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

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

The 10 principles as laid out by SEBI are as under:

Principle 1: The valuation shall be done in good faith and in true and fair manner through appropriate valuation policies and procedures.

Principle 2: Investment in a 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: The assets held by the mutual funds shall be consistently valued according to the policies and procedures.

Principle 4: The asset management company shall provide for the periodic review of the valuation policies and procedures to ensure the appropriateness and accuracy of the methodologies used and its effective implementation in valuing the securities/assets.

Principle 5: The valuation policies and procedures approved by the Board of asset management company should seek to address conflict of interest.

Principle 6: Disclosure of the valuation policy and procedures approved by the Board of the asset management company shall be made in Statement of Additional Information, on the website of the asset management company/mutual fund, and at any other place specified by the Board.

Principle 7: 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.

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

Principle 9: Documentation of rationale for valuation including inter scheme transfers shall be maintained and preserved by the asset management company as per Regulation 50 of SEBI (Mutual Fund) Regulations, 1996 to enable audit trail.

Principle 10: The asset management company shall take into consideration prices of trades of the same security or similar security reported at all available public platforms.

- 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 recognised stock exchange, the securities shall be valued at the last quoted closing price on the stock exchange where the security is principally traded.

 On a particular valuation day, if a 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 selected stock exchange or any other stock exchange, as the case may be, 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’other than money market and debt 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 asa ‘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 of the asset management company.

- 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 995.0 parts per thousand.

- Net Assets of Scheme

 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 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. This again is in line with the accrual principle.

- NAV = (Current value of investments held + Income accrued + Current assets – Current liabilities – Accrued expenses) / No. of outstanding units. Income accrued is the dividend declared but not received. Expenses accrued include fees payable.

- The process of valuing each security in the investment portfolio of the scheme at its current market value is called ‘mark to market'.

- Investment and Advisory Fees are charged to the scheme by the AMC.

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

- Expense limit in case of fund of funds scheme.

- 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 percent 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

- AMC can charge additional recurring expenses if the new inflows from beyond top 30 cities are at least

a) 30% of gross new inflows in the scheme or

b) 15% of the average assets under management (year to date) of the scheme, whichever is higher

 Funds can charge additional expense of upto 30 basis points on daily net assets of the scheme.

 Daily net assets x 30 basis points x New inflows from beyond top 30 cities 365 X Higher of (a) or (b) above

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

 All the profits earned (based on 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 sale price on new units, which is attributable to valuation gains, is not available as a distributable reserve.

- The difference between the NAV and re-purchase Price is called the “exit load”.

- 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.

- 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 upto 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 upto at least 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.

- AMC shall not charge investment and advisory fees on the segregated portfolio. However, TER (excluding the investment and advisory fees) can be charged, on a pro-rata basis only upon recovery of the investments in a segregated portfolio.