Market regulator SEBI has made changes in the code for valuation of investments. The rationale behind this is the failure in realising the fair value of the underlying assets in the debt schemes of mutual funds.
To this extent, SEBI's notification says that the valuation of investments should be reflective of the realisable value of the securities or assets. About 60 per cent of investments in the mutual fund industry are in debt schemes. The underlying assets in the money and debt market schemes, when not traded on a particular valuation day, are valued on an amortisation basis. Amortisation refers to the process of calculating interest over the tenure of the security. For an instrument with a maturity of one year, the interest rate on the 364th day will be lower, leading to higher value of the underlying asset.
Therefore, redemptions before maturity lead to a situation where change in the interest rate is not captured such that the artificial price, thus created, is not reflective of the realisable value of the underlying assets. Since the realisable value is not created, there is a serious mismatch leading to a distortion of the NAVs. The investments in new type of securities by mutual fund schemes should be made after establishment of the valuation policies and procedures for such securities. The asset management company should also conduct periodic review of the valuation policies and procedures to ensure accuracy and appropriateness.
Keywords: Code for valuation, investments, SEBI, Investments, debt schemes, mutual funds.