Advisers urge caution over retail bonds Bonds issued by household-name companies are paying annual returns of more than 6 per cent to private investors seeking income, but wealth managers warn that tying up money in direct corporate bonds can carry higher risks than many investors realise. This week, a retail bond from student housing firm Unite paying 6.125 per cent a year for seven and a half years closed early, following high demand. Since the market for retail bonds was first launched in the UK in 2010 more than £2bn of bonds have been issued by businesses such as Tesco, Standard Life and National Grid seeking to raise funds without relying on bank loans. For investors the returns on offer look attractive when compared to the annual interest paid by savings accounts, fixed-rate savings bonds and gilts. Tullett Prebon is paying 5.25 per cent a year for 6.5 years and Tesco's third issue pays 5 per cent until 2020. Stobart Group recently withdrew its relatively uncompetitive plan for a 5.5 per cent bond for six years. Investors who purchase a retail bond with a term of five years or more until maturity can include the bond in their individual savings account (Isa), making the investment tax efficient. Minimum investments can be as low as £100, but are usually between £1,000 and £2,000. However, the income from small investments may be eroded by share dealing fees. Retail bonds can only be purchased through a stockbroker, such as Killik & Co, Hargreaves Lansdown or Barclays Stockbrokers, which charges an administration fee of £65 on investments between £2,501 and £20,000. Bonds listed on the London Stock Exchange can be sold before the maturity date via the Order Book for Retail Bonds (Orb), which is still young. This could provide investors with a profit if the bonds are trading at a price above the issue price, but could mean they lose money if the bonds are trading lower. Investors also cannot generally trade bonds online, and so must pay higher telephone dealing fees. One of the greatest threat to investors of bonds is inflation, according to David Coombs, head of multi-asset investments at Rathbones Investment Management. If interest rates rise, the market value of bonds is likely to fall as their coupon rates start to look less attractive. Coombs advises clients to think carefully about the current risk to reward ratio. "We have already begun reducing exposure to corporate bonds," he said. Money invested in retail bonds is also not protected by the Financial Services Compensation Scheme, meaning that the investment is only as safe as the company. Advisers recommend that investors interested in retail bonds check the issuing company's balance sheet, paying particular attention to cash flow, and finding out what the bond is secured against. Retail bonds should be part of a balanced portfolio, and should not be considered as an alternative to cash savings, said Justin Urquhart Stewart of Seven Investment Management. "Retail bonds can be attractive because of the yield but because you are dealing with one company the risk is higher than investing in a bond fund which will hold hundreds," he said. This is debt, not ownership, which means that you are treated differently if the company fails.