Following the launch of high-yield Fractional Bonds, we wanted to talk about how they are different from loan-backed Notes and how they offer additional diversification opportunities to investors on Mintos. In this blog post, we’re taking a closer look at how the two assets compare against each other.
- Fractional Bonds and loan-backed Notes offer different types of exposure and cash flow generation.
- Investing in both assets can help increase portfolio diversification and reduce investment risks.
Similarities between Fractional Bonds and loan-backed Notes
Let’s first talk about how the 2 assets are similar:
- Both are debt-based investments with fixed interest rates and repayment schedules
- Both are available exclusively on Mintos
- Both can be traded on the Mintos Secondary Market
- Both are easily accessible to retail investors on Mintos from as little as €50
- Bonds are essentially large loans taken by a company or a government
Differences between Fractional Bonds and loan-backed Notes
With the similarities out of the way, let’s explore how the 2 assets are different, and why they can complement each other in a diversified portfolio.
Loans to private individuals or small businesses
Corporate bond issued by a company
Cash flow generation
Repayments by the borrowers on the underlying loans
Profits of the company issuing the underlying bond
Based on repayments on multiple loans with different schedules
Regular intervals based on a single underlying bond with a highly fixed schedule
Varies depending on underlying loans, usually part of the principal is repaid with every installment
Depends on underlying bond, repayment on maturity is common
Different maturities available, from a few months to multiple years
Typically 3 to 5 years
Depends on the underlying loans. Typical risks include a default of the borrower, a default of the lending company, market risk, interest rate risk, currency risk, and liquidity risk.
Additional risks apply, you can read more about them in our risk disclosure.
Depends on the underlying bond. Typical risks include a default of the bond issuer, market risk, interest rate risk, inflation risk, and liquidity risk. Additional risks apply, you can read more about them in our risk disclosure.
The importance of diversification
Diversification is an important strategy that aims to reduce investment risk by spreading it across multiple investments. In a well-diversified portfolio, no single investment is responsible for the portfolio’s performance. Diversified assets react differently to market forces, and when one asset is down, another one might be up. As a result, the overall performance of the portfolio is more robust.
The key differences between Fractional Bonds and loan-backed Notes outlined above offer an opportunity to broaden your diversification. By investing in Fractional Bonds, you can add an asset with a different risk profile, and strengthen the resilience of your overall portfolio.
Why should I invest in both loans and bonds issued by the same lending company?
The two assets offer different risk profiles, cash flow generation, and maturity. With their typically longer term and principal repayment, Fractional Bonds can be an interesting addition if you want to lock in a certain interest rate for a longer time. Moreover, investing in both may increase your portfolio diversification and hence reduce your exposure to investment risks.
Why should I invest in Fractional Bonds with a 5 year maturity when I can invest in short-term Notes?
It depends on your investment goals. A longer maturity doesn’t have to be a drawback. While in the current economic environment both Fractional Bonds and short-term Notes can offer high interest rates, that historically hasn’t always been the case. The longer maturity of Fractional Bonds can lock in a certain interest rate for an extended period of time, enabling investors to hedge against a potential decline in the market rates. Moreover, holding investments with different maturities can make your portfolio more resilient to market fluctuations.
What’s the difference in cash flow and repayment schedules between Fractional Bonds and Notes?
Both Fractional Bonds and loan-backed Notes have fixed interest and repayment schedules. However, there are a few important differences as to when and how interest and principal are paid back.
- Fractional Bonds: The cash flow for the repayments is generated by the profits of the company issuing the underlying bond. Interest is paid in regular intervals based on a single underlying bond with a highly fixed schedule. Principal repayment depends on the underlying bond, the most common case is repayment on maturity.
- Loan-backed Notes: The cash flow for the repayments is generated by the repayments made by the borrowers on the underlying loans. Interest is paid in regular intervals based on multiple underlying loans, each of them with its own schedule. Principal repayment varies depending on the underlying loans, usually part of the principal is repaid with every installment.