Series

A Category III AIF gives different investors different terms. A larger commitment usually buys a lower management fee.

It records those differences in layers. First come classes of units. Then, inside a class, come series.

The workbook's definition is short. A series of a particular class of units is distinct and exclusive from another series of the same class. The Investment Manager may create a series within a class in order to identify different investors.

Why bother? Because once two sets of investors in the same class pay different fees, they cannot share one NAV. Different fees mean different expenses, which mean different values per unit.

So the fund calculates the NAV per unit separately for each class of units or each series of units. The series is the smallest unit of account in a Category III AIF.

The definition and the illustration (Chapter 12, section 12.8). A Series of a particular Class of units is distinct and exclusive from another series of the same Class. In order to identify different classes of investors, the Investment Manager may create a series within the same class of units.

The workbook's own illustration: at the first close, all investors making capital commitments of more than INR 5 crore and less than INR 10 crore can be allocated a distinct Series, such as Class A2.

The NAV rule. NAV per unit is obtained by dividing the net value of assets attributable to each class or sub-class of units, reduced by the liabilities, contingencies, losses and expenses attributable to that class or sub-class, by the total number of units issued — rounded up to four decimal places. And it is calculated separately for each class of units or a Series of units.

How a series is identified. The Investment Manager allocates a unique number to each series (section 12.10). The workbook's Fund SER illustration shows the convention:

Total commitments INR 50 crore. Note what the table is doing: the series numbers run in blocks within a class, and the management fee is attached at series level.

Series NAV. Section 12.10 defines Series NAV as the NAV of each series of units within a particular class, equal to Series Assets less Series Liabilities and Series Expenses on the Valuation Day, rounded to four decimal places. NAV per unit of a series is its Series NAV divided by the number of units issued in that series. Series Assets are allocated as:

Series Assets = Total Assets of Fund x Opening Series NAV
                -------------------------------------------
                Total of all Opening Series NAV in the Fund

The Opening Series NAV is the Series NAV on the Valuation Day immediately before the current one. For a newly issued series, the Opening Series NAV on its first Valuation Day equals the amount drawn down against issuance of its units. Series Liabilities are allocated among all series in proportion to Opening Series NAV, while expenses attributable to a specific series are borne only by that series.

Why the fee sits at series level. Expenses in relation to each series comprise fund expenses as determined by the differential rights offered to that series under the Contribution Agreement. Lower fee, lower Series Expenses, higher Series NAV per unit — which is exactly why a separate series exists rather than a note in a register.

The investors are illustrative; the commitment band, the unit price, the fee rates and the four-decimal rounding are the workbook's own Fund SER illustration.

Fund SER is a Category III AIF that raises INR 50 crore of commitments, issuing units at Rs 1,000 each.

Two investors, one class, two series. Mr Deshpande commits Rs 6 crore and Mrs Nair commits Rs 12 crore. Under the workbook's illustration, investors committing more than INR 5 crore and less than INR 10 crore are allocated a distinct series — so Mr Deshpande goes into Class A2 Units: Series A2001 – A2010 and Mrs Nair, above the band, into Class A1 Units: Series A1001 – A1020.

What the split is worth in rupees. Class A1 pays a management fee of 1.50%; Class A2 pays 2.00%. Across the whole Class A1 block of Rs 20 crore:

At 1.50%:  Rs 20,00,00,000 x 1.50% = Rs 30,00,000 a year
At 2.00%:  Rs 20,00,00,000 x 2.00% = Rs 40,00,000 a year
Difference                          = Rs 10,00,000 a year

Rs 10 lakh a year of expense cannot be averaged across both sets of investors. It has to land on the series that incurred it, as Series Expenses.

So the NAVs diverge. Series A1001 – A1020 has 2,00,000 units and Series A2001 – A2010 has 1,00,000 units. Suppose on a Valuation Day the arithmetic gives:

Same portfolio, same Valuation Day, Rs 5.00 per unit apart — entirely because of the fee attached to the series. On Mrs Nair's 1,20,000 units that is Rs 6,00,000 of value she would have lost had she been put in the wrong series.

Why four decimals. The NAV per unit is rounded up to four decimal places, not two. On 2,00,000 units, a difference in the fourth decimal is Rs 20 — small, but a series-level allocation carried out to two decimals would misallocate it every Valuation Day.

The Series Assets, Series Liabilities, Fund Expenses, fee rates, commitments and unit counts above are the workbook's own Fund SER Year 1 figures; the Series NAVs and NAV per unit are worked here from them, because the stored copy of the workbook's Year 1 Series NAV table is partly unreadable.

Chapter 12, section 12.8 defines a Series and gives the first-close illustration; section 12.10 (Computation of NAV for a Category III AIF vs NAV attributable to a series of units) builds Series NAV, Series Assets, Series Liabilities, Series Expenses and Opening Series NAV on top of it and works Fund SER through two years. Chapter 12 carries 10% of the paper.

Expect: the definition (distinct and exclusive from another series of the same class), why a manager creates one (to identify different investors), that NAV per unit is computed separately for each class or series, the four decimal places, and the Fund SER table's series-numbering convention. Computation questions hand you Series Assets, Liabilities and Expenses and ask for Series NAV per unit.

• A series sits inside a class; it is not a class. Class A1 and Class A2 are classes; Series A1001 – A1020 is a series within Class A1. The workbook's illustration calls the new series "such as Class A2", which is exactly where the confusion starts.
• Distinct and exclusive is relative to the same class. The definition compares a series with another series of the same class, not with every series in the fund.
• Four decimal places, rounded up. Two decimals is the mutual fund habit, not this rule.
• Series NAV is net of Series Liabilities and Series Expenses. Stopping at Series Assets is the standard distractor.
• A new series' Opening Series NAV is the amount drawn down, not the commitment and not the previous series' NAV.
• Series-specific expenses are borne only by that series. General expenses are allocated across all series in proportion to Opening Series NAV. Two different allocation rules in one computation.
• This is not a series of a close-ended scheme launched in tranches, and not a bond series. It is a fee-and-rights sub-division of a class of AIF units.