Skip to main content

MUTUAL FUNDS: Marking Debt Instrument To Markets

There are three types of investors in mutual funds, who gain or lose based on the daily Net Asset Value (NAV) - one, those who come in; second, those who stay put in the fund; third, who exit the fund. It is pertinent to ensure the NAV declared is fair to all of them.

NAV would be 'fair' to all only if it reflects realisable value of a unit. In other words, the portfolio, if sold, should realise the market value that is equivalent to an aggregate value of all the outstanding units. Calculation of this 'fair' value of a unit is very simple if we have a market value for each portfolio asset, that is, security or stock. This practice is popularly known as marked-to-market (MTM).

In the Indian equity market, the secondary market is broad-based, liquid and vibrant. Hence, valuing aunit at marketor fair price is simple in equity funds. The secondary market in debt space in India, on the other hand, is still wholesale and relatively less liquid. A lot of debt and money market securities are not traded for days. Commercial Papers (CPs) and Certificates of Deposits (CDs) are not listed on the exchange and hence, not MTM. In the absence of a market price for such securities, it remains a challenge to derive realisable value of the underlying securities and hence the units.

The risk, therefore, in the current scenario is that while the units are priced based on the amortised value of portfolio securities. The latter, if required to be sold, might fetch more or less than the assumed or amortisation value.

In both the cases, one type of investor will be benefiting at the cost of others.

If short-term interest rates go up, the units remain overvalued, as they are not valued at realisable price. Hence, the exiting investors leave behind their share of loss to remaining investors. This is what we saw in the 2008 liquidity crisis.

If short-term interest rates go down, the units remain undervalued, as they are not valued at realisable price. Hence, the new investors benefit, unduly as they effectively get undervalued units.

To address this potential for under or over valuation of units of funds other than liquid funds due to the current practice of money market securities, the Securities and Exchange Board of India (Sebi) has mandated new valuation guidelines.

As a result of these new valuation norms, the NAV of funds other than liquid funds would not be linear any more and could fluctuate. The NAVs would depend on the portfolio yield and the efficiency of the fund manager to manage duration.

Liquid funds, on the other hand, can buy securities with residual maturity up to 91 days; hence, would continue to give near-linear returns.

The disadvantage, however, in moving to liquid funds is the tax disadvantage. Dividend Distribution Tax (DDT) in ultra short-term bond funds is 13.84 per cent and Mutual funds rechanges, applicable from August 1, will be yet another step in the same direction.

Popular posts from this blog

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund Tata Mutual Fund has decided to merge Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund, with effect from January 16, 2015.   Investors of Tata Indo-Global Infrastructure Fund can redeem/ switch out units from December 13, 2014 to January 12, 2015 without paying any exit load. For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call Leave a missed Call on 94 8300 8300 Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest Mutual Funds Online Invest Any Mutual Fund Online Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund A...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now