The potential risk class matrix will consist of parameters based on maximum interest rate risk (measured by Macaulay Duration, or MD of the scheme) and maximum credit risk (measured by Credit Risk Value (CRV) of the scheme). This decision was taken based on the recommendation of the Mutual Fund Advisory Committee (MFAC) and discussions held with the mutual fund industry.
in its circular stated that 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 categorisation 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,” said Sebi.
For example, if the maximum weighted average interest rate risk of the schemes as measured in terms of Macaulay Duration which is less or equal than 1 year would be classified as Class I. While maximum weighted credit risk of the scheme as measured in terms of credit risk value which is greater or equal than 12 would be classified as Class A.
The credit risk value of the scheme shall be the weighted average of the credit risk value of each instrument in the portfolio of the scheme, the weights based on their proportion to the assets under management (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.
For G-Sec, state development loans among others, credit risk value would be assigned 13, while for AAA it would be 12 and would come down according to the ratings. For below investment grade I would be assigned as 1.
For example, if an open-ended short duration fund wants to invest in securities such that its weighted-average Macaulay Duration is less than or equal to 3 years and its weighted average credit risk value is 10 or more, it would be classified as a scheme with ‘Moderate Interest Rate Risk and Moderate Credit Risk’.
shall publish this matrix in their scheme wise Annual Reports and Abridged Summary. For existing schemes, Mutual Funds
shall rebalance their scheme portfolios in line with the applicable matrix by December 1, 2021.