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8.1 Fair Valuation Principles

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NISM-Series-V-A: Mutual Fund Distributors Certification Examination Exam

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1 Chapter 1: Introduction & Exam Overview

1.1 About the NISM-Series-V-A Examination 1.2 The 12-Unit Curriculum Map and a Study Plan

2 Chapter 2: Investment Landscape

2.1 Investors and Their Financial Goals 2.2 Savings or Investments? 2.3 Different Asset Classes 2.4 Investment Risks 2.5 Risk Measures and Management Strategies 2.6 Behavioural Biases in Investment Decision Making 2.7 Risk Profiling 2.8 Asset Allocation and Do-It-Yourself versus Professional Help

3 Chapter 3: Concept and Role of a Mutual Fund

3.1 Concept of a Mutual Fund 3.2 Classification of Mutual Funds 3.3 Growth of the Mutual Fund Industry in India

4 Chapter 4: Legal Structure of Mutual Funds in India

4.1 Structure of Mutual Funds in India 4.2 Key Constituents of a Mutual Fund 4.3 AMC Organisation Structure and Service Providers 4.4 Role and Function of AMFI

5 Chapter 5: Legal and Regulatory Framework

5.1 Role of Regulators in India 5.2 Role of SEBI and the Mutual Fund Regulations 5.3 Due Diligence Process by AMCs for Distributors 5.4 Investor Grievance Redress Mechanism 5.5 AMFI Code of Conduct for Intermediaries

6 Chapter 6: Scheme Related Information

6.1 Mandatory Documents I: Scheme Information Document and Statement of Additional Information 6.2 Mandatory Documents II: Key Information Memorandum and the Advertisement Code 6.3 Non-Mandatory Disclosures

7 Chapter 7: Fund Distribution and Channel Management Practices

7.1 The Role and Importance of Mutual Fund Distributors 7.2 Different Kinds of Mutual Fund Distributors 7.3 Modes of Distribution 7.4 Pre-requisites to Become a Distributor of a Mutual Fund 7.5 Revenue for a Mutual Fund Distributor 7.6 Commission Disclosure Mandated by SEBI 7.7 Distributors versus Investment Advisers, Nomination Facilities and Change of Distributor

8 Chapter 8: Net Asset Value, Total Expense Ratio and Pricing of Units

8.1 Fair Valuation Principles 8.2 Computation of Net Assets of a Scheme and NAV 8.3 Dividends and Distributable Reserves 8.4 Entry and Exit Load and Its Impact on NAV 8.5 The Expense Ratio Framework: Base Expense Ratio, Brokerage and Statutory Levies 8.6 Key Accounting and Reporting Requirements 8.7 NAV, Total Expense Ratio and Pricing of Units for the Segregated Portfolio

9 Chapter 9: Taxation

9.1 Applicability of Taxes in Respect of Mutual Funds 9.2 Capital Gains on Mutual Fund Units 9.3 Dividend (IDCW) Income and Tax Deducted at Source 9.4 Stamp Duty and Securities Transaction Tax on Mutual Fund Units 9.5 Setting Off Capital Gains and Losses under the Income Tax Act 9.6 Tax Benefit under Section 80C and Applicability of GST

10 Chapter 10: Investor Services

10.1 The New Fund Offer Process 10.2 New Fund Offer Price and Ongoing Offer Price for Subscription 10.3 Investment Plans and Services 10.4 Allotment of Units and Account Statements 10.5 Mutual Fund Investors: Who Can Invest 10.6 Filling the Application Form for Mutual Funds 10.7 Financial Transactions with Mutual Funds 10.8 Cut-Off Time and Time Stamping 10.9 KYC Requirements for Mutual Fund Investors 10.10 Systematic Transactions and Their Operational Aspects 10.11 Non-Financial Transactions, Special Investor Categories and Turnaround Times

11 Chapter 11: Risk, Return and Performance of Funds

11.1 General and Specific Risk Factors 11.2 Factors That Affect Mutual Fund Performance 11.3 Drivers of Returns and Risk in a Scheme 11.4 Measures of Returns 11.5 SEBI Norms Regarding Representation of Returns 11.6 Risks in Fund Investing: The Investor's Perspective 11.7 Measures of Risk and Provisions Relating to Credit Risk

12 Chapter 12: Mutual Fund Scheme Performance

12.1 Benchmarks and Performance 12.2 Price Return Index or Total Return Index 12.3 Basis of Choosing an Appropriate Performance Benchmark 12.4 Benchmarks for Equity Schemes 12.5 Benchmarks for Debt Schemes and Other Schemes 12.6 Quantitative Measures of Fund Manager Performance 12.7 Tracking Error and Scheme Performance Disclosure

13 Chapter 13: Mutual Fund Scheme Selection

13.1 Scheme Selection Based on Investor Needs, Preference and Risk Profile 13.2 Risk Levels in Mutual Fund Schemes 13.3 Scheme Selection Based on Investment Strategy 13.4 Selecting a Scheme Across AMCs or Within a Scheme Category 13.5 Selecting Options in Mutual Fund Schemes and Do's and Don'ts

8.1 Fair Valuation Principles

Key Takeaways Explain This Topic AI

Fair valuation requires assets to be valued at the price that would be received in an orderly transaction between market participants.

The principles of fair valuation override any specific valuation rule where the rule would produce an unfair value.

Traded equity is valued at the closing price on the principal stock exchange on the valuation day.

Debt and money market securities are valued using daily prices from independent valuation agencies appointed through AMFI.

Deviations from the prescribed method must be documented and disclosed on the AMC website.

Last updated: August 2026

Why Valuation Is a Fairness Question

NAV is the price at which investors buy and sell units. If a scheme's assets are overvalued, an investor redeeming today takes out more than their share and the remaining investors are left worse off. If undervalued, the redeeming investor is short-changed and new subscribers get a windfall.

So valuation is not an accounting nicety. Every valuation error transfers wealth between one set of unitholders and another. That is the reasoning behind SEBI's insistence on principles rather than mechanical rules.

The Principle

SEBI's framework requires that portfolio securities be valued at fair value : the price that would be received on selling an asset in an orderly transaction between market participants at the valuation date.

The framework's defining feature is its override :

Where a prescribed valuation method would not result in fair valuation, the AMC must deviate from it and value the security at fair value, documenting the reasoning.

This reverses the usual compliance logic. Following the rule is not a defence if the outcome is unfair. The principles are:

  • Valuation must reflect the realisable value of assets
  • Methods must be applied consistently , and any change justified
  • Valuation must be independent of fund management
  • The AMC and trustees are responsible for true and fair valuation
  • Deviations must be documented and disclosed
  • Valuing Traded Equity

Straightforward where a market price exists:

Valued at the closing price on the principal stock exchange on the valuation day.

Where a security was not traded on the principal exchange on that day, the closing price on another exchange is used.

Where it was not traded on any exchange on that day, the last available closing price is used, provided it is not older than the prescribed period; beyond that the security is treated as non-traded and valued using good-faith methods based on fundamentals.

Thinly traded equity is identified by prescribed volume and value thresholds, and is valued on a fair-value basis rather than at a price set by a handful of trades.

Valuing Debt and Money Market Securities

This is where the greater difficulty lies, because most Indian corporate debt does not trade daily. A bond may not trade for weeks, so "last traded price" would be meaningless.

The framework's answer is independent valuation agencies appointed through AMFI , which publish daily security-level valuations for debt and money market instruments. Every AMC uses these.

Two consequences the exam expects:

The same security carries the same value across every fund house. Two schemes holding the same bond cannot report different values for it, which removes the scope for discretionary marking.

A debt scheme's NAV can move on a day when nothing traded , because the valuation agency's yield curve moved. Investors find this counter-intuitive and it is a routine question for a distributor.

Valuing Other Assets

  • Asset Basis
  • Traded equity Closing price on principal exchange
  • Thinly traded or non-traded equity Good faith fair value using prescribed methods
  • Debt and money market securities Daily prices from independent valuation agencies
  • Government securities Agency-published prices
  • Gold held by gold ETFs Prescribed basis referencing the international price with applicable adjustments
  • Foreign securities Price in the local market, converted at the applicable exchange rate
  • Units of other schemes NAV of the underlying scheme
  • Interest Rate Movements and Debt NAVs

Because debt securities are marked to market daily, a debt scheme's NAV falls when yields rise. Investors who bought a debt fund believing it works like a deposit are surprised, and the explanation is worth having ready:

"The fund holds bonds paying a fixed coupon. When new bonds are issued at higher rates, the older bonds become less attractive, so their market price falls until their yield matches. The fund revalues its holdings at market prices every day, so the NAV reflects that. If the bonds are held to maturity and no issuer defaults, the fall reverses as they approach maturity."

Deviation and Disclosure

Where an AMC deviates from a prescribed method to achieve fair valuation, the deviation must be documented, approved and disclosed on the AMC's website . Publication is what makes the override safe: an AMC may depart from the rule, but everyone can see that it did and why. Without the disclosure requirement the override would be an invitation to convenient marking.