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Valuation of Mutual Funds

What is NAV?

NAV or Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also changes daily. The NAV per unit of all mutual fund schemes is updated on AMFI’s website and the Mutual Funds’ website by 9 p.m. that very day.

NAV= Market or Fair Value of Scheme's investments + Current Assets - Current Liabilities and Provision NAV / Number of Units outstanding under Scheme on the Valuation Date

All the Asset Management Companies value the investments of their Schemes as mandated by the principles of ‘fair valuation’ or such other principles/regulations as be prescribed by SEBI from time to time. This is done to ensure fair treatment to all investors including existing investors as well as investors seeking to purchase or redeem units of mutual funds in all schemes at all points of time.

This policy and procedures are reviewed at least once in a financial year by an internal auditor. The periodic report from the internal auditor verifying accuracy and authenticity of valuation of investments in accordance with this policy is presented before the Board of AMC and Trustee.

Whenever there is an investment in new type of securities / assets other than mentioned in existing policy, it shall be made only after establishment of the valuation methodologies for such securities / assets by the Valuation Committee with the approval of the Board of the AMC and Trustee.

Underlying Valuation Methodology

The valuation of investments shall be based on the principles of fair valuation i.e. valuation should reflect the realizable value of the securities/assets.

Investment in any new type of security shall be made only after establishment of the valuation methodology for such type of security with the approval of the AMC Board.

The valuation norms of each of the asset class is as follows:

1. Valuation of Traded Securities - equity / equity related security (such as convertible debentures, equity warrants, etc.)/preference shares

  • On a valuation day, these securities will be valued at the last quoted closing price on the National Stock Exchange of India Limited (NSE). In case a security is not traded on the NSE, it will be valued at the last quoted closing price on the Bombay Stock Exchange Limited (BSE). If a security is not traded on any stock exchange on a valuation day, the last quoted closing price on NSE or BSE (in the order of priority) on the earliest previous day would be considered. Such day should not be more than thirty days prior to the valuation day.
  • If the security cannot be priced as per the above-mentioned criteria, then the valuation will be determined by the Valuation Committee based on the principles of fair valuation. During this process, the Valuation Committee will also consider if the price of the security is available on any recognized stock exchange other than the NSE and BSE and if the same is reliable/ can be considered for fair valuation.

Thinly traded securities

A thinly traded security as per valuation norms laid by the SEBI When trading in an equity / equity related security (such as convertible debentures, equity warrants, etc.)/preference shares in a month is less than Rs.5 lakh and the total volume is less than 50,000 shares.

In order to determine whether a security is thinly traded or not, the volumes traded in all recognised stock exchanges in India may be considered. Where a stock exchange identifies the “thinly traded” securities by applying the above parameters for the preceding calendar month and publishes/provides the required information along with the daily quotations, the same may be used by the mutual fund.

In case the share is not listed on the stock exchanges that provide such information, then it will be mandatory for the mutual fund to make its own analysis in accordance with the above criteria to ascertain whether such securities are thinly traded. After this, the securities would be valued accordingly.

Suspended equity securities

If trading in an equity security is suspended up to 30 days, then the last traded price would be considered for valuation of that security. If the suspension exceeds a period of 30 days, then the Valuation Committee will decide the valuation norms to be followed and such norms would be documented and recorded.

a) Based on the latest available Balance Sheet,

Net Worth per share = [share capital + reserves (excluding revaluation reserves) – Misc. expenditure and Debit Balance in P&L A/c] / Number of Paid up Shares.

b) Average capitalisation rate (P/E ratio) for the industry based upon either BSE or NSE data shall be taken and discounted by 75%, which means that only 25% of the Industry average P/E shall be taken as capitalisation rate (P/E ratio). For this purpose, Earnings per share of the latest audited annual accounts will be considered.

c) The net worth per share calculated as above will be further discounted by 10% for ill-liquidity to arrive at the fair value per share.

Unlisted Equity Shares

Based on the latest available audited balance sheet, net worth shall be calculated as lower of (i) and (ii) below:

(i) Net worth per share = [share capital plus free reserves (excluding revaluation reserves) minus Miscellaneous expenditure not written off or deferred revenue expenditure, intangible assets and accumulated losses] divided by Number of Paid up Shares.

Valuation of Exchange Traded Fund (ETF)

ETFs are - valued at closing market prices available on the stock exchange i.e. NSE. If the closing price is not available on NSE then the closing prices available on BSE is considered. If price at both NSE and BSE are not available, the latest NAV of the fund is considered.

Valuation of Debt & Money Market Instruments

Asset Management Companies usually appoint independent external valuation agencies approved by AMFI, such as ICRA and CRISIL Ltd, an, to conduct the daily valuation of all debt and money market instruments by following all the procedures as laid below and provide the daily MTM prices for valuation with necessary justification. Securities are then valued at the average of the prices provided by these 2 valuation agencies.

  • Valuation of money market and debt securities with residual maturity of < 60 days:

    All money market and debt securities, including floating rate securities, with residual maturity of up to 60 days shall be valued at the weighted average price at which they are traded on the valuation day. When such securities are not traded on a valuation day, they shall be valued on amortization basis.

  • Valuation of money market and debt securities with residual maturity of > 60 days

    All money market and debt securities, including floating rate securities, with residual maturity of more than 60 days shall be valued at weighted average price at which they are traded on the valuation day.

Frequently asked Questions

(1) What is NAV?

NAV or Net Asset Value is the fair market value per unit of a Mutual Fund scheme investment.

(2) How are the equity shares valued?

The traded equity securities will be valued at the last quoted closing price on the National Stock Exchange of India or the Bombay Stock Exchange.

(3) How are the debt securities valued?

All money market and debt securities are valued at the weighted average price at which they are traded on the valuation day.

(4) How are the ETFs valued?

Exchange Traded Funds are valued at closing market prices available on the stock exchange, NSE or BSE.

(5) Who decides the valuation methodologies for the underlying securities?

SEBI decides the valuation methodology of the underlying securities. This policy and procedures of the valuation are reviewed at least once by the AMC in a financial year by an internal auditor.

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