SEBI does not define Macaulay duration; each scheme's document has to explain it. In plain terms, it is roughly the average number of years a fund waits to get its money back. More exactly, it is the weighted average time, in years, until a bond's interest and principal (the amount lent) arrive. Each payment is weighted by its present value, what it is worth today. SEBI works out a fund's figure as the average of its holdings' durations, weighted by each holding's share of the fund.
SEBI uses it to measure interest-rate risk: the chance that a rate change alters the value of the bonds a fund holds. The longer the duration, the higher the risk score. The riskometer is the risk label SEBI makes every fund show, on six levels from Low to Very High, checked every month. In its formula, up to half a year of duration scores 1. Up to a year scores 2, then one more per year to 6 above 4 years.
The Potential Risk Class (PRC) matrix is a 3 × 3 grid, so every debt scheme sits in one of 9 cells. Rows set maximum duration: Class I up to 1 year, II up to 3 years, III any. Columns cap credit risk, the chance a borrower pays late or does not pay back, using a credit risk value per holding. Government securities and cash score 13, AAA bonds 12, AA+ 11 and AA 10, falling to 1 at the bottom of the scale. So a higher credit risk value means lower credit risk. Class A needs a fund average of 12 or more, B 10 or more, and C is below 10.
The fund house picks the cell, which is a ceiling, not a target. SEBI treats a move to a riskier cell as a fundamental attribute change, a change to a basic feature of the scheme. You must be told in writing. You may then sell at the NAV with no exit load, a fee some funds charge for selling within a set time.
