NISM Series V-D · Chapter 7: Net Asset Value, Total Expense Ratio and Pricing of units

L1 · Foundation

Foundation — Fair valuation, net assets and how NAV is built

Why SEBI wrote ten fair valuation principles, how traded and non-traded securities are valued, how the balance sheet of a scheme turns into net assets, and the two formulas that give NAV — worked through the chapter's own Rs 200 crore example.

15 min read · Worth 3% of the paper · Written from pages 143–160 of the official NISM workbook · Updated 18 September 2026

7.1 Why fair valuation exists at all

Start with the thing that makes a mutual fund different from a company. "An investor in a mutual fund scheme is the beneficial owner of the units one has bought... the ownership of the mutual fund scheme is collectively in the hands of all the investors at any point in time. At the same time, the investors can sell their units and new investors can buy. Thus, periodically, the ownership could also change. In such a case, it becomes very important that any investor in the scheme gets a fair price for one's investments."

That is the whole problem in two sentences. Every day, some people are walking in and some are walking out — and they all transact at one number, the NAV. If that number is wrong, one group is paid at the expense of the other. Nobody has to cheat for the harm to happen; a careless valuation is enough.

"The asset management companies are required to compute and carry out a valuation of investments... in accordance with the investment valuation norms specified in the Seventh Schedule of SEBI (Mutual Funds) Regulation 2026. The primary objective... was to ensure fair treatment to all investors including existing investors as well as investors seeking to purchase or redeem units... At the same time, the valuation principles also address the mispricing risk and reduce the vulnerability of short-term debt-oriented schemes to redemption pressure."

The ten principles of fair valuation

Principle 1 — fair value means realizable value. "The valuation of investments shall be based on the principles of fair valuation i.e., valuation shall be reflective of the realizable value of the securities/assets. The valuation shall be done in good faith and in true and fair manner through appropriate valuation policies and procedures."

Principle 2 — a method before an investment. "The policies and procedures approved by the Board of the Asset Management Company shall identify the methodologies that will be used for valuing each type of securities/assets held... Investment in new type of securities/assets by the mutual fund scheme shall be made ONLY AFTER establishment of the valuation methodologies for such securities with the approval of the Board of the asset management company."

Principle 3 — consistency, plus a plan for the abnormal day. "The assets... shall be consistently valued according to the policies and procedures. The policies and procedures shall describe the process to deal with exceptional events where market quotations are no longer reliable for a particular security."

Principle 4 — periodic review, and an annual independent audit. "The asset management company shall provide for the periodic review of the valuation policies and procedures... The Board of Trustee and the Board of asset management company shall be updated of these developments at appropriate intervals. The valuation policies and procedures shall be regularly reviewed (AT LEAST ONCE IN A FINANCIAL YEAR) by an INDEPENDENT AUDITOR."

Principle 5 — conflict of interest. The policies "should seek to address conflict of interest."

Principle 6 — where the policy is published. "Disclosure of the valuation policy and procedures (with regard to valuation of each category of securities/assets where the scheme will invest, situation where these methods will be used, process and methodology and impact of implementation of these methods, if any)... shall be made in STATEMENT OF ADDITIONAL INFORMATION, on the website of the asset management company/mutual fund and at any other place SEBI may specify."

Principle 7 — the AMC owns the outcome, not just the process. "The responsibility of true and fairness of valuation and correct NAV shall be of the ASSET MANAGEMENT COMPANY, IRRESPECTIVE OF DISCLOSURE of the approved valuation policies and procedures i.e., if the established policies and procedures of valuation do not result in fair/appropriate valuation, the asset management company SHALL DEVIATE from the established policies and procedures in order to value the assets/securities at fair value, provided that any deviation... may be allowed with appropriate reporting to Board of Trustees and the Board of the asset management company and appropriate disclosures to investors."

This is the most important principle in the section. "We followed our written policy" is not a defence. If the policy produces the wrong answer, the AMC is required to depart from its own policy — and then report and disclose the departure.

Principle 8 — detect and prevent. "The asset management company shall have policies and procedures to detect and prevent incorrect valuation."

Principle 9 — audit trail. "Documentation of rationale for valuation including INTER SCHEME TRANSFERS shall be maintained and preserved... as per Seventh Schedule... to enable audit trail."

Principle 10 — look at every public platform. "In order to have fairness in the valuation of debt and money market securities, the asset management company shall take into consideration prices of trades of SAME SECURITY OR SIMILAR SECURITY reported at ALL AVAILABLE PUBLIC PLATFORM."

And the tie-breaker: "a mutual fund may value its investments according to the Valuation Guidelines notified by SEBI. In case of any conflict between the Principles of Fair Valuation and Valuation Guidelines, the PRINCIPLES OF FAIR VALUATION detailed above SHALL PREVAIL."

How individual securities are actually valued

Traded securities (other than money market and debt)

"The securities shall be valued at the last quoted closing price on the stock exchange."
"When the securities are traded on more than one recognised stock exchange, the securities shall be valued at the last quoted closing price on the stock exchange where the security is PRINCIPALLY TRADED. It would be left to the asset management company to select the appropriate stock exchange, but the REASONS FOR THE SELECTION SHOULD BE RECORDED IN WRITING." There is no objection to "all scrips being valued at the prices quoted on the stock exchange where a majority in value of the investments are principally traded."
"Once a stock exchange has been selected... the asset management company shall record reasons for the CHANGE of the exchange in writing."
"When on a particular valuation day, security has not been traded on the selected stock exchange, the value at which it is traded on another stock exchange may be used."
"When a security is not traded on any stock exchange on a particular valuation day, the value at which it was traded... on the earliest previous day may be used provided such date is NOT MORE THAN THIRTY DAYS PRIOR to the valuation date."

Non-traded securities

"When a security is not traded on any stock exchange for a period of THIRTY DAYS prior to the valuation date, the scrip must be treated as a 'non-traded' scrip."
"Non-traded securities shall be valued 'in-good faith' by the asset management company on the basis of appropriate valuation methods based on the principles approved by the Board... Such decision of the Board must be documented in the Board minutes and the supporting data... must be preserved. The methods... shall be periodically reviewed by the trustees and reported upon by the auditors as 'fair and reasonable' in their report on the annual accounts."

The three specific methods:

(i) Equity. "shall generally be valued on the basis of capitalization of earnings solely or in combination with the net asset value, using for the purposes of capitalization, the price or earnings ratios of COMPARABLE TRADED SECURITIES and with an appropriate DISCOUNT FOR LOWER LIQUIDITY."

(ii) Convertible debentures and bonds. "the non-convertible and convertible components shall be valued SEPARATELY. The non-convertible component should be valued on the same basis as would be applicable to a debt instrument. The convertible component should be valued on the same basis as would be applicable to an equity instrument. If, after conversion, the resultant equity instrument would be traded pari passu with an existing instrument which is traded, the value of the latter instrument can be adopted after an appropriate discount for the non-tradability of the instrument during the period preceding conversion... whether the conversion is OPTIONAL should also be factored in."

(iii) Warrants. "the warrants can be valued at the value of the share which would be obtained on the exercise of the warrant as reduced by the amount which would be payable on exercise of the warrant. A discount similar to the discount... in respect of convertible debentures must be deducted to account for the period which must elapse before the warrant can be exercised."

Physical gold and silver

"the valuation of physical gold and silver is based on the POLLED SPOT PRICES published by recognised stock exchanges that are used for the settlement of physically delivered gold and silver derivative contracts. The spot polling mechanism complies with the guidelines specified by SEBI from time to time."

7.2.1 Net assets — the chapter's own example

"Investors have bought 20 crore units of a mutual fund scheme at Rs 10 each", so the scheme mobilised 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 and money market instruments. 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."

Particulars	Rs crore
Liabilities
Unit Capital (20 crore units of Rs 10 each)	200
Profits (Rs 8 cr received − Rs 4 cr paid − Rs 1 cr payable)	3
Capital Appreciation on Investments held (10% of Rs 140 cr)	14
Unit-holders' Funds in the Scheme	217
Expenses payable	1
Scheme Liabilities	218
Assets
Market value of Investments (Rs 140 cr + 10%)	154
Bank Deposits and money market instruments (Rs 60 cr + Rs 8 cr − Rs 4 cr)	64
Scheme Assets	218

"The unitholders' funds in the scheme are commonly referred to as 'NET ASSETS'. The assets of the scheme are the investments held by it. This along with the accrued income that includes dividend or interest due on securities held in the portfolio but not yet received, and receivables, such as the amount due on shares sold, constitute the total assets. The scheme may have some short-term liabilities and accrued expenses. The current liabilities include payables for securities bought and BORROWINGS FOR A PERIOD NOT EXCEEDING SIX MONTHS to meet liquidity needs."

Four conclusions the workbook draws:

"Net assets include the amount originally invested, the profits booked in the scheme, as well as the appreciation in the investment portfolio."
"Net assets increase when the market prices of securities held in the portfolio increase, EVEN IF THE INVESTMENTS HAVE NOT BEEN SOLD and profits realized."
"A scheme cannot show better profits by delaying payments. While calculating profits, all the expenses that relate to a period need to be considered, IRRESPECTIVE OF WHETHER OR NOT THE EXPENSE HAS BEEN PAID. In accounting language, this is called the ACCRUAL PRINCIPLE."
"Similarly, any income that relates to the period will boost profits, irrespective of whether or not it has been actually received in the bank account."

7.2.2 Net Asset Value — two formulas, one answer

Rs 217 crore ÷ 20 crore = Rs 10.85 per unit.

(Rs 218 crore − Rs 1 crore) ÷ 20 crore = Rs 10.85 per unit.

Three drivers follow: "Higher the interest, dividend and capital gains earned by the scheme, higher would be the NAV"; "Higher the appreciation in the investment portfolio, higher would be the NAV"; "Lower the expenses, HIGHER would be the NAV."

And the full profitability metric:

(A) + Interest income; (B) + Dividend income; (C) + Realized capital gains; (D) + Valuation gains; (E) − Realized capital losses; (F) − Valuation losses; (G) − Scheme expenses.

The two worked examples in the chapter

Example 1. Stocks Rs 150 cr; bonds Rs 67 cr; money market Rs 2.36 cr; dividend accrued but not received Rs 1.09 cr; interest accrued but not received Rs 2.68 cr; fees payable Rs 0.36 cr; 1.90 crore units.

NAV = (150 + 67 + 2.36 + 1.09 + 2.68 − 0.36) ÷ 1.90 = 222.77 ÷ 1.90 = Rs 117.25

Example 2. Stocks Rs 230 cr; money market Rs 5 cr; dividend accrued but not received Rs 2.39 cr; amount payable on purchase of shares Rs 7.5 cr; amount receivable on sale of shares Rs 2.34 cr; fees payable Rs 0.41 cr; 2.65 crore units.

"NAV = (Current value of investments held + Income accrued + Current assets − Current liabilities − Accrued expenses) / No. of outstanding units."

NAV = (230 + 5 + 2.39 + 2.34 − 7.5 − 0.41) ÷ 2.65 = 231.82 ÷ 2.65 = Rs 87.48

7.2.3 Mark to market — and what happens when you skip it

"The process of valuing each security in the investment portfolio of the scheme at its CURRENT MARKET VALUE is called 'mark to market'."

"The NAV is meant to reflect the true worth of each unit... 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. Valuing shares of a company at their acquisition cost, say Rs 15, is meaningless if those shares have appreciated to, say Rs 50. If the scheme were to sell the shares at the time, it would recover Rs 50 and not Rs 15."

The chapter then proves the point with numbers. A scheme has unit capital Rs 1,00,000, face value Rs 10, so 10,000 units; net assets Rs 1,50,000; therefore NAV Rs 15.

CASE 1 — units issued at face value Rs 10 when NAV is Rs 15. An investor buys 100 units at Rs 10.

Particulars	Value	Calculation
Unit Capital	Rs 1,01,000	1,00,000 + (100 × 10)
Outstanding units	10,100	10,000 + 100
Net Assets	Rs 1,51,000	1,50,000 + (100 × 10)
NAV	Rs 14.95	1,51,000 ÷ 10,100

CASE 2 — units redeemed at face value Rs 10 when NAV is Rs 15. An investor redeems 100 units at Rs 10.

Particulars	Value	Calculation
Unit Capital	Rs 99,000	1,00,000 − (100 × 10)
Outstanding units	9,900	10,000 − 100
Net Assets	Rs 1,49,000	1,50,000 − (100 × 10)
NAV	Rs 15.05	1,49,000 ÷ 9,900

"Issuing fresh units at a price LOWER than the NAV will result in the post issue NAV COMING DOWN for all investors (Case 1). Redeeming units at price LOWER than the NAV will INCREASE the NAV for the remaining investors (Case 2)."

"Thus, marking to market helps investors buy and sell units of a scheme at fair prices, which are determined based on transparently calculated and freely shared information on NAV. Such mark-to-market based NAV also helps in assessing the performance of the scheme/fund manager."

7.5 Key accounting and reporting requirements

"The accounts of the schemes need to be maintained DISTINCT from the accounts of the AMC. The AUDITOR FOR THE AMC HAS TO BE DIFFERENT from that of the schemes."
"Norms are prescribed on when interest, dividend, bonus issues, rights issues etc. should be reflected for in the accounts."
"NAV is to be calculated up to 4 DECIMAL PLACES in the case of index funds, liquid funds and other debt funds."
"NAV for equity and balanced funds is to be calculated up to AT LEAST 2 DECIMAL PLACES."
"Investors can hold their units even in a FRACTION of 1 unit. However, current stock exchange trading systems may restrict transacting on the exchange to WHOLE UNITS."

Think of it like this

One price, two queues

Picture a co-operative grain store where members can join or leave any day, and the price of a share of the store is fixed once daily. If the stock of grain is valued at last year's rate, the person joining today pays too little and everyone already inside is quietly poorer; if it is valued too high, the person leaving today takes too much out. That is exactly a mutual fund: "the ownership of the mutual fund scheme is collectively in the hands of all the investors at any point in time... periodically, the ownership could also change." SEBI's fair valuation principles exist so that the same single number is fair to both queues — those coming in and those going out.

Policy is the map, fair value is the destination

Principle 7 is unusual for a regulation, because it tells the AMC to break its own rule when the rule gives the wrong answer: "if the established policies and procedures of valuation DO NOT RESULT IN FAIR/APPROPRIATE VALUATION, the asset management company SHALL DEVIATE from the established policies and procedures in order to value the assets at fair value" — with reporting to both Boards and disclosure to investors. A driver who follows the map straight into a flooded road and says "the map told me to" has not driven well. The map is a means to reach the destination; fair value is the destination, and responsibility for arriving there "shall be of the asset management company, irrespective of disclosure of the approved valuation policies."

Thirty days is the line between traded and non-traded

A share has a closing price today — easy. A share has no price today but traded three days ago — use it, because a past price may be used "provided such date is not more than thirty days prior to the valuation date." A share has not traded for thirty days — now it crosses a line and "must be treated as a non-traded scrip", to be valued "in good faith" by a Board-approved method, documented in the Board minutes, reviewed by trustees and reported by auditors as fair and reasonable. Like a vegetable: fresh today, acceptable for a few days, and past a point you do not price it from memory — you get somebody qualified to assess what it is actually worth.

Two pieces in one wrapper — the convertible debenture

A convertible debenture is two instruments tied together: a loan that pays interest, and a right to become a share. So "the non-convertible and convertible components shall be valued SEPARATELY. The non-convertible component... on the same basis as would be applicable to a debt instrument. The convertible component... on the same basis as would be applicable to an equity instrument." Like a combo meal priced by its parts rather than guessed at as a whole. And a discount applies for the waiting period before conversion, with "whether the conversion is optional" also factored in — an option you may decline is worth less than an obligation you will certainly receive.

The accrual principle — you cannot look richer by paying late

In the Rs 200 crore example, Rs 4 crore of expenses had been paid and Rs 1 crore was still payable. Both are deducted, so profit is Rs 8 − 4 − 1 = Rs 3 crore. The workbook is blunt about why: "A scheme CANNOT SHOW BETTER PROFITS BY DELAYING PAYMENTS. While calculating profits, all the expenses that relate to a period need to be considered, irrespective of whether or not the expense has been paid." The same applies in reverse to income. A shopkeeper who hides the unpaid electricity bill in a drawer has not become richer — he has only made his own accounts useless.

Rs 15 in the book, Rs 50 in the bazaar

Mark to market answers a simple question: what would you actually get if you sold it today? "Valuing shares of a company at their acquisition cost, say Rs 15, is meaningless if those shares have appreciated to, say Rs 50. If the scheme were to sell the shares at the time, it would recover Rs 50 and not Rs 15." A man whose gold was bought at Rs 30,000 per tola and who insists his locker holds Rs 30,000 of gold is not being conservative — he is simply wrong about his own wealth, and anyone buying into or out of his household on that basis is being treated unfairly.

Case 1 and Case 2 — who pays, who gains

The arithmetic of not marking to market is not abstract. Issue 100 units at Rs 10 when the NAV is Rs 15, and the NAV for everyone drops to Rs 14.95 — the existing investors have silently subsidised the newcomer. Redeem 100 units at Rs 10 when the NAV is Rs 15, and the NAV rises to Rs 15.05 — the person leaving has been short-changed, and the remaining investors have quietly gained at his cost. As the workbook puts it: "Issuing fresh units at a price lower than the NAV will result in the post issue NAV coming down for all investors. Redeeming units at price lower than the NAV will increase the NAV for the remaining investors." Wrong pricing never destroys value — it transfers it, from someone to someone.

Four decimals for debt, two for equity

A liquid fund may move by a few paise across an entire month, so a NAV rounded to two decimals would hide most of the return. Hence "NAV is to be calculated up to 4 decimal places in the case of index funds, liquid funds and other debt funds", while "NAV for equity and balanced funds is to be calculated up to at least 2 decimal places." It is the difference between weighing rice on a shop scale and weighing gold on a jeweller's scale — the precision matches what a small movement is worth. And since units may be held "even in a fraction of 1 unit", a four-decimal NAV multiplies into a meaningful rupee figure.

Key terms in this chapter

Accrual principle: All expenses relating to a period are counted whether or not paid, and all income relating to a period is counted whether or not received — so "a scheme cannot show better profits by delaying payments".
AT-1 and AT-2 bonds: Perpetual bonds issued by banks that are subordinate to equity in absorbing losses or convertible on a trigger. A mutual fund may not own more than 10% of such bonds of a single issuer, a scheme may not hold more than 10% of its assets in them, and not more than 5% of assets in those of one issuer.
Base expense limits: The slab ceilings on scheme expenses. Any expenditure in excess of them "shall be borne by the asset management company or the trustees or sponsors" — never passed on to the scheme.
Brokerage and transaction cost allowance: Chargeable over and above the base limits, up to 0.06% of trade value for cash market transactions and 0.02% for derivatives transactions.
Capitalization of earnings: The method for valuing non-traded equity — applying the price-earnings ratios of comparable traded securities, alone or in combination with net asset value, with an appropriate discount for lower liquidity.
Credit event: The trigger for creating a segregated portfolio under the SEBI circular of 28 December 2018. For unrated instruments of an issuer with no outstanding rated debt, segregation was permitted from 7 November 2019, but only on an actual default of interest or principal.
Deemed residual maturity: The maturity assumed for valuing perpetual bonds under SEBI's glide path — reaching 100 years from the date of issuance for AT-1 bonds from 1 April 2023, while AT-2 bonds use contractual maturity. Macaulay Duration is computed on this deemed maturity.
Distributable reserves: What dividends may be paid out of: accrual-basis profits in full, valuation gains ignored, valuation losses subtracted, and that part of the sale price of new units attributable to valuation gains excluded.
Entry load: The old excess of sale price over NAV, now banned. The sale price equals the NAV, subject only to applicable stamp duty.
Equalisation reserve: The account crediting that proportion of the sale price of investments which represents realised gains, usable to pay dividends. Because of it, investors must be told that a payout includes part of their own capital, and funds must separate NAV appreciation from capital distribution.
Equity-oriented scheme (for TER): A scheme other than an index fund or ETF which, per its SID, will invest a minimum of sixty-five per cent of net assets in equity and equity related instruments.
Exit load: The shortfall of repurchase price below NAV. It may be calibrated to fall as the holding period lengthens, must be credited back to the scheme immediately rather than retained by the AMC, and cannot be charged on bonus units or units allotted on reinvestment of dividend.
Fair valuation: Valuation "reflective of the realizable value of the securities/assets", done "in good faith and in true and fair manner" — the first of SEBI's ten principles, laid down in the Seventh Schedule of the SEBI (Mutual Funds) Regulations 2026.
Fund of funds TER ceilings: 0.90% for a FoF investing in liquid schemes, index funds and ETFs; 2.10% for one investing at least 65% in equity-oriented schemes; 1.85% otherwise — each inclusive of the weighted average TER of the underlying schemes, with the FoF's own layer capped at twice that weighted average.
Mark to market: Valuing each security in the portfolio at its current market value, so the NAV reflects what the scheme would actually recover on a sale rather than what it once paid.
Net assets: The unitholders' funds in the scheme — original amount invested, profits booked, and appreciation in the investment portfolio. Net assets rise when market prices rise even if nothing has been sold.
Net Asset Value (NAV): Net assets divided by outstanding units — equivalently, total assets minus liabilities other than to unitholders, divided by outstanding units. Both formulas give the same answer.
Non-traded security: A scrip not traded on any stock exchange for thirty days prior to the valuation date. It is valued "in good faith" using Board-approved methods documented in the Board minutes, reviewed by trustees and reported on by auditors as fair and reasonable.
Parity on exit load: The rule that no distinction may be made among unitholders on the basis of the amount of subscription, that any imposition or enhancement applies only to prospective investments, and that parity applies at portfolio level.
Polled spot price: The basis for valuing physical gold and silver — spot prices published by recognised stock exchanges and used for settlement of physically delivered gold and silver derivative contracts.
Principally traded exchange: Where a security trades on more than one exchange, the one whose last quoted closing price is used. The AMC selects it but must record the reasons in writing, and must also record reasons for any later change.
Principle 7 (responsibility for correct NAV): The rule that responsibility for true and fair valuation and a correct NAV lies with the AMC "irrespective of disclosure" of its policies — and that the AMC must deviate from its own approved policy when the policy does not produce a fair value, reporting the deviation to both Boards and disclosing it to investors.
Record date: The cut-off date determining who is eligible for a dividend, based on the register of unitholders. The NAV is adjusted at the end of the record date to reflect the payout, and the record date falls five calendar days after the AMC's public notice.
Segregated portfolio: A portfolio of debt or money market instruments affected by a credit event, carved out of a scheme to ensure fair treatment and manage liquidity risk. No investment and advisory fees may be charged on it, other TER only pro rata upon recovery, and its NAV is declared daily.
Total Expense Ratio (TER): The total of expenses charged within the base limit, brokerage cost, transaction cost incurred for execution of trades, and statutory levies. It excludes issue and redemption expenses but includes the investment management and advisory fee, and must be disclosed daily, scheme-wise and date-wise, on the AMC and AMFI websites.
Yield to Call: The basis SEBI prescribes for valuing AT-1 bonds. If the issuer does not exercise the call, valuation reverts to the 100-year assumption for AT-1 and contractual maturity for AT-2 — and non-exercise caused by the issuer's financial stress must be reflected in the valuation.

Check you have understood it

The L1 test for this chapter has 8 questions. Score 60% to unlock L2 Application (worked numericals and scenarios) and then L3 Exam-Ready (NISM-style traps, timed, with this paper's real marking). Tests, the higher levels and full mock exams need a free account so we can track your progress.

Create a free account

Original explanatory writing based on the official NISM workbook for Series V-D, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

Something look wrong? Report it