NAV, TER and unit pricing — the chapter every numerical question comes from

A mutual fund's ownership changes hands every business day — new investors buy units, old ones redeem. All of them transact at NAV. So if the NAV is wrong, somebody is being quietly robbed: buy in at an understated NAV and you dilute existing holders; redeem at an overstated one and you take more than your share. SEBI's answer is a set of fair valuation principles (under the Seventh Schedule of the SEBI Mutual Fund Regulations) whose stated objective is fair treatment of all investors — existing, incoming and exiting — at all points in time. The principles also reduce mispricing risk, which matters most for short-term debt schemes facing redemption pressure.

• Realisable value. Valuation must reflect what the assets could actually be sold for, in good faith, through documented policies.
• Board-approved methodology per asset type. The AMC board approves how each security type is valued — and a new type of security can be bought only after its valuation method exists.
• Consistency, with an exceptions playbook. Assets are valued the same way every day, and the policy must say what happens when market quotes stop being reliable.
• Independent review. Valuation policies are reviewed by an independent auditor at least once a financial year; trustees and the AMC board are kept updated.
• Conflicts addressed; policy disclosed. The methodology is published in the Statement of Additional Information (SAI) and on the AMC website.
• Responsibility cannot be outsourced to the policy. If following the written policy would produce an unfair value, the AMC must deviate — with reporting to the boards and disclosure to investors. The duty of a true and fair NAV sits with the AMC, full stop.
• Detection and audit trail. The AMC needs procedures to catch incorrect valuation, and must document the rationale for valuations — including inter-scheme transfers.
• Use all public trade data for debt. For debt and money-market paper, prices of the same or similar securities reported on public platforms must be considered.

A few valuation specifics the exam samples from: traded equities are valued at the last quoted closing price on the principally-traded exchange (chosen once, changes documented); a security untraded for 30 days becomes a non-traded scrip and is valued in good faith by board-approved methods; gold in a gold ETF is valued at the LBMA AM fixing price (USD per troy ounce, 995 fineness — silver uses 999), and perpetual AT-1 bank bonds are valued on a yield-to-call basis with a deemed 100-year maturity, with tight exposure limits (10% of such bonds of one issuer; 10% of scheme assets overall; 5% per issuer per scheme).

Three drivers follow directly: more income (interest, dividend, realised gains) → higher NAV; more appreciation in the portfolio → higher NAV — even before anything is sold; lower expenses → higher NAV. And the accrual principle cuts both ways: income counts when earned, expenses count when incurred, regardless of cash movement.

Mark to market means valuing every security at its current market price rather than its purchase cost. Shares bought at ₹20 that now trade at ₹65 are worth ₹65 — the scheme would realise ₹65 on sale, so the NAV must say ₹65. The cleanest way to see why is to watch what happens when units are issued or redeemed at the wrong price.

Running a scheme costs money: the AMC's investment and advisory fee (disclosed in the SID), plus recurring expenses — distribution commissions, brokerage on trades, RTA fees, trustee fees, audit, custody, investor communication, statutory advertisements, listing fees, even winding-up costs. SEBI's deal is simple: all of it must be identified, charged to the scheme transparently, and kept within base TER limits. Anything beyond the cap is borne by the AMC, trustees or sponsor — never the investor. We've covered the investor-facing side of this in depth in the expense ratio explainer; here's the exam-facing structure.

• Index funds & ETFs: TER capped at 0.90% of daily net assets, including the investment and advisory fee.
• Fund of funds: caps include the weighted-average TER of the underlying schemes — 0.90% if it invests in liquid/index/ETF schemes; 2.10% if ≥65% of AUM goes to equity-oriented schemes; 1.85% otherwise. The FoF's own add-on is further capped at twice the underlying weighted-average TER, within those ceilings.
• Closed-ended & interval schemes: equity-oriented capped at 1.00%; others at 0.80%.
• On top of base TER: brokerage/transaction costs up to 0.06% of trade value (cash market) and 0.02% (derivatives), plus statutory levies and exit loads. Nothing else may be charged to investors.
• Daily disclosure: AMCs must publish scheme-wise, date-wise TERs under a dedicated "Total Expense Ratio of Mutual Fund Schemes" head on their website and AMFI's, in downloadable spreadsheet format.
• Distributor outreach incentive: SEBI permits additional commission to MFDs for expanding reach — per its November 2025 circular, for onboarding new individual investors from B-30 cities and women investors. Directly relevant to your business; see chapter 6 on distribution economics.

A scheme cannot pay dividends out of paper gains. SEBI's rule for distributable reserves is deliberately conservative: accrued profits count, valuation gains are ignored, but valuation losses are deducted — and the slice of fresh sale prices attributable to valuation gains isn't distributable either. The effect: dividends come only from real, realised profits after providing for all possible losses. Investors must also be told plainly that an IDCW payout includes a piece of their own capital — the fund must show how much is NAV appreciation and how much is capital being returned. (IDCW = Income Distribution cum Capital Withdrawal — the renamed "dividend option"; the name itself is the disclosure.)

• Who decides: trustees set the quantum and the record date. For dividends up to monthly frequency they may delegate to AMC officials, ratified at the next trustee board meeting.
• Record date mechanics: AMC issues a public notice within one day of the decision; the record date is 5 calendar days from the notice; the NAV drops on the record date to reflect the payout (plus any statutory levy). Liquid and debt schemes with daily-to-monthly distribution frequencies don't need the notice — the SID discloses instead.
• No guarantees: neither the rate nor the regularity of IDCW is assured. Late payment attracts interest from the record date.

Open-ended schemes sell new units (sale transactions) and buy them back (re-purchase) continuously. Historically the sale price could exceed NAV — the entry load — and the re-purchase price could sit below it — the exit load. SEBI banned entry loads in 2009: today's sale price equals NAV (plus stamp duty, covered in chapter 8). Exit loads survive, with strict conditions.

• No discrimination by amount: exit load cannot vary by subscription size; parity applies at the portfolio level. Load increases apply only to prospective investments.
• Holding-period calibration is fine: e.g. 1% if redeemed within 12 months, nil after — a retention incentive, applied uniformly.
• No load on bonus units or IDCW-reinvestment units.
• Exit load proceeds go back into the scheme — immediately. They compensate remaining investors for the cost of the exit; they are not AMC revenue and not available for selling expenses.

• Separate books, separate auditors: scheme accounts are maintained apart from the AMC's, and the scheme's auditor must be different from the AMC's.
• NAV precision: at least 4 decimal places for index funds, liquid funds and other debt funds; at least 2 decimal places for equity and balanced funds. Units can be held in fractions — though exchange trading systems may only handle whole units.

Finally, the segregated portfolio — SEBI's quarantine ward. When a debt instrument in a scheme suffers a credit event (default/downgrade), the affected paper can be carved into a separate portfolio so that redemptions in the healthy "main" portfolio aren't poisoned by one bad bond. The pricing rules: the segregated portfolio's NAV is declared daily; the AMC may not charge investment and advisory fees on it (other TER components only as and when the money is actually recovered, pro-rata); and its existence is disclosed across all scheme documents and portfolio statements. The risk side of this story — what a credit event does to investors — is chapter 10 territory.