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Investments with regular payouts (Part 2)

POSTED ON AUGUST 28, 2020    

This is the second article in a two-part series on investments that give regular returns. It explains the different types of fixed income securities, including what to expect if you choose to invest in each one.

 

You can read Part 1 by clicking here.

 

 

Here are the kinds of fixed income securities:

 

Time deposits

Time deposits (TDs) are perhaps the most basic low-risk investment with a regular payout. Here’s how it works: you put your money in a TD, then get your money back plus interest upon maturity. You also have the option of rolling over your TD when it matures, that is, re-opening the TD, possibly with the interest the original earned, at a different interest rate and term.

 

With time deposits, your risk is if the bank you open a TD with closes down. In that case, you’re covered by the Philippine Deposit Insurance Corporation (PDIC) which will help you recover up to P500,000, depending on how much you put in.

 

Long-term negotiable certificates of deposit

Like TDs, you get interest from long-term negotiable certificates of deposit (LTNCDs). However, LTNCDs have longer placement periods. Though anything above 1 year can generally be considered long-term, LTNCDS commonly have terms of at least 5 years.

 

Banks offer LTNCDs to investors during a designated offer period prior to the actual launch date. After the offer period, you can still invest in LTNCDs by buying from investors who have them. This is because LTNCDs are “negotiable,” meaning the ownership of the security can be transferred to somebody else.

 

Government securities

Government securities are fixed income securities that are issued and explicitly guaranteed by the national government–in our case, the Republic of the Philippines.

 

The available government securities in our country fall under three categories: Treasury Bills, Fixed Rate Treasury Notes (FXTNs), and Retail Treasury Bonds (RTBs). Being guaranteed by the government’s power to print money, these securities are relatively low risk.

 

Treasury bills are issued as zero-coupon fixed income securities that have terms of less than 1 year. FXTNs meanwhile, are fixed income securities issued with terms above 1 year, coupled with semi-annual coupon/interest payments, and are generally for people and institutions that already have a lot of money to invest with.

 

Finally, RTBs are also issued with terms above 1 year, have quarterly coupon/interest payments, and are meant for the general investing public through their smaller minimum investment of P5,000.00.

 

Corporate bonds

As an alternative to borrowing money from banks, privately-owned corporations can also issue bonds to get funding for their business needs. In general, corporate bonds carry more risk than government securities because the capacity of corporations to pay depends on how well their business is doing and is not guaranteed by the government in any way. This increased risk, however, carries a higher potential for investment rewards as these securities are typically issued with higher interest rates.

 

Of course, not all corporate bonds are equal. Each corporation has a different level of credit score which measures the likelihood that they can pay back their debts. However, compared to stocks/equity investments, these securities still have less risk compared to stocks.

 

Holding a corporate bond means a company owes you money while holding stocks means you are a part-owner of the company. If a corporation were to go bankrupt, creditors (i.e. people and institutions they owe money to, like bond investors) are given priority over owners (stockholders).

 

Except for time deposits in banks, all these securities are Mark-to-Market (MTM) which gives you both the risk of losing a portion of the money you invest and the opportunity to take profit through capital appreciation if you decide to sell the security before the end of its term.

 

Mix it up

When it comes to choosing investments, you don’t necessarily have to choose one over the other.

 

Depending on a number of factors, you can adopt a strategy where you grow your money through regular payouts and capital appreciation. You can choose to mix up time deposit with corporate bonds and stocks. What matters is that you align your investment activities with your investment goals.

 

Read Part 1 here.

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