Chapter 7: Net Asset Value, Total Expense Ratio & Pricing Of Units

CHAPTER 7: NET ASSET VALUE, TOTAL EXPENSE RATIO & PRICING OF UNITS

In Order to Ensure Such Fair Treatment to all Investors, SEBI has Laid Down Certain Fair Valuation Principles.

Valuation-

NAV of the scheme will depend upon the value of the portfolio, which in turn, depends upon the value of the securities held in it. The valuation of these securities to determine the NAV has to be done as per guidelines laid down by SEBI and AMFI.

1. Traded Securities other than money market and debt securities:

•  The securities shall be valued at the last quoted closing price on the stock exchange.
•  When the securities are traded on more than one RSE, the securities shall be valued at the last quoted closing price on the SE where the security is principally traded. It is on the AMC to select the appropriate SE but the reasons for the selection should be recorded in writing.

2. Non-traded Securities’ other than money market and debt securities:

•  When a security is not traded on any SE for a period of 30 days prior to the valuation date, the script must be treated as a ‘non-traded’ scrip.
•  Non-traded securities shall be valued “in-good faith” by the AMC on the basis of appropriate valuation methods based on the principles approved by the Board of the AMC.

3. Value of Gold: the gold held by a gold exchange traded fund scheme shall be valued at the AM fixing price of London Bullion Market Association (LBMA) in US dollars per troy ounce for gold having a fineness of 965.0 parts per thousand.

4. Value of Silver: The silver held by a silver exchange traded fund scheme shall be valued at the AM fixing price of LBMA in US dollars per troy ounce for silver having a fineness of 999.0 parts per thousand.

Computation of Net Assets of Mutual Funds Scheme & NAV

1. NET ASSETS OF THE SCEME

Eg: Investors have bought 20 crore units of a mutual fund scheme at Rs. 10 each. The scheme has thus mobilized 20 crore units X Rs. 10 per unit i.e., Rs 200 crore. An amount of Rs. 140 crores, invested in equities, has appreciated by 10 percent. The balance amount of Rs 60 crore was placed in bank deposits. Interest and dividend received by the scheme is Rs 8 crore, scheme expenses paid is Rs 4 crore, While a Further Expense of Rs. 1 Crore is Payable.

Net Asset Value:

• Unit-holders’ Funds in the Scheme (Net Assets) + No. of outstanding Units
• In the above example, it can be calculated as: Rs 217 crore + 20 crore i.e., Rs 10.85 per unit.
• Alternate formula: (Total Assets minus Liabilities other than to Unit holders) + No. of outstanding Units.

MARK TO MARKET: The process of valuing each security in the investment portfolio of the scheme at its current market value is called ‘mark to market i.e., marking the securities to their market value.

The NAV is meant to reflect the true worth of each unit of the scheme because investors buy or sell units on the basis of the information contained in the NAV. If investments are not marked to market, then the investment portfolio will end up being valued at the cost at which each security was bought.

Valuation-

Case1: Assume an investor buys 100 Units when the NAV is Rs. 15 at FV of Rs. 10. Post the purchase, the numbers Will be:

Case 2: An Investor Redeems 100 units When the NAV is Rs. 15 at FV of Rs.10. Post the Redemption, numbers Will be:

• Issuing Fresh units at a price Lower than the NAV will Result in the Post issue NAV Coming Down for all Investor (Case 1).
• Redeeming units at price Lower than the NAV will Increase the NAV for the Remaining Investors (Case 2).

Total expenses in mutual fund scheme

Investment and Advisory Fees are charged to the scheme by the AMC. The details of such fees are fully disclosed in the Scheme Information Document.

Recurring Expenses: The AMC may charge the mutual fund scheme with recurring expenses some of which are:

•  marketing and selling expenses including agents’ commission, if any
•  brokerage and transaction cost
•  registrar services for transfer of units sold or redeemed
•  fees and expenses of trustees
•  audit fees
•  custodian fees
•  costs related to investor communication

Any expense other than the investment advisory fee and recurring expenses shall be borne by the asset management company or trustee or sponsors.

In case of an index fund scheme or exchange traded fund, the total expense ratio of the scheme including the investment and advisory fees shall not exceed 1.00 per cent of the daily net assets.

In case of open-ended schemes other than as specified for fund-of-fund and index fund schemes, the total expense ratio of the scheme shall not exceed the following limits:

In Case of Close Ended and interval Schemes,

1. The TER of Equity-Oriented Scheme (s) Shall not Exceed 1.25 percent of the Daily net Assets of the Scheme.
2. The TER of Schemes other than Scheme Specified Above Shall Not Exceed 1.00 Percent of the Daily Net Assets the Scheme.

Dividends and Distributable Reserves

SEBI guidelines stipulate those dividends can be paid out of distributable reserves. In the calculation of distributable reserves:

• All the profits earned (based on the accrual of income and expenses as detailed above) are treated as available for distribution.
• Valuation gains are ignored. But valuation losses need to be adjusted against the profits.
• That portion of the sale price on new units, which is attributable to valuation gains, is not available as a distributable reserve.

This conservative approach to calculating distributable reserves ensures that dividend is paid out of real and realized profits, after providing for all possible losses.

The trustees shall decide the quantum of dividend and the record date. With respect to dividends up to monthly frequency the trustees can delegate to the officials of the AMC to declare and fix the record date as well as the quantum of dividend. This would have to be ratified by the trustees in the immediately following Board meeting.

CONCEPT OF ENTRY AND EXIT LOAD AND ITS IMPACT ON NAV

Open-ended schemes is the ongoing facility to acquire new units from the scheme or sell units back to the scheme (re-purchase transaction).

Schemes are permitted to keep the re-purchase Price lower than the NAV. The difference between the NAV and re-purchase Price is called the “exit load”. If the NAV of a scheme is Rs 11. per unit, and exit load of 1% was charged, the re-purchase Price would be Rs. 111% on Rs. 11 i.e., Rs. 10.89.

• SEBI has banned entry load. So, the Sale Price is same as the NAV.
• While charging exit loads, no distinction will be made among unitholders on the basis of the amount of subscription.
• No exit load will be charged on bonus units and units allotted on reinvestment of dividend.
• Exit loads have to be credited back to the scheme immediately i.e.. they are not available for the AMC to bear selling expenses.
• Upfront commission to distributors will WISDO distributors will be paid by the investor directly to the distributor, based on his assessment of various factors including the service rendered by the distributor.

CHAPTER 1: Investment Landscape

CHAPTER 2 : Concept And Role Of A Mutual Fund

Chapter 3: Legal Structure Of Mutual Funds In India

Chapter 4: Legal And Regulatory Framework

Chapter 5: Scheme Related Information

Chapter 6: Fund Distribution & Channel Management Practices

Chapter 7: Net Asset Value, Total Expense Ratio & Pricing Of Units

Chapter 8: Taxation

Chapter 9: Investor Services

Chapter 10 : Risk, Return And Performance Of Funds

Chapter 11 : Mutual Fund Scheme Performance

Chapter 12 : Mutual Fund Scheme Selection