Marking to market is the process of assigning the latest market value to all securities in a mutual fund portfolio on a periodical basis. As most securities are traded on a daily basis, their price varies continually. It is important that a mutual fund scheme’s Net Asset Value (NAV) should reflect this change in prices. The changes in the prices of securities, in turn, affect the value of the portfolio, which, in turn, impacts the NAV of the scheme.
The market value of a security is calculated according to the last traded or closing price of the security. If a security has not been traded for a while, Securities Exchange Board of India (SEBI) has prescribed valuation methods to value such securities.
Marking to market is important as it is the mechanism through which the fund manager determines how much the fund’s holdings are worth in the prevailing market conditions.
How does marking to market help in the NAV calculation?
First, the fund will mark to market its portfolio. In other words, it calculates the present value of all the securities and cash equivalents held in the portfolio based on their latest prices. The receivables and payables are adjusted and any ongoing expenses, fees, and trading costs are subtracted. Finally, this net amount is divided by the number of units outstanding in the scheme. The resulting figure is the fund's NAV per unit.
This is the calculation that is used to determine the fund’s NAV:
(Total market value of all scheme holdings + total receivables^ - total fund liabilities/payables*) / Number of outstanding units of the scheme
^Receivables are any monies owed to the scheme as a result of holding investments such as a bond where a coupon is due for payment or shares on which dividends are due.
*Payables may include expenses or taxes that the scheme is obliged to pay.