Why does SEBI mandate daily Mark-to-Market (MTM) valuation of mutual fund investment portfolios rather than valuing assets at historical purchase cost?

[ A ]To reflect the true realizable worth of each unit so that entering and exiting investors transact at fair prices, preventing unfair wealth transfer among unitholders.[ CORRECT ]

[ B ]To ensure that the scheme NAV never experiences any daily downward fluctuations.

[ C ]To allow the AMC to eliminate all recurring operating expenses and management fees entirely.

[ D ]To guarantee that all debt schemes generate identical daily returns regardless of interest rate cycles.

Takeaway

Option A is correct: To reflect the true realizable worth of each unit so that entering and exiting investors transact at fair prices, preventing unfair wealth transfer among unitholders.

Derivation

Mark-to-Market (MTM) values all portfolio holdings at current market prices daily. If assets were carried at historical cost, newly entering investors would buy units too cheaply in an appreciating market (diluting existing unitholders) or redeem at inflated values in a declining market (penalizing remaining unitholders). Daily MTM ensures transaction prices accurately reflect true underlying value on any given day, preventing wealth transfers. This tests fair valuation theory. The common pitfall is assuming MTM eliminates market volatility.

Why the others fail

B — To ensure that the scheme NAV never experiences any daily downward fluctuations.

MTM directly causes daily NAV fluctuations by reflecting market movements rather than guaranteeing flat valuations.

C — To allow the AMC to eliminate all recurring operating expenses and management fees entirely.

MTM is an asset valuation discipline and has no impact on the elimination of legitimate scheme operating expenses.

D — To guarantee that all debt schemes generate identical daily returns regardless of interest rate cycles.

MTM highlights the true yield and credit variations of debt securities rather than creating artificial identical returns.