Debt Mutual Funds: What is PRC Matrix and how does it help pick the right fund?
- In 2021, a SEBI circular made it mandatory for mutual funds to classify all debt schemes in terms of a Potential Risk Class (PRC) matrix. The matrix provides for a great framework to measure the maximum level of risk a fund can take.
Debt mutual funds in India had witnessed a series of credit defaults till the year 2000. The biggest of casualties was suffered by Franklin Mutual Fund which wound up 6 of its debt schemes which were affected. There were also other AMCs (asset management companies) which had part of their holdings which had defaulted. The sad part of that episode was that some of these debt securities were AAA rated before the default which shook the confidence of investors as never before.
Investors started getting sceptical about investing in debt mutual fund schemes due to these instances. The Securities and Exchange Board of India (SEBI) has come out with more stringent norms to put an end to such defaults bringing AMCs on their toes. Many AMCs ramped up their internal credit appraisal systems with focused manpower deployed into the job.
Investors have started probing more about the dependability of the debt funds since the fiasco. AMCs have multi-level filters today to pick fixed income securities. These measures have ensured high level of caution at the level of investors and fund houses.
Introduction of PRC Matrix
SEBI, to address this concern, had introduced a practice of disclosing the Potential Risk Class (PRC) Matrix, a matrix which mutual fund houses are to disclose for each of their debt schemes on their fact sheet. In 2021, a SEBI circular made it mandatory for mutual funds to classify all debt schemes in terms of a Potential Risk Class (PRC) matrix. The matrix provides for a great framework to measure the maximum level of risk a fund can take.
It is a simple yet powerful 3*3 grid which reveals the credit quality of the fund. One axis measures the maximum interest rate risk (measured by Macaulay Duration (MD) of the scheme) while the other axis captures the maximum credit risk that the scheme intends to take at any point in time. These are the 2 key aspects which indicate the risk associated with a debt fund. As per the circular, each debt scheme has to be placed in one of the grids available in the PRC matrix.
The investor community has very little knowledge about PRC and it has not been published enough.
The prescribed threshold:
Credit Risk Value
The Credit Risk Value (CRV) of the scheme shall be the weighted average of the credit risk value of each instrument in the portfolio. CRV scores shall be based on the lowest long-term rating of an instrument.
Following is the Credit Risk Value given to various kinds of securities based on which the 3 thresholds are arrived at.
The credit risk value is given from 1 to 13 for each category 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, below investment 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 maximum weighted average Interest Rate Risk of the scheme (measured in terms of Macaulay Duration (MD)) is taken into consideration based on which they are classified as 3 categories:
Class I - the maximum residual maturity of each instrument held by the scheme shall be three years
Class II - the maximum residual maturity of each instrument held by the scheme shall be seven years
Class III - can invest in instruments of any maturity (These are not applicable for Central/State government securities)
The PRC Grid Table
Following is the grid table formed based on the above mentioned risk categories.
As per the SEBI circular, each debt scheme has to be placed in one of the 9 grids available in the PRC matrix.
Each fund would fall under one of the nine grids AI, AII, AIII, BI, BII, BIII, CI, CII & CIII, with AI being the safest and CIII being the riskiest.
The PRC of Funds in Reality
Any investor of debt funds should henceforth check the PRC grid under which a fund falls in the process of choosing their ideal fund.
The reality of the PRC matrix is throwing a very interesting picture. We randomly picked 4 different AMCs - ICICI, Kotak, Bandhan and Nippon - to see the PRC grid under which debt funds of the same category of these AMCs fall as on 31st Oct'2023. Their PRC grid for few categories are given 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 category, Bandhan falls under least risk and in the medium term fund category, Kotak and Nippon are the riskiest based on PRC. This also shows how funds of each AMC in the same category stack up so differently when it comes to the grid of risk (PRC) and when a debt investor has to choose a fund this PRC matrix would come in handy to pick the right fund.
SEBI should instruct AMCs to create more visibility about PRC matrix and educate investors about the same for them to take more informed decisions while investing in debt funds.
V Krishna Dassan, Director - Wealth Management, Dhanavruksha Financial Services Pvt. Ltd.
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First Published:16 Nov 2023, 12:09 PM IST
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