What Is Mark to Market in Mutual Funds and Why Does It Matter?

Whenever you check your mutual fund portfolio, the net asset value (NAV) you see reflects a fresh calculation based on current market prices of every component the fund has invested in. This daily repricing process is called Mark to Market (MTM).

It directly impacts your NAV, which in turn affects your redemption proceeds. In debt funds, it may indicate portfolio risks that many investors overlook.

What Is Mark to Market?

Mark to Market or MTM means a mutual fund values all its investments at current market prices every day, not at the original purchase price. Before the trading day closes, the fund recalculates the value of its portfolio using the latest market prices. This updated value is then used to calculate the fund’s NAV.

As stock or bond prices rise or fall, the NAV also changes daily. This is why the value of your mutual fund investment keeps changing even if you do not buy or sell units.

Regulatory Framework: Who Governs MTM in India?

Mark-to-market valuation is regulated by three bodies in Indian mutual funds:

• Securities and Exchange Board of India, or SEBI, is the primary regulator for mutual funds in India. As per Notification No. SEBI/LAD-NRO/GN/2026/294, under the SEBI (Mutual Fund) Regulations, 2026, all mutual funds must value their investments as per the prescribed valuation methodologies. These new rules replaced the older 1996 regulations and took effect from April 1, 2026.

• Association of Mutual Funds in India (AMFI) is the mutual fund industry entity that works under SEBI’s supervision. It issues guidelines to fund houses on how to calculate NAVs and follow valuation rules consistently.

• Asset Management Companies (AMCs) are responsible for carrying out the daily MTM valuation of portfolios. They update the value of every security in the portfolio using current market prices and calculate the fund’s NAV each day.

SEBI mandates daily MTM valuation to ensure fairness. Investors buying or selling mutual fund units get a price that shows the fund’s latest market value, rather than any historical or outdated values.

Mark to Market in Equity Funds

In equity mutual funds, every stock in the portfolio is valued at its latest market price each day. For example, if Infosys shares rise 3% in a day, the value of that holding in the fund also rises (proportionally). If the stock market falls, the fund’s NAV falls too.

Because stock prices change daily, equity fund NAVs also move up and down every day. One important thing to remember is that when you redeem your units, you get the NAV of that particular day. So in volatile markets, the timing of your redemption can affect how much money you receive.

Mark to Market in Debt Funds

MTM is more important in debt mutual funds, where many investors may not be completely aware of the risks.

Many people think debt funds are completely safe because they invest in bonds and fixed-income instruments. However, bond prices also keep on changing in the market and this affects the fund’s NAV every day.

1. Interest Rate Risk

When interest rates rise, bond prices usually fall. As a result, the NAV of debt funds can also fall. Long-duration debt funds are more sensitive to interest rate changes. During a sharp rise in rates, these funds can see noticeable short-term losses.

2. Modified Duration

Modified duration measures how sensitive a debt fund is to interest rate changes. For example, if a debt fund has a modified duration of 5 years, a 1% rise in interest rates can reduce its NAV by roughly 5%. You can find a fund’s modified duration in its monthly fact sheet.

3. Credit Risk

Debt funds also face credit risk. If a company’s bond is downgraded or defaults on payments, the bond’s market value can fall sharply. Because of MTM rules, this fall is immediately reflected in the fund’s NAV, which is why some debt funds can suddenly show sharp losses.

The Franklin Templeton Episode

One of the biggest examples of debt fund risk in India happened on April 23, 2020, when Franklin Templeton India shut down six debt mutual fund schemes managing around ₹25,200 crore, as confirmed by Franklin Templeton's official spokesperson statement reported by Business Standard.

These funds had invested heavily in lower-rated, high-risk bonds. During the COVID-19 lockdown, the bond market faced a severe liquidity crisis, meaning these bonds could not be sold easily at fair prices. At the same time, many investors wanted to withdraw their money, creating further pressure on the funds.

Because mutual funds follow MTM rules, the falling value of these bonds was immediately reflected in the schemes’ NAVs. The episode highlighted two important lessons,

• MTM reflects real portfolio risk and not just accounting adjustments.
• In debt funds, the quality of bonds held by the fund is very important, more so during market stress.

Mark to Market vs Amortisation

Earlier, some debt mutual funds used a method called amortisation to value certain bonds. Under this method, the bond’s value increased gradually until maturity, without considering daily market price changes. This made fund NAVs look more stable, but the actual impact of interest rate changes and credit risk remained hidden. MTM reveals these impacts. It values bonds using current market prices, so the NAV reflects the real value of the fund’s investments every day. To improve transparency, SEBI gradually shifted debt funds toward full MTM valuation. Under the SEBI (Mutual Fund) regulations, most securities must now be valued based on market prices, although limited amortisation is still allowed for some very short-term instruments.

What Changed for Gold and Silver Funds in April 2026

From April 1, 2026, SEBI changed the way gold and silver mutual funds value their holdings. Earlier, these funds used international gold and silver prices as a benchmark. Now, they must use spot prices published by recognised Indian stock exchanges. Because of this change, the NAVs of gold and silver ETFs and related mutual funds now reflect Indian market prices more accurately and transparently.

How to Use MTM as an Investor

For Equity fund investors

Do not worry too much about daily NAV ups and downs. Short-term movements are normal in the stock market. Focus more on the fund’s long-term performance and portfolio quality.

For Debt fund investors

Before investing, check

Modified duration: A higher duration means the fund’s NAV can move more when interest rates change.

Credit quality: Funds holding lower-rated bonds carry a higher risk of sudden NAV falls.

At the time of redemption The amount you receive depends on the NAV on the day you redeem your units. In volatile markets, even a small delay can affect your redemption value, especially in debt and hybrid funds.

When comparing funds, any fund with very smooth NAV growth is not always safer. Sometimes it may simply have lower market volatility or different valuation methods. Always check the fund’s portfolio and risk level before investing.

Frequently Asked Questions

Does MTM affect all types of mutual funds?

Yes. MTM applies to equity, debt, hybrid, gold and index funds. The degree of daily NAV movement varies by asset class. Equity funds show more visible day-to-day swings. Debt funds show gradual but sometimes sudden impacts due to MTM changes from credit or rate events.

Why did my debt fund's NAV fall suddenly, even though I thought it was a safe fund?

A sudden NAV fall in a debt fund is often an MTM event. Either a bond in the portfolio was downgraded, a default occurred or interest rates rose sharply. SEBI's MTM rules require these changes to be reflected in the NAV immediately, which is why the drop can feel abrupt.

Is amortisation still allowed in any mutual fund?

SEBI permits amortisation-based valuation only for very short-duration instruments under specific conditions. The broader framework under SEBI (Mutual Funds) Regulations 2026 mandates MTM valuation for most mutual funds.

How does MTM affect my SIP returns?

SIP investments benefit from MTM volatility through rupee cost averaging. When NAVs fall due to MTM repricing, your fixed monthly SIP buys more units at a lower price. Over time, this averaging effect can improve overall returns compared to a lump sum invested at a single point.

What is the difference between an MTM loss and an actual loss?

An MTM loss reflects the current market value of a security, not a realised loss. If the bond or stock recovers in value, the NAV recovers accordingly. An actual loss is realised only when the security is sold below its purchase price, or when you redeem your units at a lower NAV than you paid.

How can I assess my debt fund's MTM risk before investing?

Check the fund's modified duration, available in the monthly factsheet. The higher it is, the more the NAV will move for any given interest rate change. Also check the credit quality breakdown. A higher proportion of AAA-rated bonds means lower MTM risk from credit events.