Buying institutional bonds is a long established method of investing. Unlike investing in equity, which gives you a share in a particular company, a bond investment makes you effectively a creditor to that company (or government), entitling you to regular interest payments.
While investing in traditional bonds can be an attractive option, it is usually out of the reach of most investors, as the typical institutional bond issued by a company is likely to state a minimum investment requirement. This minimum investment level is often a six-figure sum, which means such bonds are not an option for regular investors.
As people hunt for income due to the low interest rates on savings, a series of higher risk mini bonds are also available.
These are not tradable bonds, with no secondary market to trade them on. As with traditional bonds, when you purchase a mini-bond, you effectively become a creditor to the company and receive regular interest payments at agreed intervals throughout the life of the bond, depending on the terms. When it expires, you get your initial investment back.
The downside of this is that should the company go bust, then you are unlikely to get your investment back. Mini bond investments are seen as high risk and are not covered by the FSCS.
One of the quirks of mini bonds is that they can offer unusual returns, depending on the company involved. For example, some bonds offer the option of paying their returns to investors in the form of vouchers for the company product or service, which can be anything from free wining and dining to money off cosmetic or fashion products.
Famously, the food chain Chilango offered free burritos to their investors. Many mini-bonds also offer discounts and loyalty rewards for bondholders but some will just offer regular interest payments.
This innovative and flexible approach to investment can make mini bonds an attractive option for regular customers who know a company’s products or services well and who would like to show their support for the company or even those just hoping to receive a return.
It is worth bearing in mind that you’ll need to be comfortable with the level of risk and can afford to lose your capital. Cautious investors should probably look elsewhere, unless mini bonds make up a small overall percentage of a portfolio.
As with traditional bonds, there is a degree of risk involved in mini bonds, particularly as they are usually associated with new or growing companies, and the income that the investor receives will be fixed, regardless of how well the company fares.
It is also important to note that mini bonds cannot be held in an ISA, although they can be held in a SIPP. But for small investors, mini bonds can offer an accessible alternative to the traditional bond market.Last updated: June 9th, 2017