A friend recently reached out and inquired whether it was wise to borrow money to invest in bonds. As with many things, my standard response was that it depends on several factors.
The primary objective of investing is to generate a meaningful return while protecting your principal. A good return is achieved if the additional value generated by the investment exceeds the cost of funds. In our case, it will depend on the yield or return you get on the bonds compared with the interest rate on the loan.
For example, in Uganda, bonds are currently averaging a net yield of about 15%. On the other hand, loans from commercial banks average about 16% to 26%, depending on your credit profile and the bank you are borrowing from. So clearly, it doesn’t make any economic sense to borrow at, say, 20% and then invest at 15%.
However, if you can access very cheap credit, say from your workplace, an investment club, or a SACCO—at, for instance, 5%—then it is feasible to invest in a bond at 15%. This way, you earn a net return of about 10%. You also need to consider the opportunity cost of investing in bonds compared to other feasible alternatives. The question to ask is whether bonds are the best use of your money, given your current circumstances and goals.
For instance, if you are a busy trader downtown, it may be possible to earn a higher return by investing in your business rather than diverting attention to bonds. You could buy more inventory, invest in better distribution, or open another location.
So, as you can see, it all depends. It is advisable to consult a financial advisor before making large financial transactions. This will significantly reduce the risk of losing your hard-earned money.
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