Mark to market valuation likely for all debt securities

Mark to market valuation likely for all debt securities

From April 1st the securities and exchange board of India (SEBI) may make it mandatory for the debt products to assign the latest market price to all their bond investments this is because of the investors in a mutual fund debt plans especially liquid schemes and may have to bare for more confusion regarding returns. Mark to market valuation

On the mark-to-market basis, only the debt papers comprising maturity of over 30 days will be valued and most fund houses value the remaining papers based on amount.

Here the fixed income scheme reflect the portfolio’s fair value that has been ensured by the net asset value by undertaking the shift and by the new method of calculation, all the categories will be impacted like debt MFs including liquid funds and ultra short-term funds which widely invest in debt papers with the maturity of 30 days.

On the SEBI board meeting held on August 21st, the records said that with the effect from April 1, 2020, the valuation of money market instruments and debt are based on amortization and can disburse with and can completely shift to market to market valuation and the move is aimed at aligning their values to the market prices and boosting transparency in bond funds.

The change in the valuation method would mean Net asset value can fluctuate as prices more frequently and could swing in the changes in credit ratings or in the event of uncertain markets for the investors in fixed income schemes.

Most investors keep their hard earn money based on the popularity of products like liquid schemes, but this move can slow such products. On August 31st, the assets managed by the liquid category of mutual funds were Rs 5.49 crore and Rs 90,293 crore worth money managed by ultra short-term schemes.

A fund manager with a domestic mutual fund said that until now the securities with the experience less than 30 days interest used to be amortized over the remaining period. But Nowadays the rating agencies will set the prices and people will use these prices for calculating net asset value (NVA) and also for valuing securities.

In the absence of an active corporate debt market, the credit rating agencies will provide daily bond prices in India. Based on the closing price of the share, we calculate the net asset value of the equity fund daily. To determine the daily price of the bond MFs use the amortization method.

Consider a mutual fund that has invested Rs 100 crore in debt papers of a company ‘A’ with a coupon rate of 10% and the tenure of the bond is 30 days. Since the fair market price of these bonds isn’t available, the fund house would divide the total interest receivable during maturity with the tenure of the bond, i.e. in this case 0.33%, and then accrue it daily. Hence, the value of the bond would be Rs 100.33 crore on the 30th day, Rs 100.66 crore on the 29th, Rs 100.99 on 28th and so on. 

To reflect its true picture, the value of the security should markdown by a fund in the event of credit deterioration. The fund manager of another fund house said that it doesn’t happen in the present scenario because of the security defaults.

Until last year, it required only debt papers with a maturity of over 60 days to value the investments on a mark-to-market basis. 

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