Mark-to-Market & Fair Valuation Principles
Mark-to-market means valuing a scheme's holdings at current market value rather than at purchase cost. This lesson explains how shares and debt securities are valued, what thinly traded and below investment grade mean, and why the method is meant to treat investors who enter, leave or stay fairly.
What mark-to-market means
A scheme's NAV is meant to show what its portfolio is worth today. Holdings are therefore valued at current market value, not at the price the scheme paid for them.
A share bought at ₹400 that now trades at ₹460 is carried at ₹460; if it later trades at ₹350, it is carried at ₹350. Gains and losses reach the NAV as prices move, whether or not anything has been sold.
How securities are valued
Traded equity shares are valued at the last quoted closing price on the principal stock exchange on which they trade. A share is thinly traded when its trading in a month is below ₹5 lakh in value and below 50,000 shares in volume. Thinly traded and non-traded shares are valued on separate fair-value principles rather than at cost.
Debt and money market securities are valued at the average of the security-level prices given by valuation agencies. They are not carried at purchase cost or face value, so a change in interest rates or in an issuer's credit standing shows up in the NAV.
Ratings and downgrades
A debt security rated below BBB− is below investment grade. When a bond is downgraded, the valuation agencies' prices reflect it, and the lower value flows into the NAV promptly instead of being deferred until maturity.
On a credit event (a downgrade below investment grade or a default) a scheme may, if its offer document provides for it and the trustees approve, move the affected security into a segregated portfolio.
Why it matters to investors
Investors buy and redeem units at NAV. If holdings were carried at cost, the NAV could differ from what the portfolio is really worth. Someone redeeming at an overstated NAV would take out more than a fair share and leave the shortfall with those who stay; someone buying at an understated NAV would gain at the expense of existing unitholders.
Mark-to-market is meant to let investors entering or leaving a scheme transact at a price that reflects current portfolio value. The other side of this is that the NAV rises and falls with market prices, and a fall in a bond's price or rating reduces the NAV.
Rules at a glance
A downgrade reaches the NAV (illustrative arithmetic)
Assume a debt fund holds 4% of its portfolio in one company's bond. The bond is downgraded, and the valuation agencies' prices for it fall by 25%. With everything else unchanged, the NAV falls by about 4% × 25% = 1% that day.
An investor who redeems the next day receives the lower NAV. Marking to market is meant to reflect such events in the NAV as they are priced in, so that those who stay are less likely to be left carrying a loss that others avoided. Prices can lag an event, so the method narrows that gap rather than removing it.
Cost against market value (assumed figures)
- Assume a scheme bought 1,00,000 shares of a company at ₹400 each. Cost = 1,00,000 × ₹400 = ₹4,00,00,000, or ₹4 crore.
- Today the share's last quoted closing price on its principal stock exchange is ₹460. Value in today's NAV = 1,00,000 × ₹460 = ₹4,60,00,000, or ₹4.6 crore.
- The unrealised gain, ₹4.6 crore − ₹4 crore = ₹60 lakh, is already part of the NAV although no share has been sold.
- If the next day's closing price is ₹437, the holding is valued at 1,00,000 × ₹437 = ₹4,37,00,000, which is ₹23 lakh lower than the day before.
Result. The holding is carried at ₹4.6 crore on the first day and ₹4.37 crore on the next. The purchase cost of ₹4 crore plays no part in either day's NAV.
Key points
- Mark-to-market: holdings are valued at current market value, not at purchase cost.
- Traded equity shares are valued at the last quoted closing price on the principal stock exchange.
- Debt and money market securities are valued at the average of security-level prices given by valuation agencies.
- An equity share is thinly traded when its monthly trading is below ₹5 lakh in value and below 50,000 shares in volume.
- Below investment grade means a rating below BBB−.
- A downgrade is reflected through valuation-agency prices, so the NAV shows the lower value promptly.
Common misunderstandings
- Holdings are not valued at what the scheme paid for them: they are valued at current market value.
- A bond is not carried at face value until it matures: it is valued at the average of security-level prices given by valuation agencies.
- A fall in NAV does not need a sale: unrealised gains and losses are part of the NAV.
- Mark-to-market does not make a NAV steady: it makes the NAV follow market prices, up and down.
Questions people ask
Which price is used for a traded equity share?
The last quoted closing price on the principal stock exchange on which it trades.
How does a rating downgrade affect a debt fund?
The bond is repriced at valuation-agency prices, so the lower value shows in the NAV promptly rather than at maturity.
What rating is below investment grade?
Any rating below BBB−.
What this lesson relies on
- SEBI Master Circular for Mutual Funds (20 March 2026) — Chapters 9 and 10, on NAV, valuation and pricing of units; provisions on segregated portfolios
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.