Investing in bonds

Question: I am interested in investing in one or two high-quality bond funds for the fixed income part of my portfolios, one in a RRIF  and one non-registered. Do the same principles hold true when investing in bond funds as in individual bonds?  If so, is this a sensible time to invest, or should I wait until I think interest rates have peaked?  If now is not a good time, what alternative is there for fixed income other than GICs?  – D.S.

Answer:

For starters, the tax implications of your bond investments are very different inside and outside the RRIF. In the non-registered portfolio, the interest income will be taxed at your marginal rate, which means you may not have a lot left at the end of the day. For example, if the bond yields 6% and your marginal tax rate is 40%, your net after-tax return will be only 3.6%. Inside the RRIF, of course, the full amount of the interest will be received and taxed only when you make withdrawals from the plan.

So for your non-registered portfolio, you may want to consider investments that are more tax efficient. High-quality preferred shares, such as those offered by the major banks, are o option since their payments are eligible for the dividend tax credit.

As far as timing is concerned, how will you know when interest rates have peaked? Even professional bond traders are never sure. For the ordinary investor, attempting to time bond or stock markets is a losing game. If you want to invest in bond funds in the RRIF, choose a couple of good ones with low MERs and let the managers worry about the timing. – G.P.