Debt Mutual Funds: What is PRC Matrix and the way does it assist decide the suitable fund?

Investors began getting sceptical about investing in debt mutual fund schemes because of these situations. The Securities and Exchange Board of India (SEBI) has come out with extra stringent norms to place an finish to such defaults bringing AMCs on their toes. Many AMCs ramped up their inner credit score appraisal programs with centered manpower deployed into the job.

Investors have began probing extra in regards to the dependability of the debt funds because the fiasco. AMCs have multi-level filters in the present day to choose mounted earnings securities. These measures have ensured excessive degree of warning on the degree of traders and fund homes.

Introduction of PRC Matrix

SEBI, to handle this concern, had launched a follow of revealing the Potential Risk Class (PRC) Matrix, a matrix which mutual fund homes are to reveal for every of their debt schemes on their truth sheet. In 2021, a SEBI round made it necessary for mutual funds to categorise all debt schemes by way of a Potential Risk Class (PRC) matrix. The matrix gives for an ideal framework to measure the utmost degree of threat a fund can take.

It is an easy but highly effective 3*3 grid which reveals the credit score high quality of the fund. One axis measures the utmost rate of interest threat (measured by Macaulay Duration (MD) of the scheme) whereas the opposite axis captures the utmost credit score threat that the scheme intends to take at any cut-off date. These are the two key features which point out the danger related to a debt fund. As per the round, every debt scheme must be positioned in one of many grids out there within the PRC matrix.

The investor group has little or no information about PRC and it has not been printed sufficient.

The prescribed threshold:

Credit Risk Value

The Credit Risk Value (CRV) of the scheme shall be the weighted common of the credit score threat worth of every instrument within the portfolio. CRV scores shall be based mostly on the bottom long-term ranking of an instrument.

Following is the Credit Risk Value given to varied sorts of securities based mostly on which the three thresholds are arrived at.

The credit score threat worth is given from 1 to 13 for every class of securities:

G Sec/State Development Loans/Repo on G Secs/TREPS/Cash – 13 , AAA – 12, AA+ – 11, AA -10, AA- – 9, A+ – 8, A – 7, A- – 6, BBB+ – 5, BBB – 4, BBB- – 3, unrated – 2, under funding grade -1.

The CRV threshold is specified as follows: Class A: CRV >=12 | Class B: CRV >=10 | Class C: CRV < 10

Interest Rate Risk

The most weighted common Interest Rate Risk of the scheme (measured by way of Macaulay Duration (MD)) is considered based mostly on which they’re labeled as 3 classes:

Class I – the utmost residual maturity of every instrument held by the scheme shall be three years

Class II – the utmost residual maturity of every instrument held by the scheme shall be seven years

Class III – can put money into devices of any maturity (These aren’t relevant for Central/State authorities securities)

The PRC Grid Table

Following is the grid desk shaped based mostly on the above talked about threat classes.

As per the SEBI round, every debt scheme must be positioned in one of many 9 grids out there within the PRC matrix.

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Each fund would fall beneath one of many 9 grids AI, AII, AIII, BI, BII, BIII, CI, CII & CIII, with AI being the most secure and CIII being the riskiest.

The PRC of Funds in Reality

Any investor of debt funds ought to henceforth examine the PRC grid beneath which a fund falls within the course of of selecting their best fund.

The actuality of the PRC matrix is throwing a really attention-grabbing image. We randomly picked 4 completely different AMCs – ICICI, Kotak, Bandhan and Nippon – to see the PRC grid beneath which debt funds of the identical class of those AMCs fall as on thirty first Oct’2023. Their PRC grid for few classes are given right here:

Liquid Funds : ICICI – BI, Kotak – BI, Bandhan – AI, Nippon – BI

Low Duration Funds : ICICI – BIII, Kotak – BIII, Bandhan – AI, Nippon – BIII

Short Term Funds : ICICI – BIII, Kotak – BIII, Bandhan – AII, Nippon – BIII

Medium Term Funds : ICICI – BIII, Kotak – CIII, Bandhan – AIII, Nippon – CIII

In the liquid fund class, Bandhan falls beneath least threat and within the medium time period fund class, Kotak and Nippon are the riskiest based mostly on PRC. This additionally reveals how funds of every AMC in the identical class stack up so in a different way relating to the grid of threat (PRC) and when a debt investor has to decide on a fund this PRC matrix would come in useful to choose the suitable fund.

SEBI ought to instruct AMCs to create extra visibility about PRC matrix and educate traders about the identical for them to take extra knowledgeable selections whereas investing in debt funds.

V Krishna Dassan, Director – Wealth Management, Dhanavruksha Financial Services Pvt. Ltd.

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Updated: 16 Nov 2023, 12:09 PM IST