Bonus Bonds - gamble or investment?

Bonus Bonds were founded in 1970 and is one of New Zealand's largest unit trusts with over $3billion invested. With the scheme originally introduced to encourage savings, is this still a relevant savings scheme or is it a bit of fun?

So how do Bonus Bonds work?
When you buy a bonus bond, your money is pooled with money from other bondholders and held in a trust which is in turn invested in a range of investments. The income earned from the invested funds then forms a prize pool which is paid out to random monthly winners - the biggest prize being $1million.

The definition of an investment is "the action of investing money for profit". Do Bonus Bonds meet this definition? Well, if you win one of the monthly prizes you are certainly receiving a return on your money. On the other side, gambling is defined as "the act of playing a game of chance for money or other stakes" – Bonus Bonds could also be considered a game of chance as not everyone wins a cash prize.

With approximately one third of New Zealander's owning bonus bonds, what are the chances of holders receiving some cash?
According to the bonus bonds website, the chance of each $1 unit winning a prize ranges from 1 in 14,000 and 1 in 20,000. These do appear to be good odds, however, it should be noted that the majority of the prizes are smaller sums of $5,000 and below.

While Bonus Bonds can create a bit of fun, the return is completely reliant on luck so it may not be a good idea to use the scheme as your main form of saving.

With other alternatives such as term deposits or KiwiSaver, your savings could have a better chance of seeing a return.

If you wish to talk a qualified adviser about ways to save or invest, please contact us.

Image courtesy of freeimages.com/Jerzy Muller