Summary of "NISM VA Mutual Fund Chapter 7-Net Asset Value,Total Expense Ratio & Pricing Of Units | 2024 #nism5a"
NISM VA Mutual Fund Chapter 7
Net Asset Value, Total Expense Ratio & Pricing Of Units | 2024 nism5a
Summary of Finance-Specific Content
Key Topics Covered
1. Net Asset Value (NAV) Calculation
- NAV represents the per-unit market price of a mutual fund scheme.
- Formula:
NAV = (Total Assets - Liabilities other than unit holders) / Number of Outstanding Units - Total assets include:
- Unit capital (money raised from investors)
- Returns from equity investments (capital appreciation)
- Dividend income
- Interest income from debt or bank deposits
- Liabilities include:
- Expenses such as management fees, taxes, and other scheme expenses.
- NAV is calculated daily up to 4 decimal places for accuracy.
- Example: If total assets = ₹217 crore and outstanding units = 20 crore, then NAV = ₹10.85 per unit.
2. Valuation Principles and Methodology
- Valuation must comply with SEBI guidelines to ensure fair and reliable pricing.
- Mark-to-market valuation is used for securities in the portfolio, including equity, debt, money market instruments, debentures, and real estate.
- Valuation should reflect the realizable value of securities (price if sold in the market).
- The valuation method must be approved by the Mutual Fund’s Board of Directors and periodically reviewed.
- Avoidance of conflict of interest is critical to protect investors.
- Disclosure of valuation policies is mandatory in the Statement of Additional Information (SAI).
- Policies and procedures should detect and prevent incorrect valuations.
- Documentation of valuation must be maintained for audits and transparency.
3. Assets, Liabilities, and Net Assets Explained
- Assets: Cash, investments, properties, receivables that generate value or income.
- Liabilities: Obligations such as loans, payables, expenses.
- Net assets = Assets − Liabilities, representing the true financial position.
- Net assets form the basis for NAV calculation.
4. Income and Gains Impacting NAV
- Income added to NAV:
- Interest income (from bank deposits, debt securities)
- Dividend income (from equity holdings)
- Realized capital gains (profits from selling securities)
- Losses and expenses deducted from NAV:
- Realized capital losses
- Valuation losses (unrealized losses)
- Scheme expenses (management fees, administrative costs)
5. Expense Ratios and Limits
- Total Expense Ratio (TER) represents the annual cost charged to investors.
- TER limits as per SEBI:
- Index funds and liquid funds: max 1% of daily net assets
- Equity and balanced funds: max 2.25% of daily net assets
- Other mutual fund schemes: max 2% of daily net assets
- Expenses include management fees, advisory fees, marketing and distribution costs, brokerage, audit fees, custodian fees, etc.
- Expense disclosures must be made on the AMC’s and SEBI’s websites for transparency.
6. Entry and Exit Loads
- Entry load: Fee charged at the time of investment (purchase of mutual fund units).
- Exit load: Fee charged when redeeming or selling units before a specified period.
- Example: SBI Bluechip Fund charges 1% exit load if redeemed within 1 year; no exit load after 1 year.
- SEBI mandates disclosure of entry/exit loads in scheme documents.
- Exit load is uniform across investors, not differential based on investment size.
7. Dividend Distribution by Mutual Funds
- Dividends can only be paid out of distributable surplus (realized profits after provisioning for possible losses).
- Realized capital gains form the basis for dividend payout; unrealized gains (valuation gains) are not considered.
- A conservative approach is followed to ensure dividends are paid from actual profits.
- Trustee approval is required for dividend quantum and record date.
8. Valuation of Different Instruments
- Equity stocks are marked to market based on daily traded prices.
- Money market instruments and debt securities are valued per SEBI guidelines.
- Convertible debentures and bonds have their convertible and non-convertible components valued separately.
9. Examples and Practice Questions
- Several examples were given for NAV calculation using data on stock values, money market instruments, dividend income, interest accrued, scheme expenses, and outstanding units.
- Practice questions related to valuation principles, expense limits, dividend payout, exit loads, and decimal precision in NAV calculations were shared for exam preparation.
Key Numbers & Formulas
- NAV formula:
NAV = (Total Assets - Liabilities other than unit holders) / Number of Outstanding Units - Expense ratio limits:
- Index/liquid funds: ≤ 1%
- Equity/balanced funds: ≤ 2.25%
- Other schemes: ≤ 2%
- Decimal precision for NAV: Up to 4 decimal places for equity/index/liquid funds.
- Exit load example: 1% if redeemed before 1 year (SBI Bluechip Fund).
- Example NAV: ₹10.85 per unit (from ₹217 crore net assets and 20 crore units).
Methodology / Framework for NAV Calculation (Step-by-Step)
- Calculate total assets including unit capital, capital appreciation, dividend, and interest income.
- Deduct total liabilities including scheme expenses, taxes, management fees.
- Divide net assets by the number of outstanding units to get NAV per unit.
- Ensure valuation of securities follows mark-to-market principles as per SEBI guidelines.
- Use four decimal places for NAV precision in equity/index/liquid funds.
- Disclose valuation policies and expense ratios in official documents and websites.
- Factor in entry and exit loads where applicable, as disclosed in scheme documents.
Mentioned Assets, Instruments, and Sectors
- Equity stocks: Reliance, HDFC Bank, ITC, Infosys, Larsen & Toubro, Tata, TCS, etc.
- Money Market Instruments
- Debt securities, debentures, convertible and non-convertible bonds
- Mutual Fund Schemes: Index funds (Nifty 50, Sensex), liquid funds, equity funds, balanced funds, fund of funds
- Example mutual fund: SBI Bluechip Fund
- Sectors: IT, Banking, FMCG, Infrastructure (implied from stock examples)
Disclaimers & Notes
- The content is educational and related to NISM mutual fund certification exam preparation.
- It is not financial advice for investing.
- Viewers are encouraged to understand principles and formulas for exams and practical knowledge.
- Disclosure of valuation policies and expenses is mandatory for investor protection.
- SEBI regulations govern mutual fund operations, valuation, and expense limits.
Presenters / Source
- Presenter: Finance with Nobita (YouTube Channel)
- Content based on NISM VA Mutual Fund Certification (Chapter 7) syllabus and SEBI regulations.
This summary consolidates detailed explanations, formulas, regulatory guidelines, and practical examples presented in the video focused on mutual fund NAV calculation, valuation principles, expense ratios, and unit pricing relevant for exam preparation and mutual fund understanding.
Category
Finance
