Government Bonds for Individual Investors: Are They Worth Investing In?

Hello, this is Bitpunk. Today we'll take a look at the 'Government Bonds for Individual Investors' newly launched by the government. What are the features of these bonds, and are they worth investing in? Also, what is the expected return, and what should you know before investing?

What Are Government Bonds for Individual Investors?

Government Bonds for Individual Investors are bonds issued directly by the Government of the Republic of Korea. Unlike regular government bonds, only individual investors can buy them. You can invest from a minimum of KRW 100,000 up to a maximum of KRW 100 million per year.

These bonds come in two maturities: 10-year and 20-year. Early redemption is possible, but to get the maximum interest and tax benefits, you need to hold them until maturity.

No interest is paid during the holding period, and you receive the principal and interest in a lump sum at maturity, so you can think of it as an ultra-long-term government bond product.

So, Are They Worth Investing In?

Government Bonds for Individual Investors were launched for people who want to park a lump sum for a long period. That makes them a good fit for investors who want to steadily set aside money for the future, such as for retirement or a child's college tuition.

But there's something you really need to know before investing: the product's advertised return, and its real return after accounting for inflation. Let's go through them one by one.

What's the Return on Government Bonds for Individual Investors?

While promoting these bonds, the media has been saying that if you hold them for the full 20 years, your principal will double. Is that really true? First, take a look at the return table below.

That might not mean much at first glance. If you hold the 10-year and 20-year bonds until maturity, the expected returns are as follows.

• 10-year bond: 3.540% coupon rate + 0.15% additional rate = final after-tax return of about 37%
• 20-year bond: 3.425% coupon rate + 0.30% additional rate = final after-tax return of about 91%

Yes, as you can see, if you hold the 20-year bond until maturity, your principal grows 1.91 times, so it's true that it almost doubles. On top of that, a 14% separate taxation benefit on interest income applies to total purchases of up to KRW 200 million.

Up to this point, it might not look so bad. However, once you also look at the real return after accounting for inflation, the picture changes a bit.

Analyzing the Real Return After Inflation

Over the past 20 years, Korea's average inflation rate was about 2.41%. Since the interest rate on the 20-year bond is 3.425%, the real interest rate on Government Bonds for Individual Investors comes to about 0.995%.

To sum up, if you invest in this product, you can offset inflation and earn a small profit. So Government Bonds for Individual Investors are better suited to people who want to steadily preserve the value of their principal over the long term than to people looking to generate big investment returns from their principal.

Pros and Cons of Investing in Government Bonds for Individual Investors

So what are the pros and cons of investing in Government Bonds for Individual Investors? Let's go through them one by one.

Pros

1. Stability: Government bonds issued by the state are very stable. That makes them a relatively safe investment even in highly uncertain times.
2. Tax benefits: If you hold the bonds until maturity, you can receive tax benefits.
3. Predictable returns: You can anticipate exactly how much you'll receive in 10 or 20 years, and payment is guaranteed.

Cons

1. Impact of inflation: If inflation rises higher than it is now, the real interest rate on these fixed-rate bonds could turn negative. In other words, you might not be able to protect the value of your principal.
2. Limited liquidity: If you redeem Government Bonds for Individual Investors early, you don't get the additional rate or the tax benefits. And the interest earned over a short period isn't very large either. The downside of this product is that your liquidity is tied up for at least 10 to 20 years.
3. Opportunity cost: If you invest in long-term government bonds, you can't put that money into other products that might earn higher returns.

So, Should You Invest or Not?

Government Bonds for Individual Investors are a good fit for people who want to offset inflation in a stable way and preserve the value of their cash over the long term. If you're a fairly conservative investor who would otherwise keep your money only in deposits and savings accounts for 10 to 20 years, this could be a better option than that.

The real return on Government Bonds for Individual Investors, after inflation, is under 1%, so it isn't high. But the advantage is that, unless the Republic of Korea itself goes under, your principal and interest are guaranteed and you also get tax benefits.

So, should you invest or not? Still on the fence? Unfortunately, there's no right answer, but please take a look at the points below and give it some serious thought.

'Do you need to have a certain amount of cash in 10 or 20 years, no matter what?' If so, Government Bonds for Individual Investors are definitely not a bad place to invest.

Or, 'Are you willing to take on more risk to chase market returns?' If so, Government Bonds for Individual Investors are not the right product for you.

How to Invest in Government Bonds for Individual Investors

If you've read this far, you might be interested in investing. Here's how to buy Government Bonds for Individual Investors.

• First, you need to open a separate account dedicated to government bonds through one of the currently partnered securities firms (such as Mirae Asset Securities).
• Government Bonds for Individual Investors can be purchased 11 times a year. You can buy the bonds issued on the 20th of each month from January to November.
• You can invest from a minimum of KRW 100,000 up to a maximum of KRW 100 million per year.

Finally, please note that while you can redeem these bonds early starting one year after purchase, doing so means the tax benefits and the additional rate will not apply.

p.s. Well, that's all for now.. adios. As for me, I'm thinking of buying about KRW 100,000 worth a month as stable savings...