TMI BlogPotential Risk Class Matrix for debt schemes based on Interest Rate Risk and Credit RiskX X X X Extracts X X X X X X X X Extracts X X X X ..... For investors to take informed decisions, there is a need to know the following while investing in a mutual fund scheme: a. current risk level as indicated by Risk-o-Meter and b. maximum risk the fund manager can take in the scheme 5. 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. 6. Based on the recommendation of the Mutual Fund Advisory Committee (MFAC) and discussions held with the mutual fund industry, it has been 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). 7. While the AMCs will continue to retain the same category of their schemes as per the SEBI c irculars SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 6, 2017, SEBI/HO/IMD/DF3/CIR/P/2017/126 dated December 4, 2017 , they have full flexibility to place single/multiple schemes in any cell of the Potential Risk Class mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olio of the scheme, the weights based on their proportion to the AUM. Similarly, Macaulay Duration at the scheme level shall be the weighted average of the Macaulay Duration of each instrument in the portfolio with the weights being based on their proportion to the AUM. The value of the debt instrument to be considered for calculating AUM shall include the accrued interest i.e. dirty price of the instrument. 14. The debt securities of schemes are to be assigned a value for credit risk in the following manner: TABLE 1 Instrument CREDIT RISK VALUE (CRV) G-Sec/ State development loans/ Repo on Government Securities/TREPS / Cash 13 AAA 12 AA+ 11 AA 10 AA- 9 A+ 8 A 7 A- 6 BBB+ 5 BBB 4 BBB- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Credit Risk Relatively Low (Class A) Moderate (Class B) Relatively High (Class C) Interest Rate Risk Relatively Low (Class I) Moderate (Class II) B-II Relatively High (Class III) 17. The maximum interest rate risk which the aforesaid scheme can take would be in terms of the Weighted Average Macaulay Duration of the scheme and the same shall be 3 years. The maximum Weighted Average Credit Risk which the aforesaid scheme can take would have Credit Risk Value of 10 or more. Both the maximum interest rate risk and maximum credit risk would be reflected in the above matrix. By virtue of its placement in this position, the scheme would have the flexibility to take interest rate risk and credit risk below the maximum risk as stated above in Table 2. 18. The type of the scheme shall be modified to include the above ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he scheme will continue to maintain the threshold of the cell in which it is positioned on INR 90 crores in line with Class I /or Class II categorization in line with this circular. 21. AMCs shall update their SIDs to reflect the fact that placement of the scheme in one of the cells of PRC matrix does not reflect the scheme holdings pertaining to the aforementioned perpetual bonds with respect to the MD and maturity thresholds specified above, till the time such bonds are held by the scheme, for pre-existing holding of aforementioned perpetual bonds by debt schemes as on the date of this circular. 22. Fresh investments in perpetual bonds (including Additional Tier 1 bonds) can only be made in schemes that are in Class III. 23. For the debt instruments with call / put options, the deemed maturity will be in terms of SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000 and SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019 . For instruments with interest rate reset dates, the interest rate reset date shall not be treated as deemed maturity. 24. The dynamic aspect of the risk of each scheme would be separately reflected in the Risk-o- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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