Monday, May 3, 2010

6 Investment Alternatives That Are Within Your Budget (Part 1)

Dear Investor Juan

Dear Investor Juan,

Hi there, I’ve been reading your blog for quite some time and I find it very interesting. I just want to ask, if you only have about 100,000 pesos, where would you invest it?


Hi Alex!

Regardless of the amount that you’re planning to invest, the best investment vehicle for you depends on factors like your investment objective (are you looking for long-run growth or periodic income?), risk appetite (are you risk averse or risk seeking?), and investment horizon (are you investing in the short or long term?). I will discuss these factors in greater detail in a future post, but for now, I’ll just give you a list of some of the most readily available investment instruments which generally yield better than bank savings deposits and are within your budget. Items in the list are arranged from lowest to highest risk.

1. Treasury securities

Treasury or government securities are debt instruments issued by the government to the investing public; because there’s zero chance that the government will default, they are also referred to as risk-free securities. The three main flavors of treasury securities are Treasury bills (T-bills), Treasury bonds and Retail Treasury bonds; these types generally differ in terms of tenor or investment duration (from 91 days for T-bills to 25 years for Treasury bonds), annual interest (from 4% for T-bills and up to around 10% for Treasury bonds), and denomination (from 5,000 pesos for Retail Treasuries to 500,000 for both T-bills and Treasury bonds). Most banks are authorized by the government regulators to issue and trade the securities; for example, Banco de Oro offers all flavors within your budget of 100,000 (you can just visit the company’s website for details).

2. Bank time deposits

Bank time deposits provide better yields than savings deposits but not by much. For 100,000 pesos, annual interest ranges from 2% to 2.7% for most banks, depending on the tenor (7 days to one year). Personally, it does not make a lot of sense to invest in time deposits, especially since all of us have access to less risky Treasury securities that offer better returns.

3. Corporate bonds

Corporate bonds are long-term debt issued by corporations and can be traded publicly. Bondholders receive periodic coupon payments (semi-annually or annually, based on a typically fixed coupon interest rate) and the original investment or par value at the bond’s maturity date (usually 7 years or more from the date of issue). Corporate bonds are considered riskier than government securities since there’s always a chance that the issuing corporation will default on the debt, but at the same time bonds are less risky than stocks since the issuing company is obliged to pay bond interest at the risk of incurring heavy penalty charges when it defaults. Local corporate bond issues are underwritten (facilitated) by most local banks and are sometimes available at affordable denominations (as low as 10,000 pesos). Coupon rates range anywhere from 7% to 10% per year, depending on the credit rating of the issuing company and interest rate levels at the time of the issue, among other things.

Click here for Part 2.
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