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Credit risk applies to debt-type investments, such as term
deposits, debentures and bonds. It is the risk that the
company to which you have lent money will become insolvent,
and will be unable to meet interest payments or to repay
your funds.
Information is the best means for avoiding credit risk.
If you're considering an investment, ask for information
about the company's credit rating, past performance, ownership
etc. This should give a good indication of the quality of
the organisation. Be wary of investments that appear too
good to be true.
Diversification also helps reduce your exposure to credit
risk. By spreading your money amongst a number of institutions
you can minimise the impact on your portfolio should an
institution experience credit problems.
Credit ratings and managed investments
The international ratings agency Standard & Poor's
(Australia) Pty Ltd ("S&P") began rating certain
types of managed investments in Australia in 1989. S&P
currently provide ratings for:
- Cash management trusts
- Bond funds
- Investment bonds
- Approved deposit funds
The highest rating available is 'AAA', and S&P consider
funds rated from 'AAA' to "BBB' to be 'investment grade',
that is to have the capacity to pay income and repay funds
in a timely manner.
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If an investment seems too good
to be true ... be careful, it probably is.
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Reproduced with the kind permission of
FPA and Macquarie Investment Management Limited
© 2000 - 2001 Forsyte
Consulting Pty Ltd. All rights reserved unless otherwise
stated.
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