Hello Readers! 

The mutual fund and investment regulating body in India, SEBI (Security Exchange Board Of India) announced on 7^th June 2021 that is on last Monday, that “It has been decided that all debt schemes will be classified in terms of a Potential Risk Class Matrix (PRCM) consisting of parameters based on maximum interest rate risk (measured by the Macaulay Duration (MD) of the scheme) and maximum credit risk (measured by Credit Risk Value (CRV) of the scheme).”

That means, as per the new direction the fund managers of all debt schemes, will now have to mention it clearly that what maximum risk they can take while managing the allocation of these debt schemes.

SEBI says this step has been taken in the interest of debt fund investors. The defined amount of interest rate risk and credit rate risk of debt fund schemes, will help investors plan their investment as per the scheme’s risk profile.

Why This Step Has Been Announced?

The risk profile of bond schemes is measured as per the portfolio of the scheme and displayed as per risk-o-meter. However, to generate good returns from the scheme, the fund managers often bring changes in the portfolio of these bond schemes and end up taking more risk.

Well, the new system of PRCM will give a clear idea of how much risk the fund manager can take. The defined risk in bond schemes will help investors in two ways, they can easily know, that how much risk exists in the portfolio and how much risk the fund manager can take. These two points when clear to investors will help them make informed decisions regarding their investment in bond schemes.

How The PRCM Method Will Define The Risk?

The PRCM will have nine cells defined by three levels each of CRV and MD. The least potential risk level is defined by relatively low-interest rate risk (Class I) and relatively low credit risk (Class A). The highest potential risk level is defined by relatively high-interest rate risk (Class III) and relatively high credit risk (Class C).

MD and CRV of a scheme will be determined by the risk weights of the fixed income instruments it holds. While calculating both the CRV and MD, the proportion of assets under management invested in the bonds and their risk weights will be considered.  

What If The Fund Has More Risk Than PRCM?

SEBI has allowed the fund houses to place one or more schemes in a cell of PRCM. However, it also has specified that if the fund manager arranges the portfolio of the bond schemes in such a manner that it takes more risk than the one specified by the PRCM cell it has chosen then the same will be treated as a change in the fundamental attribute of the scheme.

However, the fund manager says that analyzing PRCM that is a potential risk class matrix that will help investors get a better idea about the level of risk associated with the scheme but making it a fundamental attribute is a case of regulatory overreach.

Let Us Conclude! 

SEBI said that the new circular shall come into force from 1^st December 2021. They further said that new debt schemes will have to choose PRCM cell at the time of filing scheme information document for the new fund offer. While the fund houses of the existing bond schemes would have to inform about the potential risk of their bond scheme to their investors through SMS and provide a link to the mutual fund website.  

SEBI also directed that the like the risk-o-meter, the maximum potential risk of the scheme (PRCM cell positioning), must also be mentioned on all scheme-related communications to the investors.

Keep reading our articles for more updates on finance and investment!!

For any kind of query you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).