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  • What is the PRC
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How the PRC Matrix Helps You Understand Debt Mutual Funds

Learn how the PRC matrix of debt mutual funds can help in assessing risk levels.

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Article 1

If you invest in debt mutual funds, you may have received notifications from your fund house about the Potential Risk Class (PRC) matrix. This framework aims to help investors understand the maximum risk levels associated with debt mutual fund schemes, enabling more informed investment decisions.

What is the PRC matrix?

The PRC matrix is a classification system that indicates the highest level of risk a debt mutual fund can take in the future. It provides a clear picture of the potential risk that fund houses are willing to assume for their current and future investments, allowing you to evaluate the risk profile of different debt funds more effectively.

Key takeaways

  • The PRC matrix is quite transparent in illustrating the risk profile of the debt mutual fund and thereby facilitating a smart investment decision.
  • The matrix classifies the funds based on the level at which they can potentially assume the highest risk, enabling one to assess both the credit and interest rate risks.
  • Investor protection will be enhanced because the risk level is established, therefore you are in a position to select funds which are in correlation with your required risk temperament, thus keeping investment within the comfort zone.

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Understanding risk in debt mutual funds

Debt mutual funds face two main types of risks:

  1. Credit risk: This arises when the institution issuing bonds fails to make timely payments of interest or principal, causing the fund’s value to decline.
  2. Interest rate risk: Since bond prices and interest rates move in opposite directions, a rise in interest rates can lead to a fall in bond yields, reducing the Net Asset Value (NAV) of your investment.

Also read: What is the cash ratio

Categories of the PRC matrix

The PRC matrix categorises funds based on two risk parameters: interest rate risk and credit risk. Each risk parameter has three classes:


Interest rate risk

  • Class I: Lowest interest rate risk
  • Class II: Moderate interest rate risk
  • Class III: Highest interest rate risk


Credit risk

  • Class A: Lowest credit risk
  • Class B: Moderate credit risk
  • Class C: Highest credit risk

By combining these categories, the PRC matrix gives you nine possible classifications, ranging from A-I (lowest risk) to C-III (highest risk). For example, a fund classified as A-I has both low interest rate risk and low credit risk, while a C-III classification indicates a fund with the highest levels of both risks.

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How the PRC matrix categorises debt funds

The PRC matrix uses two measures to categorise debt funds:

1. Macaulay Duration (MD): This represents the weighted average time it takes for you to recover your investment through interest payments and principal repayments. The shorter the MD, the lower the interest rate risk.

  • Class I: MD up to 1 year (lowest interest rate risk)
  • Class II: MD up to 3 years (moderate interest rate risk)
  • Class III: Any other MD (highest interest rate risk)


2. Credit Risk Value (CRV): This is assigned by SEBI based on the credit rating of the securities within the fund. A higher CRV indicates a lower credit risk.

  • Class A: Securities with CRV of 12 or more (lowest credit risk)
  • Class B: Securities with CRV between 10 and 12 (moderate credit risk)
  • Class C: Securities with CRV below 10 (highest credit risk)

For example, government securities, which are considered safe, have a CRV of 13, while lower-rated or unrated securities have a CRV of 2.

Also read: What is a Treynor Ratio

Example of a PRC matrix classification

Interest Rate Risk (MD)

Class A (CRV > 12)

Class B (CRV 10-12)

Class C (CRV < 10)

Class I (MD ≤ 1 year)

A-I (Lowest risk)

B-I (Moderate credit risk, low interest rate risk)

C-I (Highest credit risk, lowest interest rate risk)

Class II (MD ≤ 3 years)

A-II (Moderate interest rate risk, low credit risk)

B-II (Moderate risk)

C-II (High credit risk, moderate interest rate risk)

Class III (MD > 3 years)

A-III (High interest rate risk, low credit risk)

B-III (High interest rate risk, moderate credit risk)

C-III (Highest risk overall)

Conclusion

Bringing the PRC matrix into existence by SEBI has given debt mutual fund investments a new layer of transparency and clarity. You would be in a better position to make the right decision while investing in mutual funds, as you now know how much risk a debt fund can take.

The Bajaj Finance Mutual Fund Platform has more than 1,000 that you can choose from. By using the mutual fund calculator on the platform, you will be able to compare mutual funds returns and choose an option that is best suited for you.

Frequently asked questions

What is the difference between the PRC matrix and the riskometer?

Riskometer is the level of risk a mutual fund has at present. It is calculated and updated every month. The PRC matrix is a representation of future view since it displays the maximum acceptable value by which the debt fund can take.

What are Macaulay Duration (MD) and Credit Risk Value (CRV) in the PRC matrix?

MD measures the average time it will take for you to get your money back. This is indicated by interest rate risk. CRV measures creditworthiness of the securities held in the fund, indicating credit risk.

How can the PRC matrix help me select a debt fund?

The PRC matrix reveals what is the maximum risk a fund can assume, which helps you match the fund’s risk profile to your risk tolerance level.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed.

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

Disclaimer

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

BFL does NOT:

(i) provide investment advisory services in any manner or form.

(ii) carry customized/personalized suitability assessment.

(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.

In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:

Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.


Disclosure
: Bajaj Finance Limited (BFL) is a distributor of Mutual Funds with ARN - 90319 and distributes mutual funds of Bajaj Finserv Asset Management Limited (BFSAMC). BFL receives commission towards distribution of mutual fund products. BFSAMC is a group company of BFL, carrying business on arm’s length basis without any conflict of interest and in accordance with the prevailing law / regulation.

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