Default Risk

From Financial Literacy Wiki

Default risk (also known as credit risk) generally refers to the risk of debtor not being able to meet its legal obligations according to the debt contract. This risk is present in any debt or receivables obligations

In Unit Trust

Most investors may be surprised to see that default risk is cited in Country-Specific Unit Trusts and Sector-Specific Unit Trusts because the common understanding is that these funds invest in equities and the remaining funds in cash. But this is not the case, these unit trusts do invest in debt securities. In the prospectuses, these funds can and may put their funds in gold and no other commodities or metals except for Sector-Specific Unit Trusts that invest in Gold and commodities.

For Sector-Specific Unit Trusts, this risk is not cited in most prospectuses, but it does not mean that these unit trusts do not invest in debt securities. This can be seen in a paragraph stated in the most prospectuses under " Authorised Investments of the Trust". For example, Page 21 of the Prospectus of UOB United Global Technology Fund states:

" any other investments not covered in by sub-paragraphs (a) to (e) above but approved in writing by the Trustees(such approval to be confirmed in writing)"

For Country-Specific Unit Trusts, this is commonly cited in the prospectuses but most of these funds have stated that for debt securities to be included in the portfolio, it must be above a certain ratings. This information can be found under " Investment Restrictions and Prohibitions" or " Authorised Investments of the Trust" or similar headings. As an example,

"… debt securities rated at least either Aa2 by Moody's, AA by Standard & Poor's, AA by Fitch IBCA …" found on Page 36 of the Prospectus "Henderson Global Select Funds"