5.8Valuation of unit trusts and mutual funds

Valuing unit trusts and mutual funds involves assessing the net asset value (NAV) of the fund. The NAV represents the total value of the fund’s assets minus its liabilities, divided by the number of units or shares outstanding. Here’s an overview of the valuation process for unit trusts and mutual funds:

1. Calculation of Net Asset Value (NAV): The NAV is calculated on a periodic basis, typically daily, and reflects the current value of the fund’s underlying assets. The steps involved in calculating the NAV are as follows: a. Determine the market value of all the fund’s investments, including stocks, bonds, and other securities. This is usually based on the market prices of these assets. b. Add any income earned by the fund, such as dividends or interest. c. Deduct the fund’s expenses, including management fees, administrative costs, and any other charges. d. Deduct any liabilities, such as outstanding fees or expenses owed by the fund. e. Divide the resulting amount by the total number of units or shares outstanding to determine the NAV per unit/share.
2. Pricing Methodology: Unit trusts and mutual funds typically use either forward pricing or backward pricing to determine the NAV. Forward pricing uses the next available market prices of the fund’s assets, while backward pricing uses the most recent available market prices. The specific methodology used may depend on regulatory requirements and the fund’s own policies.
3. Valuation Frequency: Unit trusts and mutual funds are typically valued on a daily basis, although some funds may have less frequent valuation periods (e.g., weekly or monthly). The valuation frequency is disclosed in the fund’s prospectus.
4. Pricing Adjustments: In certain cases, valuation adjustments may be necessary to account for events that occur between valuation periods, such as significant market movements or changes in the composition of the fund’s portfolio. These adjustments ensure that the NAV accurately reflects the fund’s value.
5. Reporting and Distribution: The NAV is usually published and made available to investors on a regular basis, along with other information such as fund performance, fees, and expenses. Investors can buy or sell units/shares in the fund at the NAV price, which is typically determined at the end of the trading day.