Net Asset Value, Total Expense Ratio and Pricing of Units

NISM Series V-D | 5 marks | Official workbook pages 142-159

What this chapter is about

Master fair valuation, net assets, NAV per unit, accrued income and expenses, loads, TER, distributable surplus and accounting for segregated portfolios.

Core concepts

• Fair valuation aims to reflect the realisable value of portfolio securities and must follow the disclosed valuation policy.
• Net assets equal scheme assets plus accrued income and receivables, less liabilities and accrued expenses.
• NAV per unit is net assets divided by units outstanding. A high NAV does not make a scheme expensive in the way a high share price might.
• Total Expense Ratio captures recurring scheme expenses charged to the portfolio. Expenses reduce NAV and therefore investor return.
• Entry load is not permitted under the current framework. Exit load, where applicable, is charged on specified redemptions and credited as prescribed.
• Income distribution can be paid only from distributable surplus, not from unit capital or unrealised mark-to-market gains outside the permitted framework.
• A segregated portfolio separates stressed assets from the main portfolio so recovery and valuation can be tracked independently.

Formula and calculation sheet

Net assets = investments + cash + receivables + accrued income - liabilities - accrued expenses.

NAV per unit = net assets / units outstanding.

Redemption proceeds = units x applicable NAV - exit load and other permitted deductions.

Exam focus

• The valuation policy is disclosed in the Statement of Additional Information.
• Include accrued income and deduct accrued expenses in NAV numericals.
• Do not confuse total assets with net assets.
• Distribution is paid from distributable surplus.

Quick revision - 60 second scan

• Value assets fairly.
• Add receivables; subtract liabilities.
• Divide by outstanding units.
• TER lowers NAV over time.
• Distribution comes from distributable surplus.