NISM Series XIX-B · Chapter 8
Valuation
This original lesson is awaiting subject-matter review. If something looks wrong, tell us through the contact page.
This chapter (about 12 marks) explains how AIF holdings are valued. It starts with fair value and the methods used for unlisted holdings (which Category III funds may hold in limited amounts), then covers how a Category III fund marks its mostly listed and derivative positions to market and computes its NAV.
1Fair value
Investments are reported at fair value: the price that would be received to sell the asset in an orderly transaction between market participants on the valuation date. It is not the cost, and not a forced-sale price.
For unlisted companies there is no market price, so fair value is estimated using methods and judgement. Indian AIFs follow internationally accepted guidance, such as the International Private Equity and Venture Capital (IPEV) Valuation Guidelines, as SEBI's valuation framework requires.
2Valuation methods
| Approach | How it works | Best for |
|---|---|---|
| Market multiples | apply multiples (EV/EBITDA, P/E, EV/revenue) of comparable listed companies or recent deals | profitable or established businesses |
| Price of recent investment | use the price of a recent funding round, adjusted if things have changed (calibration) | early-stage companies soon after a round |
| Discounted cash flow (DCF) | discount expected future cash flows at a suitable rate | businesses with forecastable cash flows, infrastructure |
| Net assets | value the underlying assets minus liabilities | asset-heavy or holding companies, or failing businesses |
| Quoted price | use the listed market price | listed holdings |
Private credit investments are usually valued on expected cash flows and credit risk, with impairment if the borrower is in trouble.
Remember
- Multiples, recent round, DCF, net assets, quoted price.
- Recent round prices must be checked (calibrated) as time passes.
3From enterprise value to the fund's stake
Enterprise value (EV) is the value of the whole business. Equity value = EV − net debt (debt minus cash). The fund's stake is its share of the equity value, after any preferences in its instruments.
Example A company's EBITDA is ₹40 crore and comparable companies trade at 8x EV/EBITDA. EV = ₹320 crore. Net debt is ₹70 crore, so equity value = ₹250 crore. A fund owning 20% values its stake at ₹50 crore.
4Rules and safeguards
- Independent valuer: Category I and II AIFs must have their investments valued by a valuer independent of the manager, with the qualifications SEBI requires.
- Frequency: at least every six months for Category I and II (annually with approval of 75% of investors by value). Category III NAV: at least quarterly (close-ended) or monthly (open-ended).
- Consistency: methods should be applied consistently. Changes should be explained to investors.
- Conflicts: managers have an incentive to overstate value (to flatter performance and support fundraising). Independent valuation, audit and investor committee review reduce this risk.
Remember
- Equity value = EV − net debt.
- Independent valuer; Cat I/II at least half-yearly.
5Marking a Category III portfolio to market
Most Category III holdings are traded, so they are marked to market (MTM): valued at current market prices on each valuation date.
| Holding | Usual basis of valuation |
|---|---|
| Listed equity | closing price on the principal stock exchange |
| Futures and options | daily settlement price set by the exchange |
| Government and corporate bonds, money market instruments | prices from independent valuation agencies, or the traded price where trading is active |
| Thinly traded or suspended securities | fair value under the fund's valuation policy, with a discount for illiquidity where needed |
| Units of mutual funds | latest NAV |
Unrealised gains and losses on MTM positions are part of NAV even though nothing has been sold.
Remember
- Listed shares: closing price. Derivatives: settlement price. Debt: valuation agency prices.
- Illiquid holdings: fair value with an illiquidity discount.
6Computing NAV
NAV = (market value of assets − liabilities) ÷ number of units outstanding.
Liabilities include accrued management and performance fees, other expenses, amounts payable for purchases and margin obligations.
Example A fund holds investments worth ₹505 crore and cash of ₹15 crore. Accrued fees and other liabilities total ₹20 crore. There are 4 crore units. NAV = (505 + 15 − 20) ÷ 4 = ₹125 per unit.
Unit series: because investors in an open-ended fund come in at different NAVs, a high-water mark common to all would be unfair. Many funds issue a new series of units for each subscription date. Each series has its own NAV and HWM, so each investor pays a performance fee only on their own gains. Series may later be consolidated after a performance fee crystallises.
Independent checks: the NAV is usually computed by a fund accountant or administrator independent of the portfolio managers, prices come from independent sources, and illiquid holdings may be valued by a third-party valuer. The auditor reviews valuation each year.
Remember
- NAV = (assets − liabilities) ÷ units.
- Unit series: one NAV and HWM per subscription batch.
Original summary written by Integrato Digital to complement the official NISM workbook (March 2026 version). Read the workbook for the full text.