Debt Mutual Funds: What is PRC Matrix and how does it help pick the right fund?

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debt mutual fund schemes due to these instances. The Securities and Exchange Board of India (SEBI) has come out with more stringent norms to put an end to such defaults bringing AMCs on their toes. Many AMCs ramped up their internal credit appraisal systems with focused manpower deployed into the job.

Investors have started probing more about the dependability of the debt funds since the fiasco. AMCs have multi-level filters today to pick fixed income securities. These measures have ensured high level of caution at the level of investors and fund houses.

SEBI, to address this concern, had introduced a practice of disclosing the Potential Risk Class (PRC) Matrix, a matrix which mutual fund houses are to disclose for each of their debt schemes on their fact sheet. In 2021, a SEBI circular made it mandatory for mutual funds to classify all debt schemes in terms of a Potential Risk Class (PRC) matrix. The matrix provides for a great framework to measure the maximum level of risk a fund can take.

It is a simple yet powerful 3*3 grid which reveals the credit quality of the fund. One axis measures the maximum interest rate risk (measured by Macaulay Duration (MD) of the scheme) while the other axis captures the maximum credit risk that the scheme intends to take at any point in time. These are the 2 key aspects which indicate the risk associated with a debt fund.

As per the circular, each debt scheme has to be placed in one of the grids available in the PRC matrix. The investor community has very little knowledge about PRC and it has not been published enough. The Credit Risk Value (CRV) of the scheme shall be the weighted average of the credit risk value of each instrument in the portfolio.