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CS Professional · IFSCA - Regulations, Listing and Compliances · Fund Management Services

A fund's offer document describes its valuation methodology for illiquid holdings. After a weak quarter, the manager wants to switch to a more favourable methodology only for that quarter to show a higher NAV. Which statement is correct?

The switch is improper. A valuation methodology disclosed to investors should be applied consistently and changed only for genuine reasons, with disclosure to investors. Changing it for one quarter simply to show a higher NAV and reverting later would make the NAV unreliable and misleading.

  1. AThe switch is acceptable because the manager is the sole judge of valuation
  2. BThe switch is acceptable if the earlier methodology is not mentioned in the quarterly report
  3. CA methodology change should be made only for sound reasons, be disclosed to investors and applied consistently; changing it merely to improve reported NAV is improperCorrect
  4. DThe switch is acceptable if applied only to the current quarter and reversed later

Explanation

Valuation policies must be applied consistently and fairly. A change needs a genuine justification, with disclosure to investors, and cannot be used to flatter performance. Switching for one quarter and reverting would undermine comparability and mislead investors about NAV.

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