Nick Gardner - News Limited newspapers

AFTER the sharp rally in the stock market last year, many people are looking for a safe home for their cash a home where their capital is more secure and they can earn a predictable return over the coming months and years.

The first product that springs to mind may be term deposit accounts, but another way of investing in a fixed-interest product is through the bond market.

A bond is effectively a loan, an IOU, issued by everybody from Federal and State Governments to companies to raise capital.

Government bonds are extremely safe if bought at issue and held until maturity. But they are traded on the open market like shares and their capital value can fluctuate.

Although they are often touted as the safest investments, it is still possible to lose some of your capital if you buy and sell at the wrong time.

“With interest rates on the rise, a bond paying a yield equivalent to 5 per cent will be less attractive in a few months’ time so the capital value of the bond could fall,” says Pawan Luthra, of Wealth Creation Advisors.

“Low-risk clients need to be fully aware of the risks because if they redeem their investment at the wrong time they could incur some losses.”

If your priority is extracting income, it shouldn’t matter too much what happens to the capital value so long as the investment keeps producing your regular returns.

In that regard, government bonds are difficult to beat.

They are expensive to access directly, often requiring minimum investments of up to $100,000, but they can be accessed indirectly through managed funds.

Corporate bonds are cheaper for direct investors often $10,000 but are more risky.