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Clients might need a bonds brush-up

Advisers are being warned that some clients may get a shock when rising interest rates put pressure on bond values.

Thursday, August 17th 2017, 6:01AM

by Susan Edmunds

The Financial Markets Authority has released new research that shows a lack of understanding of bonds.

It found only 61% of people who invest in bonds know the bonds’ interest rate and only 64% knew the maturity date.

Only 44% knew the credit rating of the bond.  Just 39% knew that bonds did not keep their original value if they were sold before the maturity date.

“Investing in bonds is often associated with greater certainty and lower risk, but that’s not always the case,” FMA director of external communications and investor capability Paul Gregory said.

“We recognise in our Strategic Risk Outlook that after a long period of lower interest rates, it is inevitable they will rise again. When that happens, bond values tend to fall and there may be negative returns for conservative and default funds.

“It is important investors are not unnecessarily surprised if that happens to their bonds in those conditions. Don’t panic. Don’t sell or switch out just because you have some negative returns. Think about whether you’re still on track for your longer-term goals before making any decisions.”

The survey showed that a third of those who had bought bonds said they were always low-risk and/or were guaranteed to pay back their money.

Gregory said it was an opportunity for advisers to check with their clients that they understood what they were invested in.

They should take any chance they could to reduce clients’ uncertainty about how a particular investment could be expected to perform in various market conditions, or their shock when it did so.

Investors who were taken by surprise might be more likely to have an unthinking reaction and pull their money out, he said.

Those with a well-diversified portfolio would be less affected by any downturn in bond values due to rising interest rates, he said.

Many advisers talked about wanting to help people meet their goals and invest appropriately for their circumstances, he said.  “This is all part of that conversation.”

Only 64% of investors who had bought bonds knew they were investing in a form of debt.

The research was released to coincide with this year's Money Week, which has a focus on debt.

Tags: bonds financial advisers FMA interest rates investment risk

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