Beware of the risks when investing in mini bonds

Don’t be swayed by impressive interest rates and fun perks, says Ruth Jackson. Mini bonds aren’t as good an investment as they look.

The pitiful interest rates offered by high street banks are "spurring a rise in mini bonds that offer rates as high as 8%," says Annabelle Williams in The Times. The combination of a high interest rate and bondholder perks such as free burritos or chocolate is leading to millions of pounds being put into these investment bonds. But many investors might not fully understand the risks they're taking.

For example, Mexican restaurant chain Chilango is offering a four-year mini bond that pays 8% interest and gives you free burritos. The minimum investment is £500, but if you put in more than £10,000, you get a card entitling you to a weekly free burrito. Savers have invested £1.5m into these bonds already.

Unfortunately, "such is the need for a higher return that saversare perhaps assuming that investment mini bonds operate in the same way as the longer-term savings account on offer from banks and building societies that are frequently called bonds' too," says Williams. However, they are very different.

Read the small print

With a mini bond, investors loan their money to the company in question for a set period of time. They then receive interest during that period before their capital is returned. But importantly, the money invested in mini bonds isn't covered by the Financial Services Compensation Scheme. So if the company goes bust, you won't get your money back. "Mini bonds come with a wealth warning," says Sally Hamilton in The Mail on Sunday. "The high rates of interest are necessary because investors are vulnerable if the borrowing company gets into financial difficulty. Bondholders are at the back of the queue of creditors if the company folds." And unlike traditional corporate bonds, mini bonds cannot be traded. This means that they don't have to provide as much information to investors (and you can't sell them on).

In some cases, it can pay off. The Times gives the example of an investor in a two-year mini bond with Empire Property Holdings who made a 27.2% return. But there have also been many high-profile disasters, such as the £7m lost when Secured Energy Bonds failed in 2015. This year has seen several-high street restaurant chains run into difficulty, including Jamie's Italian and Byron Burger, so think long and hard before you sink your money into the burrito bond. It's a risky bet.

Recommended

A retail bond for income investors with a 6.5% yield
Corporate bonds

A retail bond for income investors with a 6.5% yield

This new issue from LendInvest could be attractive to income seekers willing to take some risk.
29 Jul 2022
The bear market in bonds isn’t all bad news
Government bonds

The bear market in bonds isn’t all bad news

The rise in bond yields and the fall in bond prices can be a good thing or bad thing. Bad for bondholders, but good for many risk-averse pensioners an…
21 Jul 2022
The junk-bond bubble bursts
Corporate bonds

The junk-bond bubble bursts

Yields in the US high-yield bond market (AKA junk bonds) have soared to more than 8% since the start of the year as prices collapse.
20 Jul 2022
How can you tell if the market is overvalued?
Investment strategy

How can you tell if the market is overvalued?

There are plenty of ways to value markets, says Max King, but nothing is infallible. Every ratio and calculation needs to be taken with a large pinch …
12 Jul 2022

Most Popular

Are UK house prices finally heading for a crash?
House prices

Are UK house prices finally heading for a crash?

The latest house price figures show a fall of 0.1% in July. With interest rates rising, inflation hitting double figures and a recession on the cards,…
5 Aug 2022
Brace yourself for the return of rationing
Economy

Brace yourself for the return of rationing

Russia is turning off the cheap energy. That is already leading to belt-tightening, says Matthew Lynn. Who will suffer most, and which sectors will th…
5 Aug 2022
Zhao Weiguo: China’s No. 1 chip tycoon vanishes
People

Zhao Weiguo: China’s No. 1 chip tycoon vanishes

Zhao Weiguo rode a decades-long boom in China pursuing Beijing’s core industrial policy of semiconductor self-sufficiency. Then he fell foul of Xi Jin…
5 Aug 2022