Lesson 3 of 3 · 8 min
Reading the risk box
Every open-ended debt scheme displays a three-by-three grid showing the most interest-rate risk and the most credit risk it is permitted to take.
Because the two risks are independent, one number cannot describe a debt fund. So every open-ended debt scheme displays a small grid with one cell marked. The rows are interest-rate risk and the columns are credit risk, and the marked cell says how far the fund may go on each axis.
| Axis | Class | Threshold |
|---|---|---|
| Interest-rate risk | Class I — relatively low | Macaulay duration up to 1 year |
| Interest-rate risk | Class II — moderate | Macaulay duration up to 3 years |
| Interest-rate risk | Class III — relatively high | Any Macaulay duration |
| Credit risk | Class A — relatively low | Credit Risk Value of 12 or more |
| Credit risk | Class B — moderate | Credit Risk Value of 10 or more |
| Credit risk | Class C — relatively high | Credit Risk Value below 10 |
Read the marked cell as two statements. A fund at A-I may not take much of either risk. A fund at C-III may take a great deal of both. A fund at A-III is the interesting case: it can hold very long duration and still only high-quality borrowers, which is exactly the government-securities fund from the first lesson.
Working out what a debt fund can do to you
Which row is the fund's cell in?
Check yourself
1 / 3
Kabir asks
What do the rows and columns of the risk grid represent?
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