Stocks, bonds offer investment options amid low interest rates

[THE INVESTOR] With the central bank slashing its benchmark interest rate to a historic low of 1.25 percent, putting money in bank accounts will not increase people’s income, as bank deposit rates will drop in line with the key base rate.

Experts recommend reallocating funds in bank deposits to other assets that offer higher yields. Real estate may be an option, but not a lot of people can afford to invest in an apartment unless they borrow money from banks with low interest rates.

Investing funds in alternative assets such as real estate could be worth looking into, as well as investing funds in baskets of equities and bonds. 

But one has to keep in mind that stocks in Korea could face corrections and volatility as the U.S. Federal Reserve is expected to raise its federal funds rate later this year.

Also, investing in stocks comes with risks but offers higher returns. One should approach stocks with caution given that stocks do not necessarily provide higher yields on low interest rates. For instance, investing in value stocks or dividend stocks could be an option to boost personal savings.

Asset managers have recommended against borrowing money to invest in stocks as it can increase credit risks and the stock market also faces a series of external and internal macroeconomic factors.

Bonds tend to offer stable returns in low-growth periods. Investing funds in bonds can be a good start for beginners. Interest on bonds may fall but their value will increase as bond prices move inversely to yields. However, the bond market also faces liquidity risks amid an industry slowdown, which is taking a toll on corporate profitability. Confidence has been affected in the stock and bond market following debt fallouts from once prominent industries such as shipping and shipbuilding.

Other choices could include stock accounts with deposits investing in commercial paper, bonds issued by public enterprises, short-term instruments and shares of companies with sound fundamentals, as these offer higher yields than deposit rates and relatively stable returns over the benchmark interest rates with flexible transactions.

They have been popular since their introduction in the market about a decade ago, especially among salaried workers. Those accounts enable subscribers to pay their monthly utility bills via automatic transactions on relaxed regulations. The outstanding balance of cash management accounts reached a record of 52.6 trillion won in April, according to the Korea Financial Investment Association.

By Park Hyong-ki (hkp@heraldcorp.com)