The Securities and Exchange Board of India (SEBI) has released a circular asking mutual fund houses to classify all debt schemes on the basis of Potential Risk Class (PRC) matrix based on interest rate risk and credit rate risk.
Last year in the month of October, SEBI had revamped the product labelling in mutual funds Risk-o-Meter and had asked the fund houses to indicate risk taken by the scheme as on the end of the month.
Although the Risk-o-Meter stipulated by the SEBI reflected the risk of the schemes at a given point in time, there was a need for disclosure of the maximum risk the fund manager can undertake in the scheme.
That said, Sebi based on the recommendation of the Mutual Fund Advisory Committee (MFAC) has decided that going forward all debt schemes should also be classified in terms of a PRC matrix consisting of parameters based on maximum interest rate risk and credit rate risk. For the alignment purpose, existing schemes along with provision to this circular will be placed in 9-cell table that will highlight the interest and credit risk associated with the scheme.
With this classification the mutual fund investors can make informed decision on the basis of three classification from relatively low interest rate risk and credit rate risk, moderate interest rate risk and credit rate risk to relatively high interest rate and credit rate risk.
“It was the need of the hour as it is very difficult for individual investors to perceive the risks in debt mutual funds. The biggest risk an investor faces is that he would have to constantly monitor the portfolio. Here with this matrix, an investor is ensured that going forward too the fund house will have to stick to the mandate in terms of duration as well as credit risk,” said Juzer Gabajiwala, Director, Ventura Securities.
Going forward, mutual fund houses should inform the unitholders the subsequent changes if any in one of the 9 cells via SMS and by mentioning link on their website about the said change, he said.
“It is not possible for investors to monitor portfolios every month and ascertain where duration or has increased. All this will increase the transparency, for a simple reason that any change is going to result in a fundamental change of attribute and the fund house will need to give an exit option to the investor,” added Gabajiwala.
Debt funds primarily carry two risks — duration risk and credit risk. Through this new matrix, SEBI has now given a new tool to separately understand the two risks in more granular details. Over period of time, once investors starting adopting to new such measures, there would be far closer connect between their expectations and actual outcomes, as compared to past.
“This is another in series of progressive measures in recent times to further bring out transparency and ease in understanding debt mutual funds. Investors can now evaluate both present and potential future possible risk of the fund in combination of risk-o-meter and potential maximum risk matrix respectively,” explained Mahendra Jajoo, CIO-Fixed Income, Mirae Asset Investment Managers.
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