SEBI prescribes Potential Risk Class Matrix for debt schemes based on Interest Rate Risk and Credit Risk
SEBI has mandated that the Mutual Funds to indicate risk taken by the scheme as on the end of the month. The Risk-o-Meter specified dynamically captures the actual risk in the portfolio taken by the fund manager.
However, for an investors to take informed decisions, while investing in a mutual fund scheme, he should be aware of apart from the current risk level as indicated by Risk-o-Meter, the maximum risk the fund manager can take in the scheme.
While the Risk-o-Meter stipulated by SEBI reflects the current risk of the scheme at a given point in time, there is also a need for disclosure of the maximum risk the fund manager can take in the scheme.
SEBI, based on the recommendation of the Mutual Fund Advisory Committee (MFAC) and discussions held with the mutual fund industry, has decided that all debt schemes also be classified in terms of a Potential Risk Class matrix consisting of parameters based on maximum interest rate risk (measured by Macaulay Duration (MD) of the scheme) and maximum credit risk (measured by Credit Risk Value (CRV) of the scheme).
As a result each existing scheme shall be categorised in one of the following nine 3×3 matrix:
Relatively Low Interest Rate Risk and Relatively Low Credit Risk
Moderate interest rate risk and Relatively Low Credit Risk
Relatively High interest rate risk and Relatively Low Credit Risk
Relatively Low interest rate risk and moderate Credit Risk
Moderate interest rate risk and moderate Credit Risk
Relatively High interest rate risk and moderate Credit Risk
Relatively Low interest rate risk and Relatively High Credit Risk
Moderate interest rate risk and Relatively High Credit Risk
Relatively High interest rate risk and Relatively High Credit Risk
The thresholds for the values of the interest rate risk and the credit risk dimensions would progress in a flexible manner for drawing out the categorization matrix. The thresholds across the matrix would determine the maximum interest rate risk and the maximum credit risk which the scheme would be permitted to take but the scheme would have the flexibility to move downwards on the risk scale.