FAQ About Bond Fund

After I released my research on the performance of a particular bond fund for the year 2000 till end of 2002, with a result of average 12% steady positive return, much more attractive than 2 to 3 % return in Bank saving or Fixed Deposits, or 4.25% return in EPF fund, many get excited and interested. Although there are friends and associates invested in the Bond Fund through me, it is observed that a lot of people do not have good awareness of the bond fund. (Note: In year 2003, the rate of return was around 24% per annum. However, after steady growth of bond performance for 5-7 years in Malaysia, a major correction started to occur in August, 2003, with sharp drop in prices in bond! This QuaSyLaTic existed in goog time before the sharp drop, parked the investment money in banks and EPF and resume after 8-9 months. Again, timing and action matter!)

This FAQ – Frequently Asked Question page is created to increase the financial literacy.

What is Bond Fund? What is Fixed-Income Unit Trusts?

From trust fund perspective, Bond Fund and Fixed-Income unit trusts are the same thing.

These trusts invest mainly in corporate bonds, government securities and liquid securities like bills and cash. Some investments are in overseas. However all investments are highly regulated by Bank Negara / Security Commission.

Since it is Fixed-income type, there is contractual return of investment from borrowers to bond issuers / Fund Manager at the maturity date. There is secondary trading of bond subject to the forces of supply and demand. As such the bond price can fluctuate up and down, although not often.. (The bond price behavior is dealt with in separate articles)

Portfolio of Fixed-Income or Bond Fund.

Fund Manager select diversity of fund borrowers. (see table below)

Hence such diversity spread the risk, i.e. not all in one basket as per the policy dictates.

Different bonds mature at different maturity dates, there is regular and periodic actual return of investment when well managed by the Fund Managers.

Can you give examples of a Bond fund portfolio?

In year 2000, a particular Bond fund has local investment in Prime Utilities Bhd., Unlisted Securities like Encorp Systembilt Sdn. Bhd – bond, Lekir Bulk Terminal Sdn. Bhd – bond, Malaysian Pacific Industries Bhd. – bond., etc, etc.

In year 2001/2, the following is breakdown to top 10 holdings

No Issuer Rating of Bond Exposure

1 Syarikat Air Johor (SAJ) A2 9.15%

2 CBO ONE AAA 7.75%

3 MAXISEGAR A3 7.69%

4 Sistem Lingkaran Lebuhraya Kajang (SILK) A2 5.24%

5 SILK A2 4.72%

6 SILK A2 4.71%

7 Malaysian Industrial Development Finance (MIDF) A2 3.68%

8 Projek Lebuhraya Utara Selatan (PLUS) AAA 3.15%

9 Petronas Fertilizer (Kedah) Bhd AAA 3.15%

10 KESAS AA3 3.11%

Why Bond Fund return of investment is usually better than Fixed Deposit (FD) or saving fund?

We invest in FD and / or saving in bank and bank lends the money to industries or businesses, who pay high interest to bank. Bank acts as middle man who takes a big cut from the high interest cut and pay us little interest in FD / saving.

Large corporate who needs large amount of investment fund may find it cheaper to borrow money from Fund Manager Fund manager does not operate like banks with large overheads, office, branches etc. Hence Fund Manager can afford to channel more of the gain to the investors like us, otherwise investors will still keep their money in the bank.

Some bonds are attractive to businesses or investors, and there is bond trading also, generating more income to the Fund Manager. As small investors, we benefit from all these, if the fund is well managed.

Will Bond Fund be affected by the stock market?

From this QuaSyLaTic research paper, especially comparing a few Bond Fund performances and KLCI for the last three years, Bond Fund was on steady positive growth with average 12% return (recently 2003, about 24% return) whereas generally KLCI is on the declining trend and some time up and down.

When stock market improves to bull period, business / industries will be able to get the required fund from the sale of the listed shares (which is of high value at bull market) and they do not need to issue bond, unless of low interest. Then bond fund won’t be doing well.

At the bull market, bank will offer higher interest rate to attract money to flow in, though most people get excited from higher return in the bull stock market.

That is the time the bond fund is no more attractive.

It does seem that at today scenario, US invasion of Iraq, poor economic performance, SARS, and many other uncertainties, the return of bull market will take many many years to come.

Is Bond Fund involved in the stock market?

Certain fund has a mix of bond fund, equity fund and saving fund.

This QuaSyLaTic does not recommend mix types of investment, e.g. above type of mixed fund investment will get dragged down by the equity performance during bear market, with net result is usually still negative.

Likewise it is not advisable to buy insurance with investment features.

You can choose pure bond funds without equity exposure.

Is it risky to invest in Bond Fund?

Let’s us understand how Fund Manager generally operates bond fund.

First it is highly regulated by Bank Negara / Security Commission, who have investors’ interest to protect. Hence Fund Manager has to follow the rules and regulation. Similar to operation of banks.

Securities issued or guaranteed by the Malaysian Government or Bank Negara Malaysia.

The value of the holding of any class of fixed-income security of any single issuer must not exceed 20% of the security issued.

And hosts of other restrictions and rules.

However, bond fund is subject to supply and demand of the market. As such, there is no absolute guarantee of fixed and regular return. Investor has to manage the risk / reward ratio and invest with constant monitoring.

When and why is Bond Fund most attractive?

See answers to No 5 above.

An easy yardstick to determine when to use Bond fund as instrument to invest is compared with Fixed Deposit. If the Fixed Deposit rate is low, switch to Bond Fund. Likewise compare with EPF rate of return.

When the market is turning from bear to bull, or when equity is in the very low price zone, get ready to switch from Bond fund to equity Unit Trust.

Likewise, when the bond price becomes unstable due to supply and demand forces, quit from bond fund.

Is it true that we have to wait for many years for the bond to mature, before cash out

No, as small investors, we are guaranteed by laws to cash out anytime since we only buy units. However Fund Manager has to manage to cash out when the bond contracts expire.

When can we redeem from bond fund?

Anytime in the case of unit trust instrument.. Fill in the appropriate redemption form, you get back the investment return plus principle at per the quoted price of the day.

Is it true that we have to use large amount of money to qualify for the bond fund?

No. The minimum amount is RM 2000 initially, or RM 1000 for certain bond fund.

12 Some banks also sell third party bond fund, what is the difference buying bond fund from bank and from agent?

Bank will only choose and sell those bond fund with commission, as banks has to make money, not charity service. Bank will need to protect their interest i.e. making money. Likely they are biased to bond fund with higher commission to gain.

Bank does aggressive promotion on sale of fund, they often offer goodies like free credit cards, VIP cards etc. (Actually they use investor’s money to provide the goodies, e.g. you invest RM 200,000 in a type of bond fund, the commission is 2 % i.e. RM 4000.00. From this RM 4000.00 a small amount is taken to give you the goodies.

More importantly, banks or most agents won't not monitor the bond performance to advise you when to let go and when to switch to equity unit trusts at the bottom of the market.

Should I monitor bond fund performance? Should I operate Bond fund investment like Fixed Deposit in Bank, i.e. watch up for maturity date?

For any of your own investment, you should monitor.

There is no maturity date for bond fund investment. You can cash out any time. More flexible than FD.

“Maybe I should invest in fund manager “B” Bond Fund, not fund manager “A” as, from what I know, “A” invested in one or two corporation bond fund that I think have poor business performance.

I think you need to ask yourself a question : do you want to be FULL TIME supervisor of Fund Manager on what portfolio they keep, what companies they invest. If today you are satisfied with the portfolio of the fund, and you invest, 6 months later, you hear they invest in a few company you do not have faith in (which is your opinion), do you want to pull out

This QuaSyLaTi strategy is to monitor the graphical pattern and trend of the fund performance daily. If there is any un-usual behavior, cash out and protect our investment.

Besides higher rate of return compared with FD, is there other advantage?
Yes. Flexibility and liquidity.

In FD, before the maturity date, you could not redeem, unless you forfeit the interest. But in the case of Bond fund, you could redeem anytime!

Is it advisable to stop the FD and forfeit the interest and switch to Bond Fund, or should I wait till maturity of the FD before switching to Bond Fund?
There is a cut-off point. Assuming bank FD rate is 3%, and a particular Bond Fund 12%, i.e. 1% per month. You could even cut-off the FD at the 9^th month, losing all the FD interest, but gain 1% per month for 3 months with total 3%, without any loss.

If you stop the FD, with five more months in a year, you could still get around 5% return when switch to Bond fund.

Hence make your decision using the above comparative data as guides. At the same time, there is risks involved in any investment.

Can I test the Bond investment system?

By all means. You can take some old newspaper, say 2-3 weeks ago, and check the SBB bond fund. Note down the price. Take today newspaper and check the today price. Notice the difference. Is it on POSITIVE increase?

Then check the newspaper for the next few days and weeks and see how the price varies.