Class of Units
A group of units in a Category III AIF carrying its own rights — typically its own fee terms — assigned by size and timing of commitment; NAV is computed separately for each class or series.
In plain language
A Category III AIF usually has one portfolio but many kinds of investor: a sponsor putting in its mandatory stake, employees of the manager, a family office writing a small cheque, an institution writing a large one. Charging them all identically is rarely what anyone wants.
The workbook's solution is the class of units. The number of units an investor holds fixes its beneficial interest in the fund. Where a group of investors has differential rights — assigned by the quantum of commitment, the time period of the commitment, and the proportion of the commitment to total fund corpus — the manager issues that group a separate class.
How the units are divided into classes is at the discretion of the Investment Manager. Within a class, the manager can go one step further and create series to identify smaller groups.
How it works
The workbook's illustration (Chapter 8) — Classes A, B and C for investors (minimum Rs 1 crore), D, E and F for sponsor, manager's people and their friends and family:
| Class | Commitment | Management fee p.a. | Incentive fee |
|---|---|---|---|
| A1 | Rs 1 crore to < Rs 5 crore | 2.50% | — |
| A2 | Rs 5 crore to < Rs 10 crore | 2.10% | — |
| A3 | Rs 10 crore and above | 1.75% | — |
| B1 / B2 / B3 | same bands | 1.75% / 1.40% / 1.10% | 15% |
Class D goes to the sponsor, Class E to partners and employees of the manager, Class F to friends, family or relatives of the investment team.
NAV per class. NAV per unit is calculated separately for each class of units or series of units, rounded to four decimal places, because each class bears its own fees.
Where classes show up across the paper
- Drawdown schedules are set class-wise (Chapter 3).
- The PPM must state the classes to be issued (Chapter 4).
- A PPM audit reviews minimum subscription and management fees for each class, and whether the classes in existence match the PPM.
- Large investors seeking better terms under an MFN clause or side letter are usually given a separate class, so the manager does not breach its fiduciary duty to others.
- Unlike a PMS, a Category III AIF does not let an investor choose between fee structures: every class has a pre-determined fee structure.
A worked example
Workbook Example 6 — Fund SER, Year 1. Rs 50 crore raised; Class A1 (40% of commitments) pays a management fee of 1.50%, the other classes 2.00%, plus GST at 18%. Gross assets (total assets − liabilities) are Rs 64.60 crore.
Management fee by class:
A1: 40% × Rs 64.60 crore = Rs 25.84 crore × 1.50% = Rs 38,76,000 × 1.18 = Rs 45,73,680
A2: 20% × Rs 64.60 crore = Rs 12.92 crore × 2.00% = Rs 25,84,000 × 1.18 = Rs 30,49,120
Series NAV per unit:
A1: Rs 27,04,00,000 − Rs 1,20,00,000 (liabilities) − Rs 32,00,000 (expenses)
− Rs 45,73,680 (fee) = Rs 25,06,26,320 ÷ 2,00,000 units = Rs 1,253.1316
A2: Rs 13,52,00,000 − Rs 60,00,000 − Rs 16,00,000 − Rs 30,49,120
= Rs 12,45,50,880 ÷ 1,00,000 units = Rs 1,245.5088
Same portfolio, same starting price of Rs 1,000 — but A1 units are worth Rs 7.6228 more after one year purely because of the lower fee. In Year 2 the gap widens (Rs 1,498.5885 against Rs 1,480.2764 for A2), because A1's higher NAV gives it a slightly larger share of the fund.
Why NISM asks about it
Chapter 8 (Valuation) defines class of units and series, gives the A-to-F illustration and computes Series NAV in Example 6 — expect a question on why one class's NAV differs from another's. Chapter 3, Chapter 4, Chapter 5 (PPM contents and differential rights) and Chapter 6 (different management fee percentages for different classes) all rely on the idea, and Chapter 9 uses classes of units in its capital-gains-on-transfer example.
Common exam traps
- Classes share one portfolio but not one NAV. NAV per unit is calculated separately for each class or series.
- Categorisation into classes is the Investment Manager's discretion, but every class and its rights must be disclosed in the PPM.
- The investor does not choose a fee structure as in a PMS; each class has a pre-determined one.
- Differential rights have limits. They cannot make an investor liable to others, cannot give control of decisions (unless the investor sits on the Investment Committee), and cannot alter other investors' existing rights.
- Losses cannot be tilted by class. One large investor cannot be given priority over others when losses are distributed — see priority distribution model.
- Series sit inside a class, not the other way round.
Check yourself
1.A Category III AIF has issued several classes of units, with separate series within Class A2. How must its NAV per unit be computed?
- a)Once for the whole fund, rounded to two decimal places, and applied equally to every class
- b)Separately for each class, but not for series within a class, rounded to the nearest rupee
- c)Separately for each class of units or series of units, rounded up to four decimal places
- d)Only for the class with the highest Management Fee, since other classes are derived from it
Show the answer
Answer: (c) Separately for each class of units or series of units, rounded up to four decimal places
NAV per unit is the net value of the assets attributable to each class or sub-class, after its liabilities, contingencies, losses and expenses, divided by the units issued, ‘rounded upto four decimal places’. The workbook adds: ‘The NAV per unit shall be calculated separately for each class of units or a Series of units’. Series NAV is also ‘rounded upto four decimal places’.
- A single fund-wide NAV ignores differential fee structures. The workbook says ‘all classes of units or investors in the Fund may not derive the same Net Asset Value’.
- Series within a class get their own Series NAV. The Investment Manager allocates a unique number to each series of units so that the differential rights can be identified.
- No class serves as a base from which the others are derived.
2.A large investor insists on a Most Favoured Nation clause and a reduced management fee. How do most investment managers accommodate this without breaching their fiduciary duty to other investors?
- a)By keeping the side letter confidential from the other investors
- b)By creating a separate class of units with differential rights, issued to large investors
- c)By refusing all differential treatment, since side letters are prohibited
- d)By obtaining SEBI approval for each side letter before it is signed
Show the answer
Answer: (b) By creating a separate class of units with differential rights, issued to large investors
The manager has a fiduciary duty towards other investors in the fund and should ensure that they are not in breach of such fiduciary duty, in an attempt to provide differential rights to some large investors. To avoid such a breach of fiduciary duty, most investment managers create a separate class of units with differential rights, issued to large investors. This converts a private preference into a published structural difference — and earlier chapters confirm that managers have the right to charge different management fee percentages to different classes of units or investors.
Where this is taught
- Series XIX-B · Chapter 8: Valuationintroduced here
- Series XIX-C · Chapter 14: Valuationintroduced here
- Series XIX-E · Chapter 12: Valuationintroduced here
Related terms
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- UnitThe share of a mutual fund scheme that an investor's money is translated into — typically carrying a face value of Rs 10, and worth whatever the scheme's NAV is on the day.
- Most Favoured Nation (MFN) ClauseA protection right a large investor negotiates so that no other investor in the Category III AIF is placed in a better position — usually delivered through a separate class of units.
- PPM AuditThe mandatory yearly audit of a Category III AIF's compliance with the terms of its PPM, with findings reported to the trustee or board or designated partners, the manager's board and SEBI within 6 months of year end.
- Priority Distribution ModelA structure in which one class of investors bears more loss than its pro-rata share because another class has priority in distribution — no Category III AIF scheme may adopt it.
- Series NAVThe NAV of one series of units within a class: Series Assets less Series Liabilities and Series Expenses on a Valuation Day, divided by that series' units and rounded to four decimals.
- Pari-passu rightsThe rule that differential rights offered to select AIF investors must not harm others: no liability to other investors, no control, no change to others' rights, and full disclosure in the PPM.
- Transaction ExpensesCosts of buying, selling or disposing of a Category III AIF's investments — brokerage, depository and custodian transaction charges, STT and exchange charges — borne by the fund and allocated pro-rata across classes.
- Valuation DayThe day, fixed in advance by a Category III AIF and disclosed in its offer documents, as on which its NAV is determined — at least monthly for open-ended funds and quarterly for close-ended ones.
- Beneficial InterestAn investor's share in a Category III AIF represented by the units it holds — the basis on which units are allocated and distributions or liquidation proceeds are paid out.
- SeriesA sub-division within a class of a Category III AIF's units — distinct and exclusive from any other series of the same class, created to identify a different set of investors, with its own NAV.