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IFSCA - Regulations, Listing and Compliances · Fund Management Services

Investment Restrictions and Valuation of IFSCA Fund Schemes

Updated 11 October 2026 · Fact-checked

Investment conditions, restrictions and valuation are the rules that control what an IFSC fund scheme may buy, how concentrated or leveraged it can be, how its assets are priced to get NAV, and what it must tell investors. To answer, state the rule, apply it to the facts, then conclude with the compliance step.

Understand Investment Conditions, Restrictions and Valuation

A fund scheme in GIFT City pools money from investors and invests it. Investors cannot watch every trade. So the IFSCA (Fund Management) Regulations, 2022 and the related circulars set guardrails. These guardrails work in three layers: what the scheme can invest in, how much risk it can take, and how openly it reports.

Investment conditions say what the scheme can buy and how it must behave. These come from the scheme's own documents (the placement memorandum or offer document) and from the Regulations. A scheme must follow its stated objective and strategy. It cannot drift into a different strategy without telling investors.

Restrictions limit risk. They cover diversification (how much of the scheme may sit in one issuer, sector or asset type), leverage (borrowing or derivatives that push exposure above the money invested), and dealings with related parties. The tightness of the limits depends on the type of scheme. A retail scheme, sold to the general public, gets stricter protection than a restricted scheme sold only to accredited or sophisticated investors. Always check the exact limit for the scheme type in the Regulations text and circulars supplied. Do not rely on memory.

Valuation turns the portfolio into a price. The scheme adds up the fair value of its assets, subtracts liabilities, and divides by the units outstanding. The result is the Net Asset Value (NAV). Subscriptions and redemptions happen at NAV, so a wrong valuation means one set of investors gains at the expense of another. This is why the manager must follow a written valuation policy, apply it consistently, and in many cases have the valuation reviewed independently.

Disclosure closes the loop. The manager must tell investors about the strategy, risks, fees, leverage, valuation method and NAV, and must report to IFSCA as required. In the exam, link each restriction to the investor-protection reason behind it. That reasoning earns marks.

Key rules to remember

Net Asset Value (NAV)
NAV = Fair value of scheme assets − Liabilities (including accrued expenses)
Assets include investments, cash and accrued income. Use fair value as per the valuation policy, not cost.
NAV per unit
NAV per unit = NAV ÷ Number of units outstanding
Units are issued and redeemed at this price (plus or minus any permitted load or fee).
Exposure to a single issuer
Exposure % = Value of investment in the issuer ÷ NAV × 100
Compare with the limit applicable to that scheme type. Calculate on NAV, not on the amount invested originally.
Leverage ratio
Leverage = Gross exposure ÷ NAV
Gross exposure includes borrowed money and derivative positions. A ratio above 1 means the scheme is leveraged. Check the cap and disclosure rule for the scheme type.
Core compliance rule
Invest as per scheme documents + stay within diversification and leverage limits + value fairly under a written policy + disclose
Use this four-part structure as the skeleton of any answer.

How to solve Investment Conditions, Restrictions and Valuation questions

Use this method for any case or theory question on investment conditions, restrictions and valuation.

  1. 11. Identify the scheme type: retail, restricted or venture capital. The strictness of limits depends on it.
  2. 22. Identify the issue: investment limit, diversification, leverage, related-party dealing, valuation or disclosure.
  3. 33. State the rule in plain words and name the Regulations. If the exact limit is given in the question, use it. Quote a figure from memory only if you are certain.
  4. 44. Compute where needed: exposure % on NAV, excess amount over the limit, NAV or NAV per unit. Show each line.
  5. 55. Apply the rule to the facts and say clearly whether there is a breach.
  6. 66. Conclude with the compliance action: rebalance, disclose to investors, report to IFSCA, correct the valuation or update the offer document.
  7. 77. Add the investor-protection reason in one line.

Quickest way: Four-check shortcut: Mandate, Limit, Price, Tell

When to use it: Use it when you have a short case and about 10 to 12 minutes per answer.

  1. Mandate: does the investment fit the stated objective and scheme documents?
  2. Limit: compute exposure or leverage on NAV and compare with the limit given or applicable to the scheme type.
  3. Price: check that assets are valued at fair value under the written policy, consistently, and that NAV is computed correctly.
  4. Tell: list what must be disclosed to investors and reported to IFSCA, and what corrective step the manager must take.
  5. Write the conclusion first in one line, then the working.

Common mistakes in Investment Conditions, Restrictions and Valuation

  • Applying one set of limits to all scheme types.

    Students memorise a single list of restrictions.

    Fix: Always name the scheme type first. Say that restricted schemes for accredited investors have more flexibility than retail schemes, and check the Regulations for the exact limit.

  • Calculating exposure on the original amount raised instead of current NAV.

    The initial corpus is easy to remember.

    Fix: Use current NAV as the denominator. Limits are tested against the scheme's current value.

  • Valuing assets at purchase cost.

    Cost is familiar from accounting.

    Fix: Use fair value under the scheme's valuation policy. Cost is not the NAV basis.

  • Forgetting liabilities and accrued expenses when computing NAV.

    Students add only investments and cash.

    Fix: Use the formula: assets minus liabilities, then divide by units.

  • Stopping at 'there is a breach' without the remedy.

    The question seems to ask only for a legal conclusion.

    Fix: Add the action: rebalance the portfolio, inform investors as required, report to IFSCA and correct internal controls.

  • Treating disclosure as a one-time offer-document task.

    Students link disclosure only to the launch.

    Fix: Disclosure is ongoing. Changes in strategy, leverage, valuation method and risks must be reflected and communicated as the Regulations and scheme documents require.

Worked examples

Example 1

A scheme in GIFT City holds investments with a fair value of ₹1,85,00,000, cash of ₹15,00,000 and accrued income of ₹2,00,000. Its liabilities are ₹7,00,000. There are 10,00,000 units outstanding. Compute the NAV and the NAV per unit, and explain why the valuation basis matters.

Show the solution
  1. Total assets = ₹1,85,00,000 + ₹15,00,000 + ₹2,00,000 = ₹2,02,00,000.
  2. NAV = Assets − Liabilities = ₹2,02,00,000 − ₹7,00,000 = ₹1,95,00,000.
  3. NAV per unit = ₹1,95,00,000 ÷ 10,00,000 = ₹19.50.
  4. Valuation matters because units are issued and redeemed at NAV. If investments were shown at cost and not fair value, incoming or exiting investors would pay or receive the wrong price, and one group would be unfairly benefited. The manager must therefore follow a written valuation policy applied consistently and disclosed to investors.

Answer: NAV = ₹1,95,00,000; NAV per unit = ₹19.50.

Example 2

A fund manager runs a scheme with a NAV of ₹50,00,00,000. The scheme documents, applying the limit for this scheme type, cap exposure to a single issuer at 10% of NAV. The scheme now holds shares of Sundaram Textiles Ltd worth ₹6,20,00,000. Is there a breach? What should the manager do?

Show the solution
  1. Exposure = ₹6,20,00,000 ÷ ₹50,00,00,000 × 100 = 12.4%.
  2. Permitted maximum = 10% of ₹50,00,00,000 = ₹5,00,00,000.
  3. Excess = ₹6,20,00,000 − ₹5,00,00,000 = ₹1,20,00,000.
  4. Since 12.4% is above 10%, the diversification limit is breached. (Check whether the breach arose from price rise or from fresh buying, because the permitted correction period and the manager's responsibility may differ. Read the exact provision.)
  5. Action: reduce the holding by about ₹1,20,00,000 at current value, or bring it within the limit within the permitted time, stop further purchases in the issuer, record the reasons, and make any disclosure or report to IFSCA and investors that the Regulations or scheme documents require.
  6. Reason: the limit protects investors from the loss that a failure of one issuer would cause.

Answer: Exposure is 12.4% against the 10% limit, so there is a breach. The excess is ₹1,20,00,000, which the manager must correct and, where required, disclose and report.

Exam tips

  • Write the scheme type first. Examiners reward the distinction between retail, restricted and venture capital schemes.
  • If a numerical limit is given in the question, use it exactly. If not, state the principle and say the limit is as specified in the Regulations, rather than guessing a number.
  • Show every line of a NAV or exposure calculation. Method marks are given even if the final number slips.
  • End each answer with a compliance action and the investor-protection reason. This turns a legal conclusion into a complete case answer.
  • Since the paper is open book, practise locating the investment conditions, valuation and disclosure provisions in the Regulations so you can quote them quickly.

Practice questions from Fund Management Services

Investment Conditions, Restrictions and Valuation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Investment Conditions, Restrictions and Valuation: frequently asked questions

What investment restrictions apply to fund schemes in IFSC?

Schemes must follow their stated objective and stay within diversification, leverage and related-party limits. The tightness depends on the scheme type, with retail schemes more restricted than restricted schemes. Read the exact limits in the IFSCA (Fund Management) Regulations, 2022 and the circulars.

How are schemes valued under IFSCA fund management regulations?

The manager values scheme assets at fair value under a written valuation policy applied consistently. NAV is assets minus liabilities, and NAV per unit is NAV divided by units outstanding. Units are issued and redeemed at that NAV.

Why is diversification limited for retail schemes?

Retail investors may not be able to judge or absorb concentrated risk. Limits on single-issuer and similar exposures spread the risk so that one failure does not wipe out the scheme.

What disclosures must fund managers make?

They must disclose strategy, risks, fees, leverage, valuation method and NAV to investors, and make reports to IFSCA as required. Changes must be reflected in the scheme documents and communicated as the Regulations require.