This process is crucial for valuing assets based on current market value.
What is mark-to-market?
Mark-to-market is the process by which an asset is valued based on its latest market price. It records the price or value of a security, portfolio or account on a daily basis to reflect the current market value.
What is the purpose of mark-to-market?
The market price of a bond may be different from its face value. The longer a bond’s period to maturity, the more its prices tend to fluctuate as market interest rates change. Here arises the need for
mark-to-market. This valuation helps investors buy and sell units of a scheme at fair prices.
How does mark-to-market apply to mutual funds?
Mark-to-market in the case of mutual funds is more pertinent to schemes that put their money in government and corporate bonds of variable maturities. This is mainly because the prices of these fixed income securities will fluctuate corresponding to movements in interest rates.
How does one stand to gain or lose?
Bond prices fall when interest rates rise and rise when interest rates fall. So, assuming interest rates were to decline, this would lead newer bonds to be issued at lower interest rates than existing bonds. This in turn will result in old bonds becoming more valuable leading to a rise in demand and hence prices of the older bonds would rise.
In the same fashion, if interest rates rise, then the value of the old bonds would fall since the newer bonds would bear higher interest rates.
What if mark-to-market is avoided altogether?
If mark-to-market is avoided, then the investment will reflect the value of the cost at which the security was bought. Say the bond was bought when its price acquisition cost was Rs 100. One year later it is trading at Rs 110. So it is pointless to calculate the value at the old price of Rs 100 because if the scheme were to sell, it would sell it at Rs 110 and not Rs 100. In a scheme that is marked-to-market, the NAV will capture this difference.
What is the market regulator’s stance on mark-to-market?
In 2010, SEBI had revised the valuation norms whereby debt and money market instruments’ eligibility for mark-to-market valuation was reduced from 182 days to 91 days.
Earlier this year, SEBI decided to tighten the valuation norms for debt funds. It has decided to reduce the threshold for mark-to-market requirement on debt and money market securities from 91 days to 60 days. In this case debt securities below 60 days will follow the amortization method while securities maturing above 60 days will be valued at their market prices. SEBI has instructed that for debt or money market securities that are not traded on a particular valuation day, valuation should be conducted through amortization basis and it is to be restricted to securities having a residual maturity of up to 60 days, provided such valuation shall be reflective of the fair value of the securities.