Potential Risk Class Matrix (PRC Matrix)measures the maximum risk of debt mutual fund. This came in to force on December 01, 2021 by markets regulator SEBI, requiring all fund houses to disclose to investors of the maximum risk a debt mutual fund can take.
There are basically two different types of risks associated with debt mutual funds interest rate risk and credit risk.
If the interest rate increases, then the value of underlying bonds in a debt scheme will decrease, and the Net Asset Value (NAV) of the scheme will fall. This is known as the interest rate risk.
On the other hand, if the scheme has invested in debt papers of a company and the company defaults on the principal repayment or interest payment, then the underlying bond’s value decreases, leading to a fall in the scheme value. This is known as credit risk.
The PRC matrix comprises parameters based on maximum interest rate risk (measured by Macaulay Duration (MD) of the fund scheme) and maximum credit risk (measured by Credit Risk Value (CRV) of the scheme).
According to the PRC matrix rule, there are three categories for interest rate risk, Class I, Class II, and Class III, while the three credit risk categories include Class A, Class B, and Class C.
| MaxCredit Risk of scheme→ | Class A(CRV >=12) | Class B (CRV >=10) | Class C (CRV <10) |
| Max Interest RateRisk of the scheme ↓ | |||
| Class I: (MD<=1 year) | Relatively Low Interest Rate Risk and Relatively Low Credit Risk | Relatively Low interest rate risk and moderate Credit Risk | Relatively Low interest rate risk and Relatively High Credit Risk |
| Class II: (MD<=3 years) | Moderate interest rate risk and Relatively Low Credit Risk | Moderate interest rate risk and moderate Credit Risk | Moderate interest rate risk and Relatively High Credit Risk |
| Class III: Any Macaulay duration | Relatively High interest rate risk and Relatively Low Credit Risk | Relatively High interest rate risk and moderate Credit Risk | Relatively High interest rate risk and Relatively High Credit Risk |
In case of debt funds, where risk considerations supersede returns, it’s extremely useful for an investor to know where the boundaries are and what the fund will never do. And that is precisely what a thoughtfully done PRC matrix placement can tell.
Macaulay Duration : It is the time taken to recover the real cost of a bond measured in terms of years by calculating the present value of future cash flows (interest and principal). It generally applies to investments where returns are fixed. At the scheme level, it is calculated as weighted average of the Macaulay Duration of each instrument.
Credit Risk Value (CRV): SEBI has given a numeric value to debt instruments based on the credit risk associated with them. The less the risk, higher is the credit risk value. For example, government securities have a CRV of 13, while below investment grade papers have a CRV of 1. AAA bonds, which are highest rated corporate bonds, have a CRV of 12.
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At the scheme level, it is calculated as weighted average of CRV of each instrument.
Understanding and using the Potential Risk Class matrix can take you one step closer to becoming a savvy mutual fund investor. If you are in the process of analysing debt funds for your portfolio, then add the PRC matrix to your research arsenal to choose funds that best match your risk appetite. If you are new to Mutual Fund & you cannot understand then discuss your investment objectives and risk with a professional Investment Advisor.
