What can bonds bring to my portfolio?

Fixed interest is considered as a defensive component of a balanced investment portfolio due to the consistency and predictability of returns, compared to other asset classes like shares.

The main attraction of fixed interest is the regular interest payments that you receive.

For example, if you invest in corporate bonds or government bonds that have a fixed rate of interest, sometimes referred to as the coupon, you will know how much interest you’ll get and at what intervals during its lifetime.

Some bonds pay interest monthly, others quarterly or twice a year, but whatever the pattern of payments, fixed interest allows you to plan ahead, knowing how much you will receive and when.

This regular source of income helps to offset some of the unpredictability in other areas of your investment portfolio, such as shares or property and smooth out your overall returns.

The interest payments on fixed interest investments are generally higher than you can get from cash investments.

 

Redeeming your investment

When you invest in shares, you do so knowing that the value of your initial investment could fall as well as rise and regular dividends are not guaranteed.

With fixed interest investments, however, you know that you will likely get back your initial investment in full, providing you hold them until they expire on their maturity date.

On a fixed date, the issuer of a bond will repay the initial value of the bond to the bondholder.

This happens regardless of interest rate changes, which impact the market value of fixed interest investments, during the lifetime of the investment.

Remember that this payment is not guaranteed because the issuer of a bond could default on its payments if it encounters financial difficulties. However, governments and large ‘investment grade’ corporations are least likely to default.

 

Trading bonds

It is also possible to benefit from investing in fixed interest by trading bonds that are listed on a stock exchange such as the ASX.

As with shares, the value of bonds can go up or down when listed on a stock exchange, based on changing perceptions about the future of interest rates and other factors.

This enables you to make money from buying and selling them during their lifetime but also means you could lose money if their market value falls between the time you buy and sell them. 

Back to Choosing Investments

Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. This information is not advice and has been prepared without taking account of the objectives, financial or taxation situation or needs of any particular individual. For this reason, any individual should, before acting on this information, consider the appropriateness of the information, having regards to the individual's objectives, financial or taxation situation and needs, and, if necessary, seek appropriate professional advice. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a Participant of the ASX Group and Chi-X Australia. 

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© Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. CommSec is a Market Participant of ASX Limited and Cboe Australia Pty Limited, a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited.

The information on this page has been prepared without taking into account your objectives, financial situation or needs. For this reason, any individual should, before acting on this information, consider the appropriateness of the information, having regards to their objectives, financial situation or needs, and, if necessary, seek appropriate professional advice.

CommSec does not give any representation or warranty as to the accuracy, reliability or completeness of any content on this page, including any third party sourced data, nor does it accept liability for any errors or omissions.

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