Sebi renews the classification of debt UCITS with a new risk matrix
In a circular released today, the Securities and Exchange Board of India (Sebi) published a risk classification matrix for debt mutual funds that takes into account both credit risk and rate risk. of interest. The matrix fills a long-standing gap in regulation that allowed fund companies to hold high credit risk securities in debt programs defined only by duration, as had happened in some of the frozen Franklin Templeton programs April 23, 2020. Credit risk is the risk of default. and downgrades due to the inability of a bond issuer to repay the debt fund. Interest rate risk is the risk of bond prices falling due to increases in interest rates. The risk matrix will consist of 9 cells classified according to these two parameters. The risk classification will range from AI (lowest risk to credit and interest rates) to CIII (highest risk to credit and interest rates). Collective investment companies will have to implement the new matrix by December 1, 2021.
According to Sebi, the interest rate risk will be classified into 3 buckets. The lowest risk compartment called Class I, can have a Macaulay (MD) duration up to a maximum of 1 year, the moderate risk compartment (Class II) can have an MD up to 3 years and the third (Class III) can have MD above 3 years. The regulator has also provided that class I plans can have debt securities with a maximum residual maturity of 3 years and class II plans with a maximum residual maturity of 7 years. No maximum residual maturity has been set for Class III. The standard is likely to allow investors to identify short-term compartment systems holding securities with high residual maturity, as has happened in some of Franklin Templeton’s mutual funds.
Credit risk will be classified into 3 compartments in the matrix. Credit Risk Value (CRV) greater than 12, CRV greater than 10 and CRV less than 10. The CRV is the weighted value of the credit risk of each instrument according to the credit rating. Mutual funds must display the risk cell on their plan disclosure documents (SIDs) and other important documents.
Once a system is placed in a particular cell, a change of cell would constitute a change in fundamental attributes that would involve giving existing investors the option of exiting without paying an exit charge. However, the regulator has made certain arrangements for mutual funds holding perpetual bank bonds in the risk classification exercise.
“Sebi has taken several incremental steps to improve the labeling and risk framework for debt mutual funds and this is the latest of those steps. Investors will be able to better understand the product they are investing in. with this matrix, ”said Mahendra Kumar Jajoo. , Chief Investment Officer (CIO), Mirae Asset Investment Managers (India) Pvt Ltd.
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