Mutual funds invest primarily in equity and debt instruments. Some funds may also invest in other asset classes like Gold, REITs, InvITs etc. Equity funds invest primarily in equity and equity related securities. Debt funds invest in money market and debt instruments. Hybrid funds invest in both, equity instruments and debt instruments, along with other asset classes depending on the type of the fund. The market value of a unit of mutual fund is expressed in terms of Net Asset Value (NAV). 

What is NAV?

Mutual funds are purchased or redeemed (sold) on the basis of NAV. NAV is calculated by dividing net assets of a fund by the number of units outstanding. Net asset of a fund is the market value of all the underlying securities of the fund minus the liabilities of the fund. The liabilities of the fund are monies owed to lenders, charges and fees, including the fund expenses. Next, we will discuss how market values of different securities of a fund are calculated.  

Valuation of equity instruments

Valuation of equity shares or equity market instruments in a mutual fund is done on the basis of SEBI’s mutual fund valuation guidelines. Below are some key valuation guidelines. 

The valuation of traded equity or equity related instruments on a particular day will be based on the closing price of the security in NSE. If a security is not traded on NSE, the closing price on BSE will be used for valuation.

If a security has not traded on either NSE or BSE on a particular day, then the closing price of the earliest previous day will be used for equity valuation.

Non traded or thinly traded equity shares valuation will be done on the basis of the following:-

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.

Valuation of non listed equity shares will done on the basis of the following SEBI guidelines-

Computation of Net worth per share as lower of (a) and (b): 
                                                                 
(a)

i) Net worth of the company = Paid up share capital + Reserves other than Revaluation reserve - Miscellaneous expenditure not written off or deferred revenue expenditure, intangible assets and accumulated losses. 

ii) Net worth per share = (Net worth of the company / Number of paid up shares). 

(b)

 i) Net worth of the company = Paid up capital + Consideration on exercise of Option/Warrants received/receivable by the company + free reserves other than Revaluation reserve - Miscellaneous expenditure not written off or deferred revenue expenditure, intangible assets and accumulated losses. 

ii) Net worth per share = (Net worth of the company/ {Number of paid-up shares + number of shares that would be obtained on conversion/exercise of outstanding warrants and options}). If the net worth of the company is negative, the share should be marked down to Zero.

Market values of traded open option contracts shall be determined with respect to the exchange on which contracted originally, i.e., an option contracted on the National Stock Exchange (NSE) would be valued at the settlement price on the NSE. The price of the same option series on the Bombay Stock Exchange (BSE) cannot be considered for the purpose of valuation, unless the option itself has been contracted on the BSE.


Valuation of debt instruments

Below are some key guidelines for valuation of debt instruments. Investors should note that SEBI has changed debt valuation regulation recently. The guidelines below are in accordance with latest guideline provided by SEBI. 

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 instruments and money market instruments following SEBI’s guideline.
 
According to SEBI’s guidelines, debt instruments and money market securities of all maturities will be valued based on the marked to market approach. Debt valuation will be done by the AMFI approved credit rating agencies. Previously, valuation of debt market instruments and money market instruments with maturities of less than 30 days was done on the basis of amortization method. But according to the latest guidelines marked to market approach will be used irrespective of maturities.

For repo, tri party repo (TREPS) and short term deposits, the fund house can follow amortization based valuation i.e. average yield of such securities divided by 360 days.