Foundation — Net Asset Value, valuation day and mark-to-market

Think of it like this

Key terms in this chapter

Amortized Cost

The purchase cost of a debt security adjusted for the discount or premium on purchase across its maturity period. It is used for unlisted securities with no ascertainable market, plus any interest accrued from the date of purchase.

Beneficial Interest

The interest of an investor in the fund, determined by the number of units held. It is the basis for allocation of units and distributions on liquidation or redemption.

Black-Scholes Model

The model used to price an option after the day of purchase, based on the underlying asset price, exercise price, inherent volatility, changes in interest rates and time to expiry. A change in premium signals a change in the probability of the option finishing in-the-money.

Class of Units

A grouping of units carrying differential rights assigned by quantum of commitment, the time period of commitment and the proportion of commitment to total corpus. Categorisation into classes is at the discretion of the Investment Manager.

Commodity Options

An options contract whose underlying is the right to enter into a commodity futures contract having the same underlying commodity asset as the option.

FBIL

Financial Benchmarks India Pvt. Ltd., one of the agencies — alongside the Clearing Corporation of India Ltd. and FIMMDA — whose security-level prices are used to value money market and long-term fixed income securities.

FIMMDA

The Fixed Income Money Market and Derivatives Association of India, which publishes prices for government securities of different maturities used in mark-to-market valuation.

F&O Margin Account

The balance maintained with a broker against derivative positions, comprising SPAN, exposure, VaR, extreme loss, initial and mark-to-market margins. It is an asset for NAV purposes; F&O losses create additional margin liability and profits increase the balance.

Illiquid Security

A security with few buyers and sellers and a relatively small daily trading volume, which may not be redeemable at its fair market value. It must not be valued at market price; one accepted method is discounting the future fair market value.

Independent Valuer

The valuer the Investment Manager must appoint, who must not be an associate of the manager, sponsor or trustee, must have at least three years' experience in valuing unlisted securities, and must be IBBI-registered with ICAI, ICSI, ICMAI or CFA membership, or be the holding company or subsidiary of a SEBI-registered Credit Rating Agency.

Liquid Security

A security with a ready market, many buyers and sellers and a large daily trading volume, so that it is redeemable at its fair market value on a Valuation Day.

Mark-to-Market

The process of valuing a portfolio at the fair market value of every security on a periodical basis, so that NAV represents the true worth of the portfolio. Without it, holdings remain at purchase cost, especially unlisted securities.

Moneyness

The intrinsic value of an option relative to the current futures price. A call is in-the-money when the futures price is above the strike, out-of-the-money when below, and at-the-money when equal.

Net Asset Value (NAV)

The net value of assets attributable to a class or sub-class of units, reduced by liabilities, contingencies, losses and expenses attributable to that class, divided by the units issued and rounded to four decimal places. Its calculation must be independent of the fund management function.

Off-Balance Sheet Exposure

Investing in assets that do not represent a direct obligation on the fund, through leverage strategies and derivative contracts, although the risks and returns are indirectly borne by the fund.

Opening Series NAV

The Series NAV as on the Valuation Day immediately preceding the current one. For a newly issued series, it equals the amount drawn down against issuance of units of that series on the first Valuation Day.

Overnight Market

The money market segment where the tenor of transactions is one working day. Notice money runs 2 to 14 days and term money 15 days to one year.

Registered Valuer Entity

A partnership entity or company acting as valuer, which must itself be registered with the IBBI, and whose deputed or authorised persons undertaking AIF portfolio valuation must hold ICAI, ICSI, ICMAI membership or a CFA charter.

Series Assets

Total fund assets multiplied by the ratio of that series' Opening Series NAV to the total of all Opening Series NAV in the fund.

Series Expenses

Management fees with GST and incentive fees attributable to the series under the Contribution Agreement, plus fund expenses specifically attributable to that series; expenses not specifically attributable are allocated across all series in proportion to Opening Series NAV.

Series NAV

Series Assets less Series Liabilities and Series Expenses as on a Valuation Day, divided by the units issued under that series, rounded to four decimal places.

Series of Units

A subdivision within a class of units, distinct and exclusive from another series of the same class, created by the manager to identify different groups of investors and to compute their applicable Series NAV.

Stock Futures

A futures contract whose underlying asset is the stock of a specific company. Index futures have an equity-based index as underlying, and commodity futures a single commodity product such as precious metals, base metals, energy or agricultural products.

Traded Debt Security

A debt security in which, on a specific Valuation Day, trades are reported in marketable lots on a recognised stock exchange or on the Clearing Corporation of India Ltd.

Valuation Day

The day pre-determined by the AIF and communicated in its offer documents by reference to which NAV is determined — at least monthly for open-ended and quarterly for closed-ended funds, or on every business day for mark-to-market, or at intervals set for a closing, redemption or distribution.

Volume Weighted Average Yield (VWAY)

The basis for valuing debt. T-bills and G-Secs use the VWAY of trades in the last one hour of trading; all other money market and debt securities, including G-Secs not traded in that hour, use the VWAY of all trades during the day.