Investing in Mini Bonds



http://www.wealthwatch.tv/ Should I invest my hard earned money in mini-bonds? There's nothing new about bonds. The bond market is enormous and takes many forms. It's simply a way of lending money to an organisation for an agreed amount of time in return for an agreed amount of interest. It includes government bonds, also called gilts, local authority bonds, which became infamous with the bankruptcy of Detroit earlier this year, high grade corporate bonds and so-called Junk Bonds. Today I want to talk to you about a new type of bond that's materialised in the last couple of years, Mini Bonds. According to Capita, this market is exploding at the moment. Worth just £90 million last year, something like a billion pounds worth of mini bonds will be taken out this year rising to eight billion pounds by 2017. So what are mini bonds and should you have anything to do with them. As ever, the answer is, it depends. There are good mini bonds, mediocre ones and those for which I can supply you with an investor's most important tool, a ten foot bargepole. The main advantage is much better interest rates than you'll ever get in the bank. Anything from six per cent to ten per cent is on offer, usually over periods from five to ten years. The returns can grow tax free in your SIPP if your provider has approved the scheme. But that may be challenging because the main drawback of mini bonds is that they are unregulated and therefore not covered by the Financial Services Compensation Act. But, as I've said before, that guarantee scheme is so underfunded that it can't be taken too seriously. If a bank or large company goes out of business its four billion pound pot will not go very far among tens of thousands of investors. Much more important is to look at the quality of the companies offering the mini bond. They include household names such as John Lewis and Nuffield Health, fast growing brands like Hotel Chocolat and King of Shaves as well as smaller companies you may not have heard of. You are funding some new aspect of their business so you need to understand how the bond proceeds will be deployed and what income stream is going to provide the cashflow to fund your interest payments. For example, I'm about to launch a mini bond, sometimes called a Loan Note, for a major overseas property developer. The company was recently valued at €150 million by PWC , and has delivered thousands of properties already. I know their senior management, and like their conservative approach to financial management. They are offering a ten year mini bond with 6% per annum interest. Your payments are secured against not just the shares of the company but against existing income from one of their operational resorts. Investment starts at £5,000. You can learn more at www.whyminibonds.com One other thing to be aware of with mini bonds. Unlike bonds in big companies, they can't be bought and sold on the open market. So once you make a decision to invest, you're locked in for the term of the bond. But that's not so different to many other savings bonds offered by the banks. To get the higher returns, you always have to lock your money away for longer periods. I recently asked one of my business bankers, HSBC, what they would offer me if I locked £50,000 of retained profits away in one of their long term bonds rather than in the ordinary savings account. At present my hard earned cash receives .03 % interest. If I lock it away for five years that would go up to a breath-taking 0.3%! So you can take a guaranteed loss of at least 4% a year with interest rates so far below real inflation, or you can take a chance on a mini bond to get a positive return but with some risks attached. I wish I could wave a magic wand and get you fantastic returns at zero risk, but as you can see I'm not wearing bright red underpants. From what I've told you, what do you think about the idea of mini bonds and would you invest in them? Just pop your thoughts in the comment box below this video.,

Comments

  1. The simple answer? No. Never. Incredibly bad returns other than in falling, (not currently low) interest markets.


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