How NOT to Lose Money in Unit Trust (a case study)

I am not a close follower of the unit trust industry in Malaysia. But if you are, you should have read that RHB Islamic Bond fund NAV plunged overnight 8.323% on 24 October 2011.

News here at FundSupermart

The reason?
Total write down of Tracoma bonds held by the fund portfolio. The value is RM 4.52 million
In layman terms, that means Tracoma defaults on its bond; on its obligation to pay bond holders.Its bond market value drops to ZERO.

Malaysia Government Bond Rating benchmark

So what's the deal on those ratings on government debt? By now, we all know that the US sterling creditworthiness rating since 1917 has been downgraded from triple As to double As -  by one of the rating agencies, S&P. Another 2 agencies, Moody's and Fitch, maintained the ratings at Aaa, highest in the rating list.


A lower rating implies there is more risk involved in lending money to the government. Here's a legend on the ratings, from Wikipedia.

Investment grade

• AAA: Moody judges obligations rated AAA to be the highest quality, with the "smallest degree of risk".
• AA (AA1, AA2, AA3): Moody judges obligations rated AA to be high quality, with "very low credit risk", but "their susceptibility to long-term risks appears somewhat greater". (AA+, AA and AA- in S&P)
• A (A1, A2, A3): Moody judges obligations rated A as "upper-medium grade", subject to "low credit risk", but that have elements "present that suggest a susceptibility to impairment over the long term". (A+, A and A- in S&P)
• BAA1, BAA2, BAA3: Moody judges obligations rated BAA to be "moderate credit risk". They are considered medium-grade and as such "protective elements may be lacking or may be characteristically unreliable"

Speculative grade (also known as "High Yield" or "Junk")

• BA1, BA2, BA3: Moody judges obligations rated Ba to have "questionable credit quality."
• B1, B2, B3: Moody judges obligations rated B as speculative and "subject to high credit risk", and have "generally poor credit quality."
• CAA1, CAA2, CAA3: Moody judges obligations rated CAA as of "poor standing and are subject to very high credit risk", and have "extremely poor credit quality. Such banks may be in default..."
• CA: Moody judges obligations rated Ca as "highly speculative" and are "usually in default on their deposit obligations".
• C: Moody judges obligations rated C as "the lowest rated class of bonds and are typically in default," and "potential recovery values are low".

Where does Malaysia stand?

Answer: A3

How about Greece?

Answer: Ca

And despite he fact that our leaders keep on admitting that Bolehland is "mightier" than our neighbour down South, Singapore is the nearest safe haven in terms of Government bond. 

Answer: Aaa