A client calls you, concerned that the NAV of their Mid-Cap fund dropped slightly while the Nifty 50 was relatively stable. They suspect the fund might be miscalculating the value of a specific holding that is listed on both the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). As an MFD, you need to explain that AMCs do not pick a stock exchange based on convenience or personal preference, but follow rigid, SEBI-mandated protocols to ensure that every unit holder gets a fair price.
When a security is traded on multiple exchanges, the primary rule is consistency. SEBI requires AMCs to formulate and disclose a clear, board-approved policy on which exchange will be used for daily valuation. Typically, the AMC will choose one primary exchange for a specific class of securities and apply it consistently across their portfolio. This prevents a situation where a fund manager could cherry-pick the exchange that shows a higher price on a particular day to artificially inflate the NAV.
Consider the operational impact for an MFD. If you are explaining a portfolio’s performance to a client, you can confidently state that the NAV is not a subjective estimate but an auditable calculation based on predetermined, transparent policies. This level of rigor is why the regular plan, which includes your professional guidance and suitability assessment, remains a robust choice for investors who value consistency over trying to track minute market fluctuations themselves.
By following a fixed policy for exchange selection, the AMC eliminates the potential for bias, ensuring that the price used to calculate the NAV is robust and reflects the true market liquidity.
When a particular exchange experiences technical glitches or fails to provide a closing price for a security, the AMC’s documented policy must provide for a fallback mechanism, such as using the other exchange where the security is listed. This is not an ad-hoc decision made by a dealer at the last minute, but an integral part of the fund’s fair valuation framework. Your ability to communicate these safeguards reinforces your role as a trusted guide, demonstrating that you understand the complex mechanics supporting the safety of their investments.
Nuance
Check Your Understanding
An AMC holds shares of a company that is traded on both the NSE and BSE. According to SEBI regulations, how should the AMC determine the value of these shares for daily NAV calculation?
If an AMC’s primary exchange for a specific stock fails to provide a closing price on a particular day, what is the correct regulatory approach?
This is a companion read for Section 7.1 — Fair Valuation Principles from Ace the NISM Mutual Fund Distributors Exam by Akhilesh Gururani, available on Amazon Kindle.
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