Fair Valuation Principles -Dividends & Distributable

Fair Valuation Principles

Fair Value:

• Definition: The price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction (not a forced sale) between market participants (market-based view) at the measurement date (current price).
• Market-Based Measurement: Fair Value (FV) is a market-based measurement and not an entity-specific measurement.
  • Entity Intention Irrelevant: Consequently, the entity's intention to hold an asset or to settle or otherwise fulfill a liability is not relevant when measuring fair value.

Fair Valuation Principle:

• Definition: Fair Valuation Principles are guidelines used to estimate the value of an asset or liability in a way that reflects its true market value.
• Key Principles (Valuation Methods):
  1. Market Approach:
     • Description: The Market Approach is a valuation method that determines the value of an asset by comparing it to similar assets or businesses in the market.
     • Methods:
       • Comparable Company Analysis (CCA): Valuing an asset based on the multiples of comparable publicly traded companies.
       • Comparable Transaction Analysis (CTA): Valuing an asset based on prices paid in recent transactions for similar assets.
  2. Income Approach:
     • Description: The Income Approach estimates the value of an asset or business by calculating the present value of expected future cash flows.
     • Method: Discounted Cash Flow (DCF) analysis is a common example.
  3. Cost Approach:
     • Description: The Cost Approach estimates the value of an asset by determining the cost to replace or reproduce it.
     • Method: Often used for unique or specialized assets where market or income data is limited.

Dividends & Distributable Reserves

Dividends in Mutual Funds:

• Dividend Options: Some mutual fund schemes, particularly dividend options within equity and debt funds, may declare dividends.
• Source of Dividends: Dividends are paid out of the distributable surplus, which primarily comes from:
  • Profits: Realized profits from selling investments at a gain.
  • Interest Income: Interest earned on debt securities in debt funds.
  • Dividend Income: Dividends received from underlying equity investments in equity funds.
• Impact on NAV: When a dividend is declared and paid out, the NAV of the mutual fund scheme falls to the extent of the dividend payout. This is because the fund is distributing a portion of its assets to unitholders.
• Distributable Reserves: Represent the accumulated profits and income that are available for distribution as dividends. Regulations govern how much of the reserves can be distributed.
• Taxation of Dividends: Dividend income from mutual funds is taxable in the hands of the investor, according to prevailing tax laws.