Take informed decisions for your investment

Take informed decisions for your investment

Individuals invest for many reasons. No matter what your personal financial goals may be, to achieve them, you need to make sure your money is working hard and smart! But with today’s complex global markets and so many investment choices available, it can be hard to decide what is right for you. Understanding some of the basic concepts can help you make more informed investment decisions.

There are different types of investments and each has its own purpose and potential benefits. Let us focus on bonds, as a more tangible investment opportunity by the Albanian investor.

What are bonds?

Bonds are a way in which an entity secures money by borrowing from another entity. For example, governments and corporations issue bonds when they need capital resources to finance their activities. These bonds in turn are bought by investors who want to generate income from their funds.

Practically, when investors buy government bonds, they are lending them to the government. In the same way, when investors buy corporate bonds, they are lending money to a company.

The bond pays the bondholder a periodic interest amount otherwise called a coupon. At the end of the life of the bond – called principal maturity – the initial amount invested is paid to the investor.

Let’s look at an example:

The government of country X wants to build an infrastructure project that costs 100 million ALL. To raise the money needed, government finance executives decide to issue government bonds. Each bond will be issued with a value of 100 lek – which is called the nominal value of the bond.

The government – or the issuer of the bonds – offers a coupon rate of 1% per year, to be paid every 6 months. The bonds will mature after 2 years, at which time the government will repay the value of 100 lek for each bond-holder.

Are bonds the right investment for me?

The answer will depend on your investment goal. Some investors choose bonds for their potential of generating income. Bonds make fixed and periodic payments. You can also choose bonds if you want your investment to grow, given the potential of a bond for positive price revaluation. It is important to remember that, like any investment, there is also the possibility that prices will fall, and there will be a negative revaluation.

Many individuals invest in bonds because the latter offer more stable returns than stocks. In their worst calendar year since 1989, stocks fell 38% while bonds fell less than 3%. Bonds can also help diversify your portfolio. Bonds are often seen as a good complement to stocks because stock and bond prices often move in opposite directions. Diversification can reduce overall risk and help preserve your wealth.

If investing in bonds is right for me, then how can I invest in them?

You can buy bonds individually, but for many individuals and professional investors, an investment fund that invests in bonds is preferable.

In a bond investment fund:

  • A professional portfolio manager will look for opportunities in all markets, research and select the most favorable bonds for you.
  • Bond funds also give you the opportunity for a wider range of bonds, providing an opportunity to increase your return potential and diversify your risk.
  • Some bond funds provide you with higher liquidity than investing directly in bonds, offering withdrawal opportunities at any time.
  • A bond fund ensures that any income in the form of coupons is reinvested, increasing the potential return.
  • The fund gives the opportunity to every investor to become part of a large fund with small amounts. Meanwhile, direct investment in bonds, for example in the bonds of Albania, requires a minimum investment amount (300,000 Lek for investments in Treasury bonds and 500,000 Lek for investments in Bonds).
  • Large volume transactions enable the fund to minimize the costs of selling and buying bonds and consequently maximize the rate of return for the investor.