talking about small amounts of money, you can obtain higher rates of interest in cash accounts.

So here are some reasons to include bonds in your portfolio:

- When bond yields rise higher than bank interest rates, then you'd want bonds.

- If you have more money to invest in the fixed-income portion of your portfolio than you can reasonably hold in high-interest accounts, then you'd want bonds.

- If you don't want to watch the interest rates on bank accounts and the yields on bonds like a hawk, then you might want bonds.

If none of the above apply, you can happily keep some cash in the bank and hold only equities.

1SeriousMoney1

are you buying bonds online or using offline services ?

pip895

My portfolio is ~ 1/3 bonds/Absolute return funds and 2/3 equity funds - it helps to reduce the volatility of my portfolio in an equity sell off. Having said that, for the reasons mentioned above I have more Absolute return funds than bonds at the moment.


It is also worth mentioning that even within bond funds there are a wide range of types - High yield bonds for instance tend to act more like equities.

1SeriousMoney1

Where can I read details about bonds ? How to deal with it and all other stuff ?

Linton

fredz wrote: »

Hi,

Reading about Vanguard Life Strategy funds where you can choose the relative mix of bonds and equities got me thinking about how I save and invest.

I hold enough cash to cover most eventualities, with any extra invested in funds which are almost 100% equities. What would be the advantages of moving cash into funds with a high ratio of bonds?

I guess the return on bonds may be a little higher than the best cash rates, and within ISA limits I could potentially put more in bonds than cash (depending on what was also invested in equities) as cash ISA is limited to 50% of allowance.

Any other reasons for bonds (within funds) rather than cash?

Thanks.

One reason could be the ability to balance your portfolio. If your cash is in a bank account and your equity funds with a platform, possibly in an ISA or SIPP, it is difficult to move money between the two asset classes.

Also of course there is a wide range of bonds with varying risks. Gilts at the safest end, but returning very little at the moment ,and higher risk corporate bonds which will produce a far better return than cash, but have similar risk and behaviour to equities.

fredz

Some insightful replies - thanks for the explanation.