How to buy bonds in Australia: 4 ways explained

While investing in individual bonds can be difficult, there are other options. In this article, we look at how to buy bonds in Australia.

What are bonds?

When investors buy bonds they are loaning their money to companies or governments who will pay regular interest and after an agreed amount of time reimburse investors their full loan amount – similar to an interest-only loan. Regular interest payments can provide a steady income and bonds can also help create a diversified portfolio, making bonds an attractive investment for some.

Bonds are used by companies and governments to be able to finance projects or operations. The details of a bond often include when the full amount of the loan will be paid back to the bond owner, and how much interest will be paid incrementally.

Bonds are considered to be a “safe” or defensive form of investment. This means the returns on your investments aren’t likely to be as high as what you might expect from investing in shares, but you can expect more stability. This is why bonds could make a strategic asset for your portfolio, especially in periods of volatility or falling interest rates.

Not sure how bonds work or need a refresher? Check out this article. 

Types of bonds

Before you get started investing in bonds, it is important to know the different types of bonds in Australia and which one may be more suitable for you. The two main types are Corporate and Government bonds.

• Corporate bonds – These are normally a part of a public offer when a prospectus is issued by the company and investors can buy directly. The difference between buying shares and investing in a bond is that you do not own part of the business and your investment is not impacted by the cash flow of the business. Your return is restricted to the principal amount you invested and any interest payments that were agreed on.
• Government bonds – The Australian Government issues Commonwealth Government Securities (CGS) that can be bought on the ASX via a broker or online share trading account. The bonds are generally fixed with interest payments made to you every 3-6 months over the duration of the security.

How to invest in bonds?

So if you’re ready to invest, how can you gain access to the bond market? There are several ways to get started including buying the bonds directly from the issuer, or gaining exposure through investment products listed on the ASX. 

1) Investing in individual bonds

The only way to invest in individual bonds is to buy them directly from the issuer (for example, the company) and it is similar to purchasing an IPO.  However, for the average investor, this can be quite difficult, as most issuers only offer bonds to certain parties – typically institutional investors. Although, if you are interested in a particular bond, you may be able to find a broker who may be able to arrange this for you. They should provide you with the paperwork and a prospectus with more information on the opportunity. It is important that you read the prospectus carefully before investing.  

Bond Funds

As investing in individual bonds is out of reach for most retail investors, to gain exposure to this market an alternative are bond funds. These investment funds are made up of various bonds and other debt instruments, and there are a number of ways to access them.

2) Investing in Bond ETFs

Bond ETFs are available on the ASX, therefore anyone with an online share trading account can access them. When you invest in a bond ETF, generally you will be investing in a fund that tracks the bond market and replicates its returns. Some ETFs track specific types of bonds, for example, just corporate bonds or government bonds.

Related article: What is an Exchange Traded Fund (ETF)?

Investing through a bond ETF doesn’t mean that you miss out on dividends. Typically, bond ETFs pay out interest monthly, while any capital gains are paid out through an annual dividend.

3) Investing in bonds through managed funds

Most managed funds will also be able to provide exposure to the bond market. While investing in bonds through managed funds is similar to bond ETFs, the difference is managed funds are overseen but a professional fund manager.

Fund managers will select the bonds and other securities to invest in and try to match them with their clients’ ideal asset allocation. They will also actively try to beat the market and aim to deliver their clients’ strong returns. However, bear in mind, this service comes at a cost and will often be pricier than standard ETF fees. So, make sure you shop around before deciding on the right managed fund for you.

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4) Investing in bonds through your super

Another way to access bonds is through your superannuation. In fact, most super funds allow you to invest solely in fixed interest assets like bonds and cash. However, if you are looking to diversify your investment portfolio, generally a mix of defensive assets and growth assets is recommended.

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The risks involved

While bonds are generally considered a safer investment option compared to shares, it does not mean that they are without risk. The main risk investors face with bonds, is the chance that the bond issuers will default on the loan and not be able to pay the interest owed to investors. So depending on the bond you are invested in, some are less risky than others. Corporate bonds, for example, are seen as riskier than government bonds, as the chance of a government default is minimal.

Interest rate risk should also be considered when investing in bonds. Typically, as interest rates rise the value of bonds falls. This is because investors can take on less risk by moving to cash investments with a competitive interest rate. Therefore, making bonds a less attractive investment option.

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