Net Asset Value (NAV) is the price at which an investor buys into and exits an open-ended mutual fund scheme, and it is the figure against which a fund's performance, an AMC's stewardship and a trustee's diligence are ultimately measured. Behind a single decimal lies a tightly regulated chain - daily valuation of every security under the Eighth Schedule, accrual accounting under the Ninth Schedule, and a publication and pricing discipline policed by SEBI. This chapter explains how NAV is computed under the SEBI (Mutual Funds) Regulations, 1996, why the law insists on fair valuation rather than mere market quotes, and how mispricing of illiquid debt triggered the most consequential mutual-fund litigation India has seen.
What NAV Is and Why It Governs Everything
Net Asset Value is, in its simplest form, the per-unit market value of a scheme's assets after deducting its liabilities. SEBI's own formulation captures the arithmetic precisely: NAV equals the market or fair value of the scheme's investments plus current assets, minus current liabilities and provisions (other than the liability to unitholders), divided by the number of units outstanding on the valuation date. Every figure feeding into that quotient is the subject of detailed regulation, because NAV is not a passive report card - it is the live transaction price.
In an open-ended scheme the fund continuously creates units when investors subscribe and extinguishes them when investors redeem, and it does so at NAV. A NAV that overstates the value of the portfolio lets exiting investors walk away with more than their fair share, leaving the cost to be borne by those who remain; a NAV that understates value penalises those exiting and unjustly enriches incoming investors. NAV is therefore the principal mechanism by which the law secures equal treatment among a constantly changing body of unitholders. This is the conceptual thread that runs from the structure of mutual funds in India through to the valuation rules examined below.
The Regulatory Architecture: Regulations 47 to 50
The NAV regime sits in Chapter VI of the SEBI (Mutual Funds) Regulations, 1996. Four regulations do the heavy lifting. Regulation 47 directs that every mutual fund and asset management company shall compute and carry out the valuation of investments in accordance with the investment valuation norms specified in the Eighth Schedule, and shall publish the same. Regulation 49 (read with the Ninth Schedule) prescribes the method of accounting and the standard accounting policies to be followed. Regulation 48 deals with the computation and publication of NAV itself, and the pricing of units - that the NAV, sale price and repurchase price be published and disclosed in the manner SEBI specifies. Regulation 50 requires the AMC to maintain and preserve the books, records and documents - including the rationale for every valuation decision - so that an audit trail exists.
These provisions are not freestanding. They operate against the duties cast on the asset management company and the supervisory obligations of the trustees, who must periodically satisfy themselves that the AMC has computed NAV correctly. The bare provisions are available on the SEBI website and on indiacode.nic.in; aspirants should read Regulation 47 and the Eighth Schedule together, because the regulation merely points to the Schedule where the substantive law lives.
The Principles of Fair Valuation
By an amendment notified on 21 February 2012, SEBI rewrote Regulation 47 and inserted overriding 'Principles of Fair Valuation' at the head of the Eighth Schedule. The change was philosophical, not merely technical. Before 2012 the Schedule read as a mechanical rulebook; after 2012 the rulebook is expressly subordinated to a set of principles, and where a prescribed methodology produces a value that is not fair, the principles prevail.
The first principle is that valuation must reflect the realisable value of the securities and assets, and must be done in good faith and in a true and fair manner. The principles also fix accountability squarely: the responsibility for the truth and fairness of valuation and the correctness of NAV rests on the asset management company, irrespective of whether it has disclosed its valuation policies. A further principle requires that in case of any conflict between the principles of fair valuation and the valuation guidelines prescribed by SEBI, the principles of fair valuation shall prevail. Finally, the AMC must document the rationale for valuations - including inter-scheme transfers - and preserve that documentation to enable an audit trail, dovetailing with Regulation 50. Crucially, the regulations make the AMC and the sponsor liable to compensate affected investors or the scheme for any unfair treatment arising from inappropriate valuation, converting valuation error from a disclosure lapse into a compensable wrong.
Valuing Traded Securities
For securities that are actively traded, the Eighth Schedule keeps matters simple: a traded security (other than debt) is valued at the last quoted closing price on the stock exchange where it is principally traded. Where a security is listed on more than one exchange, the AMC has the option to value it at the price on the exchange where it is most frequently traded, provided the policy is applied consistently. When a security is not traded on the valuation day but was traded within the preceding period, the last available closing price is used, subject to the staleness limits the Schedule prescribes.
The apparent simplicity is deceptive. The closing price is only a fair proxy for realisable value when the market is liquid and the position is small relative to volume. Where a fund holds a dominant position, or where the last trade is stale or manipulated, the principles of fair valuation require the AMC to look past the quote. This is why the 2012 reform mattered: a literal closing price is no longer a safe harbour if it does not reflect what the scheme could actually realise.
Thinly Traded and Non-Traded Equity
The Eighth Schedule defines thinly traded and non-traded securities with bright-line tests because illiquidity is where valuation discretion - and abuse - concentrates. An equity or equity-related security is treated as thinly traded if, in the calendar month preceding the valuation date, the total traded value on all exchanges is less than five lakh rupees and the total volume traded is less than fifty thousand shares. A security not traded on any exchange for a stretch (the Schedule fixes the look-back window) is treated as non-traded.
Thinly traded and non-traded equity must be valued in good faith by the AMC on the basis of appropriate valuation methods approved by the board of the AMC, applying recognised principles such as net worth per share, capitalised earnings and comparable multiples, with appropriate discounts for illiquidity. The trustees must oversee this exercise. Because these valuations are inherently judgemental, the documentation and audit-trail requirements bite hardest here, and a scheme that loads up on thinly traded names exposes itself to exactly the fair-treatment problem NAV is meant to prevent.
Valuing Debt and Money Market Instruments
Debt and money market valuation is the most heavily reformed corner of the regime, because debt schemes hold instruments that rarely trade and whose prices can gap suddenly on a credit event. Historically, money market and short-tenor debt instruments were valued on an amortisation basis - cost adjusted for the straight-line accrual of the difference between cost and redemption value - on the rationale that a held-to-maturity instrument's realisable value converges to par. Over successive reforms SEBI compressed the amortisation window: today, only instruments with very short residual maturities may be amortised, and instruments above the prescribed threshold must be marked to market using prices from SEBI-empanelled valuation agencies (CRISIL and ICRA), so that NAV reflects current realisable value rather than book cost.
The mark-to-market discipline now anchors on average security-level prices published by the valuation agencies, and an AMC that deviates from the agency price must record and justify the deviation, with the deviation reported and subject to trustee scrutiny. Inter-scheme transfers of debt, once a route by which an AMC could shift a stressed security between its schemes at a self-determined price, are now hemmed in by the same fair-valuation logic and dedicated SEBI norms, precisely because such transfers can disguise a NAV problem in one scheme by parking it in another. This shift from amortisation to agency-based fair pricing is the single most important post-2012 development in NAV computation, and it directly limits the kind of discretion that, exercised badly, produced the Franklin Templeton crisis discussed below.
Perpetual Bonds and the 100-Year Maturity Rule
Additional Tier-1 (AT-1) and other perpetual bonds posed a special valuation puzzle: they have no contractual maturity, yet funds had been valuing them to the issuer's first call date as if maturity were near. By circular SEBI/HO/IMD/DF4/CIR/P/2021/032 dated 10 March 2021, SEBI directed that for valuation the maturity of all perpetual bonds be treated as 100 years from the date of issuance, a change that, by lengthening assumed duration, increases price sensitivity and reduces valuation.
The 100-year rule provoked a rare public disagreement, with the Ministry of Finance asking SEBI to reconsider the measure for fear of forced selling and mark-downs. SEBI retained the principle but introduced a glide path: deemed residual maturity of ten years until 31 March 2022, twenty years in the first half of 2022-23, thirty years in the second half, and the full 100-year treatment from 1 April 2023 onwards. The episode is a textbook illustration of how a valuation assumption - a single input to NAV - can move portfolio values across an entire industry, and of the tension between investor protection through conservative valuation and market stability.
Method of Accounting: The Ninth Schedule
NAV is only as reliable as the accounting that produces the asset and liability figures fed into it. Regulation 49 requires every mutual fund to follow the accounting policies and standards specified in the Ninth Schedule. The Schedule mandates accrual accounting: investments are accounted on the date of transaction, not settlement, so that the portfolio reflected in NAV matches the economic commitments of the scheme; dividends are recognised on the ex-dividend date and interest income is accrued on a day-to-day basis.
The Ninth Schedule also governs the treatment of unrealised appreciation and depreciation, the amortisation of issue and brokerage expenses, and the recognition of profit or loss on sale of investments computed on the weighted-average cost method. Conservative accrual policies - recognising income only when reasonably certain and providing for doubtful recoveries - feed directly into a fair NAV. Where a debt instrument turns non-performing, the Schedule and SEBI's guidance require the AMC to stop accruing interest and to provide against the principal, which mechanically pulls NAV down to a fairer level.
Pricing of Units and Cut-Off Timing
NAV is computed once a day for most schemes, yet investors transact throughout the day, so the law must fix the NAV at which any given application is processed. SEBI's cut-off timing framework does this: an application received before the prescribed cut-off is generally allotted the NAV of that business day, while one received after the cut-off is allotted the next day's NAV. For purchase applications, SEBI moved in 2021 to a regime in which the applicable NAV depends on the actual realisation of funds in the scheme's account - units are allotted at the NAV of the day on which the money is available for utilisation, regardless of the application's timestamp, closing a loophole that had allowed large investors to lock in a favourable NAV before paying.
The sale price at which an investor buys and the repurchase price at which the fund buys back units are derived from NAV. Exit loads, where applicable, are deducted from the redemption proceeds rather than added to the NAV. Open-ended schemes are no longer permitted to charge entry loads, so the sale price equals NAV. These pricing rules ensure that the NAV the public sees translates transparently and uniformly into the price each investor actually pays or receives.
Computation, Rounding and Publication of NAV
Once the portfolio is valued and accounts are drawn, the AMC computes NAV by aggregating the fair value of investments and current assets, subtracting current liabilities and provisions other than the liability to unitholders, and dividing by units outstanding. SEBI requires NAV to be calculated to a prescribed number of decimal places and published with comparable precision, and to be updated and made available on the AMC's and AMFI's websites by the cut-off times SEBI fixes for different categories of schemes.
The discipline around publication is part of investor protection. Errors in NAV - whether arithmetical, valuation-based or accounting-driven - must be corrected, and where the error exceeds a materiality threshold the scheme is required to compensate affected investors and reprocess transactions. This is the operational face of the fair-valuation principle that the AMC and sponsor are liable for unfair treatment caused by inappropriate valuation. The trustees, exercising the oversight duties examined in the chapter on the trustee's constitution and duties, must satisfy themselves that NAV computation and publication systems are robust.
Side-Pocketing: Segregating Stressed Assets from NAV
A single defaulting bond can distort a debt scheme's NAV and trigger a redemption stampede in which fleeing investors crystallise the bad asset at the expense of those who stay. To address this, SEBI permitted the creation of segregated portfolios - 'side-pocketing' - by circular dated 28 December 2018, following the IL&FS default that had revealed the systemic danger of a single credit event. On a credit event such as a downgrade of a debt or money-market instrument to below investment grade, or on an actual or potential default, the AMC may, with trustee approval, segregate the affected security into a separate portfolio.
The main portfolio's NAV is then struck without the stressed asset, so that subscriptions and redemptions continue at a value reflecting only the healthy holdings, while every unitholder on the segregation date receives proportionate units in the segregated portfolio that pay out if and when recovery occurs. SEBI built in a strict disclosure regime - disclosure at the stage of the proposal, at trustee approval or rejection, and of the segregated NAV - and required the segregated units to be listed on a recognised exchange to give investors an exit. Side-pocketing is, in effect, a NAV-protection device: it prevents the mispricing of one illiquid asset from contaminating the price at which the rest of the portfolio trades.
Swing Pricing and the Cost of Liquidity
Even a correctly valued NAV can treat investors unequally during market stress, because large redemptions force the fund to sell assets at a discount and the resulting transaction costs fall on the investors who remain rather than on those who exit. By circular dated 29 September 2021, effective 1 March 2022, SEBI introduced a swing pricing framework for open-ended debt schemes (excluding overnight, gilt and ten-year constant-maturity gilt funds). Swing pricing adjusts the NAV applicable to subscribing and redeeming investors during periods of net outflows so that the transacting investor bears a fair share of the liquidity cost.
Under the framework a partial swing applies in normal times under the AMC's discretion, while a mandatory full swing operates during market dislocation as notified by SEBI for high-risk open-ended debt schemes. The mechanism does not change the underlying portfolio valuation; it adjusts the transaction price around NAV. Together with side-pocketing, swing pricing rounds out the toolkit by which the law keeps NAV-based dealing fair when liquidity, rather than valuation, is the source of unfairness.
When Valuation Fails: The Franklin Templeton Episode
The fragility of NAV in illiquid debt was laid bare in April 2020 when Franklin Templeton abruptly wound up six open-ended debt schemes holding roughly twenty-five thousand crore rupees, citing a collapse of liquidity in lower-rated corporate paper amid the pandemic. Investors who had bought and redeemed units at NAVs derived from illiquid, hard-to-value securities suddenly found those units frozen, and the realisable value of the portfolios was plainly far below the published NAVs. The matter reached the Supreme Court, which in Franklin Templeton Trustee Services Pvt. Ltd. v. Amruta Garg, 2021 SCC OnLine SC 88 (decided 12 February 2021, S.A. Nazeer and Sanjiv Khanna, JJ.), upheld the validity of the e-voting by which unitholders consented to the winding up, holding that 'consent of the unitholders' under Regulation 18(15)(c) means the consent of the majority of unitholders who participate in the poll, not of the entire body of unitholders.
While the judgment turned on the mechanics of winding-up consent rather than on valuation methodology directly, the crisis it adjudicated was at root a valuation and liquidity failure - the published NAVs had not adequately reflected the realisable value and liquidity risk of the underlying paper. The episode accelerated SEBI's tightening of debt valuation norms, the move from amortisation to agency-based mark-to-market pricing, and the introduction of swing pricing, all examined above. For an aspirant, Amruta Garg is best understood not as a NAV case in form but as the consequence of getting NAV wrong in substance.
Valuation Under the AIF Regulations
Alternative Investment Funds compute and report value under a parallel but distinct regime. Regulation 23 of the SEBI (Alternative Investment Funds) Regulations, 2012 requires AIFs to carry out valuation of their investments in the manner specified by SEBI, and casts on the manager the duty to provide investors a description of the valuation procedure and methodology. Because AIFs invest heavily in unlisted and illiquid assets, periodic NAV-style valuation is inherently more judgemental than for a listed-equity mutual fund.
By circular dated 21 June 2023 SEBI standardised the framework: AIFs must value their investments in accordance with recognised valuation standards, the manager bears responsibility for true and fair valuation, and valuations of unlisted securities must be carried out by an independent valuer meeting prescribed eligibility criteria - typically a person registered as a valuer with the IBBI and holding membership of the ICAI, ICSI or ICMAI, or an entity meeting the alternative credit-rating-agency-linked test SEBI prescribes. The 2023 framework also relaxed the eligibility for independent valuers to widen the pool of qualified professionals, required managers to report valuations to performance benchmarking agencies, and prescribed timelines for reporting valuation to investors, so that an AIF investor receives a periodic, independently assessed value much as a mutual-fund unitholder relies on a daily NAV. The architecture mirrors the mutual-fund principles - fair valuation, independent assessment, manager accountability and documentation - reflecting a common regulatory philosophy across the two vehicle types: in both, the published value must approximate what could actually be realised, and someone is accountable if it does not. For the broader framework, see the chapter on the SEBI (Mutual Funds) Regulations, 1996 and the overview at the subject hub.
Exam Pointers and Synthesis
For judiciary and CLAT-PG purposes, anchor the answer in the four operative regulations: Regulation 47 and the Eighth Schedule (valuation), Regulation 48 (computation and publication of NAV and pricing), Regulation 49 and the Ninth Schedule (accounting), and Regulation 50 (records). Be able to state the NAV formula and explain why fair valuation - realisable value, in good faith, true and fair - overrides mechanical methodology after the 21 February 2012 reform.
Layer onto that the three protective devices and their dates: the move from amortisation to agency-based mark-to-market for debt; the 100-year perpetual-bond valuation rule of the 10 March 2021 circular with its glide path; side-pocketing under the 28 December 2018 circular; and swing pricing under the 29 September 2021 circular. Tie the whole framework to its rationale - equal treatment of a constantly changing body of unitholders - and cite Franklin Templeton Trustee Services Pvt. Ltd. v. Amruta Garg as the cautionary tale of what mispriced, illiquid debt can do to NAV-based dealing. A complete answer shows that NAV is not arithmetic but a system of valuation, accounting, pricing and accountability.
Frequently asked questions
What is the formula for Net Asset Value of a mutual fund scheme?
NAV equals the market or fair value of the scheme's investments plus current assets, minus current liabilities and provisions (other than the liability to unitholders), divided by the number of units outstanding on the valuation date. Every input is governed by the Eighth Schedule (valuation) and Ninth Schedule (accounting) of the SEBI (Mutual Funds) Regulations, 1996.
Which regulation requires an AMC to value investments, and what changed in 2012?
Regulation 47 requires every mutual fund and AMC to compute and carry out valuation in accordance with the Eighth Schedule and to publish it. By an amendment notified on 21 February 2012, SEBI inserted overriding 'Principles of Fair Valuation' at the head of the Eighth Schedule, making realisable value and good-faith fairness override any mechanical methodology and fixing responsibility for correct NAV squarely on the AMC.
How are thinly traded equity securities valued?
An equity security is treated as thinly traded if, in the month preceding the valuation date, the total traded value on all exchanges is less than five lakh rupees and the total volume is less than fifty thousand shares. Such securities are valued in good faith by the AMC using board-approved methods - net worth per share, capitalised earnings and comparable multiples with illiquidity discounts - subject to trustee oversight and full documentation.
What is the 100-year rule for perpetual bonds?
By circular SEBI/HO/IMD/DF4/CIR/P/2021/032 dated 10 March 2021, SEBI directed that for valuation the maturity of perpetual bonds be deemed 100 years from issuance. After the Finance Ministry's intervention, SEBI introduced a glide path - deemed maturity of 10 years until 31 March 2022, 20 years and then 30 years across 2022-23, and the full 100-year treatment from 1 April 2023.
How did the Franklin Templeton case relate to NAV?
The April 2020 winding up of six Franklin Templeton debt schemes exposed how published NAVs had not reflected the realisable value and liquidity of illiquid corporate paper. In Franklin Templeton Trustee Services Pvt. Ltd. v. Amruta Garg, 2021 SCC OnLine SC 88, the Supreme Court upheld the e-voting winding-up consent under Regulation 18(15)(c), holding that consent means the majority of unitholders who participate in the poll. The crisis accelerated SEBI's tightening of debt valuation, swing pricing and side-pocketing.
What are side-pocketing and swing pricing?
Side-pocketing, permitted by SEBI's circular of 28 December 2018, lets an AMC (with trustee approval) segregate a security hit by a credit event so the main portfolio's NAV reflects only healthy holdings. Swing pricing, introduced by the circular of 29 September 2021 (effective 1 March 2022) for open-ended debt schemes, adjusts the NAV applicable to transacting investors during net outflows so they bear a fair share of liquidity costs.