Your Guide to the Debt Fund Risks: Understanding the PRC Matrix
So, we've had a good chat about the different types of debt funds and how to match them to your goals using the simple questions of TIME and TRUST.
This brings us to a new question. When you look at a fund, how can you quickly know how much risk a particular fund carries? We've all seen the "Risk-o-Meter" in mutual fund documents, which shows if a fund is 'Low', ‘Low to Moderate’, 'Moderate', ‘Moderately High’, ‘High’ or 'Very High' risk.
But for debt funds along with the riskometer, the regulator SEBI has given us an even more helpful tool. Think of it as a detailed "risk report card." It's called the Potential Risk Class (PRC) Matrix.
My promise to you is that by the end of this post, this matrix will seem simple, and you’ll feel much more confident looking at it.
What is this 'Report Card'?
The PRC Matrix is just a 3x3 grid. Its only job is to tell you about the two most important risks a debt fund takes: Interest Rate Risk and Credit Risk.
Let's look at these two risks one by one.
Risk #1: Interest Rate Risk (The See-Saw Effect)
This is the trickiest part of debt investing, so let's make it simple.
When you buy a bond, you're lending money at a certain interest rate. But what happens if the interest rates in the whole country change?
It works like a see-saw:
- When interest rates in the economy go UP, the price of older bonds that pay a lower interest rate goes DOWN.
- When interest rates in the economy go DOWN, the price of older bonds that pay a higher interest rate goes UP.
Need a simple example? Imagine you buy a special "government savings bond" for ₹1,000 that pays you ₹70 of interest every year (i.e., 7% interest rate). The next month, the government announces a new savings bond that pays ₹80 of interest (i.e., 8% interest rate) for the same ₹1,000 investment.
Suddenly, your older 7% bond looks less attractive. Why would anyone buy that 7% bond when they can get a new one saving bond that pays 8%?
This is Interest Rate Risk. The PRC Matrix shows this risk on its vertical (up-and-down) axis with three levels: I, II, and III. Level I is relatively low risk, and Level III is relatively high risk.
Risk #2: Credit Risk (The 'Will I Get Paid Back?' Risk)
This one is much easier to understand. Imagine you lend money to a friend. There's always a small risk he/she might face a tough situation and have trouble repaying you. Credit risk is the same idea applied to companies.
Companies are given "credit ratings" by agencies, just like we get a credit score. A financially strong and stable company gets a high rating (like AAA). A company on shakier ground gets a lower rating (AA or below rated)
The PRC Matrix shows this risk on its horizontal (left-to-right) axis with three levels: Class A, Class B, and Class C.
- Class A: The fund lends to the borrowers such as the government or top-rated companies.
- Class B: The fund has a bit more credit risk compared to funds that fall in Class A but lesser than Class C.
- Class C: The fund takes on the highest credit risk by lending to AA or below rated companies.
Putting It All Together: Reading the 3x3 Grid
Now, let's look at the grid. Remember, every debt fund has to tell you which box it fits into.
The position of the funds on the grid can change based on the level of risk of the fund and also on how the fund is managed by the fund manager. The above table is just laid out to give a snapshot of how the various funds are positioned based on the funds launched by different Asset Management Companies (AMCs).
Why Does This 'Report Card' Matter to You?
This isn't just theory. The PRC Matrix is a useful and practical tool as defined by SEBI.
- It gives you a clear picture of risk without any complicated jargon.
- It lets you compare two funds quickly and easily.
- It helps you avoid mistakes, like choosing a fund with high interest rate risk (a 'III' category fund) for a short-term goal.
I encourage you to look up any debt fund you're interested in and find its PRC Matrix. You'll now know exactly what you're looking at.
In our next blog, we’ll take one final step and look under the hood. We’ll see what kind of specific bonds and securities these different funds actually buy to fit into these categories.
Disclaimer - Please note that this article or document has been prepared on the basis of internal data/ publicly available information and other sources believed to be reliable. The information contained in this article or document is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party in any manner. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article or document.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Published on Sept 9th, 2025