How to Buy Bonds in Other Countries

Foreign bonds add diversity and in some cases, higher risk, to your portfolio.

Foreign bonds add diversity and in some cases, higher risk, to your portfolio.

Governments and corporations issue bonds, which essentially represent loans made to them by the bond purchasers. The purchaser pays a specified amount of money and the bond issuer pays you interest until the bond matures, when it returns the principal. You can invest in the bonds of foreign governments, but you take on some risks when you do so. For example, the exchange rate in currency can fluctuate, which will affect your return. The more volatile the country you invest in, the greater the potential return -- and the greater the risk of losing your money if the issuing-government defaults.

Consider how much risk you are willing to take on. There are low-risk options for foreign bonds. For example, you can invest in a mutual fund that contains a variety of foreign bonds. Such a pool of bonds tends to be less volatile than a single country's bonds. Another advantage of these mutual funds is that the amount you need to invest is often lower than with other bond purchases.

Talk to your broker about investing in foreign bonds. Having the brokerage invest in bonds on your behalf can save you considerable time and effort, especially if it has experience purchasing bonds from the countries in which you are interested in investing. However, when you work with a brokerage you will likely have to pay fees, which can cut into your profit.

Research the countries you are considering for your bond investment. If your broker has recommended some countries, you should take some time to study those as well, to be sure you fully understand the risks and potential return if you choose to invest in those countries.

Consider purchasing directly from the issuing government. This is the most cost-effective way to invest in bonds, because you will not have to pay brokerage fees. However, for many people this can be difficult, as you have to work within foreign systems, and for some overseas investments an account in the host country is required.

Purchase the bonds you have chosen and wait for them to mature. Maturity periods vary greatly, from as short as a year in some cases to as long as 30 years or longer in other cases. Generally speaking, the shorter the maturity period, the safer the investment. Of course, a safer investment also means that there is less chance of a large return. Know your risk tolerance before investing to avoid losing more than you can withstand.

 

Photo Credits

  • Thinkstock/Comstock/Getty Images