Debt fund risks to be highlighted

09 Jun 2021

In its efforts to enable investors to evaluate potential future risks in funds they invest in; SEBI issued a circular on June 7, 2021. Here is what investors can expect from this development:

  1. Introduction of Potential Risk Class Matrix for debt schemes based on Interest Rate Risk and Credit Risk
  2. Mutual Funds to indicate risk taken by schemes as on the end of the month
  3. Risks taken to be captured by the specified Risk-o-Meter to indicate the actual risk in the portfolio taken by the fund manager
  4. Investors will be able to take informed decisions with current risk level as indicated by Risk-o-Meter and the maximum risk the fund manager can take in the scheme
  5. Potential risk grid with credit risk on x-axis and interest rate risk on y-axis to follow 3 grade labelling with; relatively low, moderate and relatively high for the parameters making up for a 3 X 3 grid box.
  6. The grid scoring will have Credit Risk Value (CRV) that follows a high score of 13 for G-sec/SDL/Repo etc and lowest of 1 for below investment grade bond
  7. The interest rate risk will be measured in terms of Macaulay Duration) as Class I, where MD is less than 1 year, Class II where MD is less than 3 years and Class III where MD could be anything.
  8. This move is expected to plugs the loopholes in debt fund categorisation
  9. This new rule will come into effect from December 2021

For more details look up the circular at https://www.sebi.gov.in/legal/circulars/jun-2021/circular-on-potential-risk-class-matrix-for-debt-schemes-based-on-interest-rate-risk-and-credit-risk_50440.html

 

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