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I am an employee of one of the four major banks, and as far as I understand—

The operation of wealth management products: Common investment channels include funds, bonds, fixed deposits, and interbank transactions. The vast majority of capital-preserving wealth management products are invested in fixed deposits, government bonds, interbank transactions, and money market funds, which have a low probability of capital loss.

Some may ask how those short-term wealth management products claiming a 6% to 7% return for a few months can guarantee capital preservation and returns. The channels I can think of are interbank lending and interbank deposits. Because banks have requirements for their loan-to-deposit ratio, they often borrow funds from other banks to ensure they do not violate the regulatory limits set by the banking regulatory authority. The amount of funds borrowed from other banks is substantial, and sometimes urgently needed, so it is quite common for banks to lend money to other banks at rates of 6% or 7% for three months. This is a common practice in the banking financial institution business.

When banks offer such high interest rates to lend money, they will naturally design wealth management products with slightly lower rates. I believe that every bank of a certain scale has departments similar to financial institutions, which continuously inquire about quotes from other banks. Once they discover an opportunity, they will do everything possible to facilitate a transaction (imagine how attractive it is to have hundreds of millions in funds with a decent interest rate. The key point is that, given the current situation in China, bank failures are still unlikely, especially for financial institutions that can participate in interbank lending, which generally have good qualifications and low bankruptcy risks). Sometimes, when banks find that other banks have a demand for funds, they will urgently launch some wealth management products to raise funds from depositors and then package them to lend to other banks. Sometimes it may also be that the bank itself is approaching the lower limit of its loan-to-deposit ratio, so it will also launch some wealth management products to attract deposits from other banks to put out fires.

I believe that during the "money shortage" period in June, many people received messages from banks claiming that there were numerous wealth management products offering "capital preservation and guaranteed returns" at rates of 7% to 8%. It is rare for the banking industry to experience a widespread money shortage, but it is quite normal for a branch of a bank in a certain area to experience a temporary shortage of funds. Thus, interbank lending, interbank deposits, and various derivative products become profitable.

I come from a corporate business background, so I can only understand this level.

As for the points to note when buying wealth management products, first, you need to be clear about whether they guarantee capital preservation and returns. For the impoverished masses, the safety of the principal is very important, as it is hard-earned money. Secondly, do not be easily misled by those high returns; it is best to calculate it yourself. For example, when I was managing wealth for the company, I found that some products purchased on T+1 day had slightly higher returns compared to T+0 day purchases. However, after actual calculations, you will find that T+0 products, due to an extra day of interest calculation, actually yield better returns. (To clarify, T+0 products refer to purchases that are effective on the same day; T+1 products refer to purchases that are effective the next day.) The yield is just a reference indicator, but the actual return is the wealth we gain from our investments. So do not be easily misled by high yields, especially for some ultra-short-term wealth management products with annualized returns of 7% or 8% for 7 or 14 days; if you calculate carefully, you will find that the actual profit is not much.

There are also some good wealth management products with low investment channel risks and stable returns, but because the banking regulatory authority has regulations that do not allow promises of capital preservation and guaranteed returns, bank staff will not make such promises to you. Of course, you can ask, "Has this product ever lost money before?" If the answer is "no," and if the wealth management product is still a flagship product of that bank, then you can consider it. Especially for large banks, they value their reputation and will not easily sell products with a high risk of significant losses to customers. Here, I want to remind you that I am referring to wealth management products, not funds. Many fund investment channels are in the securities market, so the risks are very uncertain, and the wealth management managers selling funds to clients receive commissions, so they may not be as concerned about these issues.

Also, be sure to distinguish between bank wealth management, funds, and insurance. For funds, you need to understand whether they are equity, bond, money market, or mixed funds. Except for money market funds, other funds are generally difficult to provide "capital preservation and guaranteed returns," so those who do not understand wealth management should not easily touch them. Nowadays, many insurance products are packaged as "bank insurance products" with particularly high yields, so you need to understand whether the principal will be returned at maturity.

By the way, there are two points that must be noted. Some wealth management products cannot be redeemed before maturity, so you must ensure that your available funds are sufficient to avoid situations where emergency funds cannot be withdrawn, leading to public criticism of the bank. Additionally, some wealth management products automatically renew upon maturity, so you need to calculate the dates in advance; if you do not want to renew upon maturity, you should redeem them.

That's all.

Capital-preserving products in bank wealth management, as well as capital-preserving and guaranteed return products, are usually accounted for on the balance sheet, meaning that this portion of wealth management funds will be counted as deposits and thus require reserve requirements, and the reserve interest rate set by the central bank is very low, so this portion of income is definitely negative. However, to put it another way, bank wealth management products, except for those linked to derivatives and other complex structures, the less clear the investment direction is, even if it does not guarantee capital preservation and interest, the safer it is. Why do I say this? Because the banking regulatory authority requires banks to disclose the investment directions of wealth management products and requires banks to conduct one-on-one investments, but many banks cannot meet this requirement. If they invest in an asset for five years, they may sell you a wealth management product with a three-month term; what happens when that three-month wealth management product matures? Usually, banks will not sell it because the asset may not have liquidity, so they may choose to roll over the wealth management product for continued investment. What price will they sell it to the next wealth management product? They cannot sell it at a loss, otherwise, if investors pursue accountability, how will they handle it? Banks take reputation risk very seriously; if one of their products has a problem, it could lead to a total loss. Therefore, the more they are at fault, the more they must bear the consequences themselves; this is what it means to "swallow blood after losing teeth."

Looking at the investment direction of wealth management, in the early years, bank wealth management investments were quite singular, mostly fixed-income bonds, with little leverage, so the returns were not high. Later, they began to use trusts to issue trust loans, engage in entrusted loans, etc., which is equivalent to direct financing, and the returns increased. The banking regulatory authority saw that the business was growing, and the risks were difficult to control, so they tried various ways to issue notifications for regulation. However, there are policies from above and countermeasures from below, leading to the emergence of various channel businesses; whether it is brokerage funds, insurance trusts, or many so-called new products, they all fundamentally remain the same. Although from a product design perspective, it is possible to use income stratification and leverage to invest in relatively low-risk bonds (the Chinese bond market has national characteristics and has never had substantial defaults), most banks are investing in non-standard assets (the banking regulatory authority created a non-standard concept, which contradicts the later proposed "Kerry Economics" that aimed to guide funds into the real economy, a slap in the face) to maintain high returns, which essentially provides blood supply to government financing platforms, real estate, and other industries. As the original poster mentioned, many wealth management funds are directly deposited or lent interbank, and during the Everbright incident this year, as well as at critical points at the end of the quarter, the prices were quite good, absolutely high returns. However, the price of funds has significant fluctuations; for example, in the first five months of this year, there was not much good market performance. I remember that Agricultural Bank had a product linked to SHIBOR, which guaranteed stable interest margins for banks, and investors need to pay attention to SHIBOR trends before entering. Recently, the medium to long-term SHIBOR has deviated significantly from reality, so it is more appropriate to refer to the interbank market bond repo rates, which can be checked on the China Foreign Exchange Trading Center website; this is going off-topic.

Although this question is about high returns in bank wealth management, in reality, for investors, besides bank wealth management, there are also brokerage collective wealth management, asset management plans from fund companies, asset management plans from fund subsidiaries, trust plans, and many other products available for investment. However, compared to bank wealth management, which usually starts at 50,000, the starting point is relatively low, while trust plans usually start at one million. In the market, various financial institutions also tend to favor the wealthy; the higher the starting point of the wealth management product, the relatively higher the returns. However, when purchasing, clients must ensure they choose legitimate channels and products.

Understanding Money Market Funds#

What knowledge do you need to learn to invest in money market funds? What factors are related to the appreciation and depreciation of money market funds? How do you determine whether to increase or decrease your holdings?

Xu Yinpeng

To be frank, from the questions you ask, it seems you are too conservative and overly focused on details, which may cause you to lose sight of the main point. Money market funds should never be a labor-intensive investment tool. We should spend our time researching other non-money investment tools. If you feel insecure about money market funds, it seems that only government bonds and fixed deposits are left—bank fixed deposits will show differentiation in the future.

Money market funds are a cash management tool, and they may only be a cash management tool. The emergence of money market funds has organically combined safety, liquidity, and profitability, allowing people to obtain certain returns under a very high level of safety.

The main factors affecting money market funds include the coupon interest of the specific basket of bonds held, short-term market interest rates, the leverage ratio of the money market fund portfolio, the average holding duration (simply understood as the average maturity of the basket of bonds), the degree of market liquidity, the scale of the money market fund, and the composition of the money market fund holders.

For example, the Huaxia Cash Money Market Fund generally sees higher yields at the end of the half-year and year-end due to tighter liquidity, which causes market interest rates to rise, and thus the yield of the money market fund also tends to be higher. On the other hand, some smaller money market funds with only a few billion in scale may have relatively lower yields; the high returns of Huaxia Cash are somewhat related to its scale of 30 billion. Furthermore, regarding the composition of investors, if a fund has a high proportion of individual investors, such as Yu'ebao, which is primarily retail investors, its scale tends to remain stable, which is why we see that Yu'ebao's yield has been the highest among all money market funds since June. Whether it can maintain its top position in the future is uncertain.

Should you increase or decrease your holdings in money market funds? If you need money, then decrease; if you have spare money that you won't use temporarily, then increase. No one ever uses money market funds for trading. Strictly speaking, they are not even in the investment category; they are merely a cash management tool.

The main investment targets of money market funds are agreement deposits, interest rate bonds, short-term financing, central bank bills, and corporate bonds. To ensure liquidity, the duration of bond types in money market funds is relatively short.

From the perspective of investment types, it is easy to see the associated factors of money market funds—benchmark interest rates, market liquidity, etc.

1. The benchmark interest rate determines the cost of funds and the coupon interest rate of bond types. When the central bank raises interest rates, the yields on agreement deposits, demand deposits, and floating-rate bonds will rise in sync, while the agreement deposits and corporate bonds held by money market funds will still be calculated at the coupon interest rate until maturity, resulting in some yield loss. However, because money market funds have short holding periods and fund managers often choose floating-rate products when negotiating, when interest rates rise, the yields of money market funds will rise in sync, while bond funds will see short-term declines and long-term increases. The same pattern applies when interest rates fall. Of course, when interest rates fluctuate significantly, you can check the interest rate sensitivity of money market funds to judge (the higher the interest rate sensitivity, the more elastic the fund's net value changes in the opposite direction); generally, the longer the duration, the higher the interest rate sensitivity, and the shorter the duration, the lower the interest rate sensitivity.

2. Market liquidity determines the floating yields of interest rate products. When liquidity is tight, the central bank's interest rates may not have adjusted, but interbank SHIBOR reacts significantly, and general floating-rate bonds and large-denomination certificates of deposit are linked to SHIBOR, which is basically consistent with the benchmark interest rate. However, changes in liquidity have a significant impact on the performance differentiation between bonds and money market funds; generally, when liquidity is loose, bond funds yield higher returns; when liquidity is tight, money market funds can operate flexibly and increase repo trading operations, yielding better than bond funds.

In summary, the central bank's interest rate adjustments do not have a significant impact on holding money market funds, as the overall market interest rates tend to rise or fall in sync. However, when market liquidity tightens, if your own risk tolerance is low, it is advisable to buy money market funds.

Here are some recommended money market funds with good management:

1. General investors can choose Southern Money Market, Huaxia Money Market, and Hua'an Cash Rich Money Market, all of which achieve T+0 redemption for money market funds, with stable performance and overall high returns, making them the top three in fixed income.

2. For short-term speculation, you might want to look at Wanjia Money Market, Baoying Money Market, China Merchants Money Market, and Tianhong Zenglibao (Yu'ebao), which have good relationships with banks and can obtain higher agreement deposit rates during tight liquidity periods at the end of the quarter, generally SHIBOR + 20-30 basis points, and the concentrated redemption time is fixed, making it easy to achieve high returns in the short term, but performance can be volatile.

3. For corporate investors, if you have financial management needs, the first choice is E Fund Money Market, which is designed for institutional investors and provides comprehensive related services, making subscription and redemption more favorable for large investors.

If you are still confused, a simple way to choose a money market fund is to select one with a large scale.

How to purchase trust products?

Xie Jialin

Thank you for the invitation... I see that many friends answering questions earlier are from trust companies. As someone who has worked in a third-party firm for a certain period and is still in the industry, I will also answer this question.

The current sales channels for trusts are:#

1. Wealth centers established by trust companies themselves;

2. Trust companies entrust financial institutions to sell on their behalf, such as banks, brokerages, etc.;

3. Trust companies find third-party companies to sell on their behalf (this description does not comply with legal regulations; it should be that third-party companies recommend trust wealth management products to their investors, while on the trust company side, they recommend clients to the trust company).

Subscription process:

1. Obtain information about trust products from the above three channels, including but not limited to fund allocation, risk control measures, duration, expected yield, etc.

2. Confirm the subscription product.

3. Subscribe... Under normal circumstances, investors should carefully read the contract terms and trust prospectus before signing and then transfer funds to the designated fundraising account in the contract; however, due to the hot sales of trust products in recent years, in reality, it is often the case that after the trust company determines the fundraising account, investors first transfer funds to subscribe to secure a share, and then sign the trust contract (the transfer account can be confirmed through the product information source or the trust company's customer service hotline), meaning that in practice, there are many cases of transferring funds before signing the contract.

4. Wait for the announcement and confirmation of the establishment of the trust plan (some trust companies do not issue this; they will only return a notification of funds received).

Currently, there are no restrictions on the place of registration in actual operations.

The second question:#

Before the trust plan officially starts issuing, the relevant sales channels already have information about the product, except for the fundraising account, and it is common to encounter different products with different expected yields. Different expected yields can reflect the risk of the product to some extent, but this is not absolute and still depends on the product's structural design.

The so-called rigid payment mentioned by the questioner is a legendary agreement, meaning there is no legal requirement for trust companies to implement rigid payment to investors. The "Measures for the Administration of Collective Fund Trust Plans by Trust Companies" stipulates that as long as the trust company fulfills its fiduciary duties as stipulated in the trust contract, if there are actual investment losses, the investors themselves must bear the responsibility.

Of course, in practice, trust companies, in order to maintain their reputation or to meet regulatory requirements for guaranteed payments to maintain social stability, will try to properly handle and pay off trust projects that encounter problems. This once again reflects the advantages of our socialist system.

However, as long as the trust industry continues to move forward, rigid payment must and will inevitably be broken, which aligns with the principle of matching investment risks with returns and promotes the healthier development of the entire financial system. (Do not underestimate this point; with a healthy environment, social and economic development can thrive, and we can live happier lives.)

Therefore, carefully discern the risks of products and choose those that align with your financial goals, without blindly pursuing high returns. In wealth management, safety is the top priority.

The third question:#

Currently, the vast majority of domestic trust products belong to reverse trusts (an informal term), meaning that there is a predetermined use of funds, allocation, and yield before finding investors. They are of a financing nature. The actual funding needs of the financing party are clear; they cannot afford to have less or more, so if they cannot raise funds, they cannot proceed with their projects. Therefore, in practice, many projects are issued first to see how much can be raised; if the market response is good, the fundraising is completed and over; if not, they may establish a phase first and then reopen fundraising later.

If you really want to invest in trusts, you need to ask the institution that recommends them to you, as the funds transferred to the fundraising account will only earn interest at the current rate before the trust plan is officially established. Some investors like to keep their funds in money market funds, letting their wealth managers pay attention to the establishment time, so they can subscribe at the last moment before establishment... (Well, some wealthy individuals calculate this way), and this situation can greatly extend the fundraising time for the trust plan... Everyone is waiting and wants to wait until the last moment.

So, if you are sure, just buy; those who can afford trusts are people who make big money and do big things, so do not worry too much about these small amounts. Right, wealthy comrades... Sometimes, if you wait for a high-quality project, you might miss it and have to wait for the next high-quality project to appear; the time cost in between could be better spent enjoying life.

This is my first answer; it may be a bit chaotic, and there may inevitably be mistakes. I welcome corrections and exchanges.

2013-10-24

Yuan Lu

1. The answer to this question is that both can be purchased, and the specific composition of sales channels has been clearly answered by Nanqu Xiongmao.

2. There are differences in the yields of different trust products, and project risk is one of the most important reasons. Many factors influence the yield sold to investors, from project type, actual risk, the strength of the financing party, willingness to repay, trust remuneration rates, custody fees, to sales channel commissions, and the average yield of similar projects, all of which can have varying degrees of impact. Ultimately, the fundamental reason lies in the fact that trust projects are non-standardized financial products, lacking a unified evaluation standard. Rigid payment is another unwritten rule concept, equivalent to the project risk being entirely borne by the trust company, without being passed on to investors, but this does not prevent trust companies from setting product yields based on project risks.

3. The deadline for trust products is very flexible, generally following a first-come, first-served principle, meaning that once the subscription reaches the project financing amount, it will be established; the faster the funds are handed over to the financing party, the better, as the financing party cannot just wait idly for the funds. Conversely, there may be a situation where a trust project is listed online for a period of time, but the subscription amount does not meet the expected target. In this case, there are generally two outcomes: one is that the financing party urgently needs money and has no choice but to settle for a lower amount, so they proceed with the trust project establishment, but the scale is smaller than originally expected; the second is that the funds are delayed, and the financing party has already obtained funds through other channels and no longer needs it, resulting in the trust project being abandoned. Therefore, it is normal for trust products to have no deadline; it is still uncertain whether they can be established.

From the perspective of promotional (commonly referred to as sales) channels, trust products have two major channels: 1. Trust companies sell directly; 2. Entrust external institutions to sell.

I. Trust companies sell directly

The "Measures for the Administration of Collective Fund Trust Plans by Trust Companies" issued by the banking regulatory authority has set strict conditions for the return of trust company products, such as prohibiting advertising and not allowing cross-regional promotion without filing. Among these, advertising restrictions are generally well adhered to (some companies in regions with lax regulation may exploit loopholes), while cross-regional promotion has been factually breached, and regulatory authorities have also turned a blind eye.

Currently, many trust companies have established independent wealth management centers responsible for selling their own products and other financial products.

II. Entrusting external institutions to sell

1. Bank channels

According to the "Measures for the Administration of Collective Fund Trust Plans by Trust Companies," if a trust company entrusts external institutions to sell, it must entrust financial institutions. In previous years, banks and trust companies collaborated extensively, from project promotion to product sales, so many products were sold by banks. This is legal and compliant.

Changes occurred at the end of last year when Huaxia Bank's Shanghai Jiading branch illegally sold private placement products from general companies, which were widely reported as trust products, causing trust companies to be implicated. Later, the banking regulatory authority required banks to obtain approval from their headquarters to sell trust products, leading to a shrinkage of bank sales channels, especially for large banks.

2. Non-bank financial institution channels

In recent years, the stock market has been sluggish, and the business of brokerage firms has been poor, while trust products have been thriving, offering high and stable yields with rigid payments, attracting many investors and funds. In light of this, securities companies, rather than being passive, have taken the initiative to transform into wealth management consultants, acting as agents for selling trust products. However, after the introduction of asset management products last year, securities companies prioritized selling their own asset management products, which has also significantly impacted this channel.

3. Non-financial institutions

This is the gray channel. Many investment consulting companies and other general business enterprises are now also selling trust products, and they account for a significant proportion, forming a scale that regulatory authorities have also tacitly accepted.

From a risk perspective, financial institutions selling trust products tend to be more cautious because they are dealing with their own clients, requiring long-term maintenance and regulatory oversight, and they generally conduct some internal review of the products. In contrast, many non-financial third parties prioritize profit, paying little attention to risk. To enhance their sales competitiveness, these third parties often share a portion of the commissions obtained from trust companies directly with investors, providing cash immediately after signing and transferring funds. This practice creates unhealthy competition for trust companies, which must avoid this issue when setting product yields.

The last two questions posed by the questioner are not really questions. Different products have different risks, and naturally, the yields will differ. Rigid payment itself carries risks, and the risk of rigid payment varies from company to company, so the prices will naturally differ.

Website sales require attracting clients and phone inquiries as the top priority; setting a deadline would be counterproductive.

Trust vs. Fund

What are the differences between trusts and funds?

Scott Yang

What level of answer are you looking for? I will try to explain it in simple terms.

From the essence of these two concepts, trusts and funds are independent but intersecting concepts.

A trust is a legal arrangement in which you (the trustor) transfer ownership of property to someone else (the trustee), who operates that property and distributes the operating income to the person you designate (the beneficiary). How the trustee operates depends on the laws governing the trust and the agreements in the trust legal documents.

A fund, on the other hand, is an investment arrangement, meaning a group of people (which can be a few individuals or an unspecified public) pool their money together in a certain form to invest and enjoy the returns. The "certain form" can take many forms, such as a company, a partnership, or even a trust.

From the analysis above, it is clear that the intersection of trusts and funds is that investors (the trustors of the trust) pool their money together and entrust it to a trust company (the trustee of the trust) for investment, with the investment returns distributed back to the investors (the beneficiaries of the trust) based on their proportion. This type of investment-oriented trust arrangement is usually referred to as a "unit trust."

Beyond this intersection, trusts (traditionally, in foreign contexts) can also serve other purposes beyond investment, such as family wealth succession, providing living expenses for descendants (one famous example is that Hitler's living expenses while studying art in Austria came from a trust established by a family elder), and in some cases, tax avoidance.

Funds, apart from the trust model, commonly include corporate forms (where all the money is invested in an xxx investment company, and investors are shareholders of that xxx investment company, enjoying investment returns based on their shareholding levels and proportions), partnership forms (commonly used in private equity and hedge funds), etc.

Specifically, in China, the current trust legislation is relatively rudimentary and mainly focuses on unit trusts. In the past few years, during the market boom, domestic trust companies primarily focused on this area. For the purpose of investor protection, China's trust legislation has set a high threshold for unit trust investors.

As for funds, the current legal situation in China allows private equity funds to adopt corporate forms (but this is subject to updates in corporate legislation) and partnership forms; public funds are currently mostly trust-type/contract-type, but there have been ongoing calls to introduce corporate-type and other organizational forms.

From what I know, although domestic trust companies also have family trust (referring to the other trusts mentioned in point 3) businesses, the business threshold is very high, and the actual business volume is also very small.

2013-07-24

Are domestic bonds worth buying?

Are domestic bonds a good wealth management tool? Should one buy some domestic bonds?

Xu Yinpeng

In fact, the money market funds we are familiar with primarily invest in bonds; buying a money market fund essentially means buying a basket of short-term bonds, but this basket of bonds is selected by fund managers. Bonds, in essence, are IOUs, a promise to pay interest at a certain rate and repay the principal under agreed conditions. In fact, bank deposits are essentially a type of bond: banks promise to pay you interest at a certain rate and ultimately return the principal.

The bonds we are most familiar with are government bonds. Currently, the yield on a 5-year savings-type government bond is 5.41%, meaning if you buy a 100 yuan bond, you will receive 5.41 yuan in interest income at the end of each year for the next five years, and in the fifth year, you will also get back your principal (plus the last interest payment). In addition to government bonds, companies also issue bonds to raise funds. In the current domestic context, the conditions for issuing government bonds are quite stringent, so there have been no default incidents in the past 20 years, meaning all bonds have ultimately paid back principal and interest, although there have been cases of delayed payments.

Bonds issued by companies often have yields higher than government bonds. For example, the 11 Suzhong Energy (5) bond, which recently dropped to 91.4 yuan, currently has a pre-tax yield to maturity exceeding 10%, while its coupon rate is 7.05%.

The two yields mentioned here may be confusing, so let me explain: Currently, the 11 Suzhong Energy bond has three years until maturity. If you buy it now for 91 yuan and hold it until maturity, your annualized yield over these three years will be 10%. This 10% yield comes from (ignoring taxes): buying the bond at 91 yuan, and at maturity, the issuer will redeem it at 100 yuan face value, while you will also receive 7.05 yuan in interest each year during those three years.

The 7.05% is crucial for the issuer because regardless of how the bond is traded in the market, on each interest payment day, they will pay interest based on the face value of 100 yuan at 7.05%. Therefore, the yield to maturity is the annual yield you would receive if you held the bond until maturity, while the coupon interest is what you receive from the issuer. Clearly, if you do not hold until maturity, such as holding for only one year, your yield is uncertain: various scenarios could occur, including potential losses. For instance, if you hold for 255 days, your annual yield will depend on two factors:

1. Coupon interest. This is already set at an annualized rate of 7.05%. If you hold for 255 days, your interest income will be 100 × 7.05% × 255/365 = 4.93 yuan.

2. Changes in bond prices. If the price rises from 91.4 yuan to 92.4 yuan, your total return will be 5.93 yuan, resulting in an annualized yield of 8.49%; if the bond price drops from 91.4 yuan to 85 yuan, your total return will be -1.47 yuan, leading to an annualized yield of -2.3%.

You might think this investment is not that appealing, as there is default risk on one hand, and the yield is not particularly high on the other. However, an annualized yield of 6% to 10% is considered quite good, and the risk of obtaining this yield through bonds is genuinely low, especially in the current context where overall default risks are very low, with only localized default risks. If you choose bonds with higher credit ratings and create a diversified portfolio, the risks you bear are actually very low. For those who find suitable maturity matches, the price fluctuation risks in between can almost be ignored.

Returning to the earlier example, if I say that the possibility of default for the 11 Suzhong Energy bond is extremely low, then the chance of its price dropping to 85 yuan in a year is also very small because we can think in reverse: if it really drops to 85 yuan, then at that time, investors could buy a two-year bond priced at 85 yuan with a coupon interest of 7.05%, yielding an annualized return of 16%. Clearly, the market is unlikely to leave such a significant benefit unclaimed. Therefore, bond prices cannot fall indefinitely unless there are significant concerns about default risks. Bonds are low-risk and have low entry barriers; you can buy a bond for as little as 1,000 yuan, and transactions are T+0. You only need to open a stock account to buy and sell bonds.

Supplement:

I would like to commend @Yin Xiaoer for their opinion and then share my thoughts. Liquidity issues are a hard constraint of the exchange, but the reality is that some bonds do provide a certain level of liquidity, not all are zombie bonds. If the average daily trading volume is above 3 million and the lower trading volume is above 500,000, liquidity is not an issue for small retail investors buying 10,000 or 20,000. Since this platform's audience is primarily small investors, I believe there is operational feasibility for everyone. Furthermore, bond trading is indeed not suitable for beginners, so I think a buy-and-hold strategy is a good approach for novices. For a buy-and-hold strategy, the 11 Chaori bond you mentioned is an exception; I recommend that if beginners do not have professional investors to help them choose, they should opt for bonds with higher ratings and avoid those with particularly high yields. Additionally, it is crucial to create a diversified portfolio: with 10,000 yuan, you can create a portfolio of 10 different bonds, which is very helpful in reducing risk. If you have a good understanding of a particular industry, conducting fundamental analysis before buying is even better. For instance, if you are familiar with the real estate industry, you can pay attention to the 09 Mingliu bond. As for the 11 Suzhong Energy bond, I believe its default risk exists but is very small.

As for bond funds, I wholeheartedly agree. Historically, pure bond funds with excellent performance are a great choice for beginners, as they save the hassle of managing a bond portfolio and indirectly avoid interest taxes. Of course, when buying bond funds, it is essential to choose the right timing; buying medium to long-term bonds before an interest rate hike cycle is not advisable.

As for convertible bonds, I am quite obsessed with them, but beginners may fear the risks. Therefore, I will not elaborate on ordinary bonds here, but for investors seeking relatively higher returns, some convertible bonds with guaranteed returns can indeed be considered, such as Minsheng Convertible Bonds (closing below 106 on October 23).

2013-10-24

Yin Xiaoer

Countless friends have asked me this question, and contrary to @Xu Yinpeng's viewpoint, I have repeatedly advised individual investors not to easily participate in the bond market.

First, for the foreseeable future, individual investors can only participate in the exchange bond market, which means buying and selling bonds like stocks. However, investors often find that many bonds have neither buy nor sell orders, and the K-line charts are completely ineffective. In reality, mainstream bond investors are concentrated in the interbank bond market, which individuals cannot access. Therefore, during the major bear market for credit bonds in 2011, exchange bonds experienced situations where they had no price and no market. At such times, if someone needs to pay for their child's tuition, they might not even be able to sell a bond at an 80% discount.

Secondly, bond trading requires individuals to have a deep understanding of macroeconomic fundamentals, something that most stock fund managers struggle with, let alone individual investors. First, ask yourself a question: What do you expect the CPI and PPI to be next month? If your error does not exceed 0.5% for more than ten consecutive times, congratulations, you might be the Zhang Wuji among individual investors. I won't elaborate further on this point.

Thirdly, even if you adopt the buy-and-hold strategy mentioned by @Xu Yinpeng, it essentially relies on your judgment of the company's fundamentals. The problem is that individual investors' judgments are often unreliable. For example, many older investors bought the well-known 11 Chaori bond between 60 and 70 yuan, corresponding to an exercise yield of about 50% to 35%. The remaining exercise period was less than two years. However, the bond has now been delisted. Unfortunately, in the next two years, investors will not be able to liquidate... Even if they exercise their rights on the due date, looking at the financial statements, there is no cash available. What will they use to repay the debt? In reality, the worst-case scenario for such investments is total loss. The risks of this investment are similar to buying *ST stocks, but after restructuring, stocks may double or triple, while your maximum return rate is only 50%, and the worst-case scenario is the same. If you really want to take risks, I personally recommend trading *ST stocks. Of course, I agree with @Xu Yinpeng that the 11 Suzhong Energy bond has a low risk of default. However, this is a professional judgment I made as an investment manager in an institutional setting. Bonds differ from stocks; stocks are driven by news and concepts, while bonds require investors to accurately assess whether the company can produce real cash to repay. Most individual investors may not even know how to read a balance sheet, and they cannot be held accountable for their fundamental judgments. Encouraging them to gamble on junk bonds is irresponsible behavior.

Fourth, while some may think stock funds are problematic, bond funds are genuinely a good choice (please don't attack me, I'm not a fund manager). Individual investors have no need to manage a bond portfolio themselves. All the disadvantages mentioned for individual investors can be overcome by a seasoned bond fund manager and a team of experienced traders. Moreover, the most important point is that, aside from junk bonds, the differences between individual bonds are not very significant, so the value of alpha strategies in the bond market is far less than in the stock market. A mediocre bond fund manager's returns may not differ much from those of the best bond fund managers, while the differences in stocks can be vast. Additionally, bonds have low volatility, so the probability of losing money when buying bond funds is extremely low. For example, even after the unprecedented liquidity crisis in June, the year-to-date returns of all medium to long-term pure bond funds have generally not been negative—please actively ignore the last place "Huaxia Asia Bond China," as this bond fund invests in Hong Kong bonds, where the market is quite peculiar, with a high proportion of junk bonds, leading to daily fluctuations akin to stocks.

Fifth, individuals can trade convertible bonds. To put it bluntly (please don't hit me, my mentor), this is something to trade like stocks, listening to news, trading concepts, selling when prices rise, and having a bond floor when prices fall. You can watch the K-line and trade repeatedly. Skilled technical traders in the community might make money this way.

To summarize my advice: individuals should allocate fixed-income investments but should do so through money market funds, bank wealth management products, and bond funds; I oppose individuals buying bonds directly, with the sole exception being convertible bonds.

Understanding Bonds

What are the differences between spot yield, yield to maturity, and forward yield?

Li Hao

Thank you for the invitation.

I think this question can be transformed into: What are these three things?

Because if you know what these three are, the differences are self-evident. So let me explain what each of them is.

Spot yield (spot rate) is the yield we most commonly understand. For example, if the one-year spot yield is 2.83%, then if you lend 100 today, you will receive 102.83 next year. If the five-year spot yield is 3.24%, then in five years, you will receive the principal of 100 plus 100 × (1 + 3.24%) × 5 in interest (China uses simple interest calculation, thanks to @Fang Fifteen for the reminder). In another way, when you go to the bank to deposit money (fixed deposit), the interest rate displayed on the electronic version is the spot yield, which should be easy to understand. This type of government bond is also called a zero-coupon bond, meaning no interest is paid during the term, and the final payment is made at maturity.

Yield to maturity (YTM) is generally not used by the average person, but it is very important in finance.

Most government bonds are coupon bonds; for example, if the coupon interest is 5% and paid annually, it means that if you buy a 100 yuan bond, you will receive 5 yuan in interest each year. However, this is completely different from the spot yield. This 5% cannot be equated to a 5% yield because bonds are not necessarily issued at face value; they may be issued at a discount or premium. For example, if a bond has a coupon of 10%, it is clearly higher than what people generally understand as "interest rate," and in this case, it must be issued at a premium, and the actual yield will certainly be less than 10%.

Yield to maturity, if you do not want to study too much, you can understand it as "what the real yield is in this situation."

If you are a serious person, I will explain it seriously: if you discount future cash flows at a fixed interest rate to present value, which is to find PV, then YTM is the rate that makes the PV equal to the current price of the bond. YTM can be applied in various fields, not just bonds. For example, if a 10-year government bond pays interest once a year, you will discount the future 10 interest payments and the principal at maturity back to present value, and its value will equal the current price of the bond.

YTM is quite useful because, for example, if a 10-year bond with a 5% coupon is currently priced at 101 yuan, and a 5-year bond with a 3% coupon is priced at 98 yuan, with different times, coupons, and prices, how do you determine which bond is "more valuable"? If you compare prices, you would be wrong because the expensive bond pays 5% interest; if you think 5% is greater than 3%, you would also be wrong because the 5% bond is expensive and has a longer duration. At this point, an important evaluation metric is YTM; for instance, if the 10-year YTM is 3.5% and the 5-year YTM is 3.6%, then you could say the 5-year bond is "more valuable," although this is not very common in reality.

Now, forward yield is calculated using spot yields. Its main function is to provide a predictive measure of future interest rates. Here, we need to shift our thinking about the forward yield curve; for example, the 10-year forward yield does not refer to the current yield but to the yield of a one-year (or two-year, three-year, etc.) zero-coupon bond ten years from now. This value is a forecast derived from today's spot yields. The forward yield curve can also be used for yield curve trading; for instance, if you see a "peak" or "trough" in this curve, traders or fund companies can devise strategies to trade and profit.

The calculation of forward yield is not easy to understand; if you do not need it for work, generally just focus on the spot yield curve and the yield to maturity curve.

I originally wrote a lot more, but I want to know if there are any unclear points in what I said above so I can improve what I have written. I will gradually add more later. This question, while short, involves very complex underlying concepts, and the more I write, the more I feel at a loss. If anyone has any knowledge they do not understand, please comment, and I will continuously improve and modify my responses.

2013-10-06

Can insurance also be wealth management? Is wealth management insurance worth it? What are its pros and cons? Who is it suitable for?#

Da Long

Insurance products are a must-have in family wealth management and should be prioritized for allocation. As for why this is the case, it is not directly related to this question, so I will directly answer the related questions about wealth management insurance products.

We cannot simply evaluate this product as valuable or not because this question is relative. However, for most families, I still do not recommend wealth management insurance.

The specific reasons are as follows:

We must first clarify the original intention behind choosing insurance products. Personally, I believe that insurance is not bought for one's own protection but for the protection of our closest family members. The various illnesses or dangers we face will not diminish because we buy insurance; it simply means that after these accidents occur, we will not impose any financial burden on our family. The purpose of buying insurance is to provide this protection, not to hope that insurance products will help us preserve or increase the value of our existing assets.

Once we clarify our intention for choosing insurance, we may still feel conflicted. Wealth management insurance products can provide both protection and asset preservation and appreciation, so why not choose such products? The reason is simple: if you expect the insurance company to help you achieve wealth appreciation, you might as well choose to deposit your money in a bank fixed deposit, which would yield more than the returns generated by the insurance company. Additionally, if the insurance product also focuses on wealth management, it either provides significantly less coverage than pure consumption-type insurance products or requires much higher premiums for the same coverage. Therefore, I personally believe that, relatively speaking, choosing wealth management insurance is not as cost-effective or wise as choosing pure consumption-type insurance.

Moreover, I have interacted with many executives from insurance companies, and they all unanimously agree that choosing pure consumption-type protection insurance is more worthwhile.

Of course, I am speaking relatively. I think for recent graduates or those who lack spending discipline, wealth management insurance products can also be a short-term choice, as they can help you save money each month while providing a degree of protection for those who are still young and unable to afford insurance products; it can be a solution.

2013-10-23

Shen Xiaoshen

Thank you for the invitation.

First, I believe that the target audience for wealth management insurance needs to meet the following two conditions:

1. Have spare money;
2. Be patient with time.

Why do I say you need spare money? Because wealth management insurance has particularly low yields in the short term. Take the commonly used 5+5 type insurance as an example: you save for five years and then keep it for another five years, and after ten years, the yield is only around 1% (but with some protection). In my view, it is better to put the money in a fixed deposit and use the fixed deposit returns to buy a card.

There are also universal products available, currently with ten-year, five-year, and sixty-year terms, with yields mostly around 4%, along with protection. I think this type of product can be considered, but the duration is longer, and the yield is similar to fixed deposits. If you exit midway, there will be losses, so you really need to have spare money to allocate a little.

Most wealth management insurance products are lifelong, without additional protection, especially bank insurance products, such as saving for 5 years for lifelong coverage, which has low yields and no additional protection. This means that if the insured dies, you only receive the principal and returns, with no extra compensation. It is said that the returns compound over time, and the longer you live, the more you receive, but in reality, the extra money you receive later is just the money you received less of earlier.

However, these types of insurance have several advantages:

1. The returns are tax-exempt, meaning the product returns are exempt from all taxes.
2. They are protected from debt; if you have outstanding debts, the returns and principal from the insurance product, or the insurance compensation, cannot be used to offset debts.
3. They are exempt from inheritance tax. If you are wealthy, you can allocate a lot of money to insurance, and when you die, your son inherits this wealth without paying inheritance tax.

Overall, wealth management insurance is not suitable for many people; insurance is more about protection. If you ask me to save several thousand yuan a year for insurance wealth management, I would prefer to spend a few thousand yuan a year on consumption-type insurance.