Case 095NAV operations and operational riskWarm up
An equity fund with Rs 1,600 crore of net assets failed to accrue a Rs 3.2 crore dividend on the ex-date. By how much was NAV wrong, which investors were affected, and does the error cross the materiality threshold?
1The situation
An equity fund of Sindhuja Mutual Fund has net assets of Rs 1,600 crore and 32 crore units, so its NAV is Rs 50.00. One of its holdings went ex-dividend on Tuesday, entitling the fund to Rs 3.2 crore, but the fund accounting team did not book the receivable that day. The NAV published on Tuesday evening therefore left the dividend out. The error was found on Wednesday morning.
On Tuesday, investors redeemed Rs 8 crore of units and others bought Rs 12 crore, all at the published NAV. The fund house's valuation policy treats any NAV error above an assumed 0.10% of net assets as material and requires compensation and reporting; confirm the current regulatory threshold and the rules for compensating investors before answering in an interview.
2Your task
How large was the error, who gained and who lost, is it material under the assumed threshold, and what does the fund house have to do?
Quick check
Which investors were actually harmed by Tuesday's low NAV?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
NAV was understated by Rs 0.10, 0.20% of net assets, twice the assumed 0.10% threshold, so it is material. The correct NAV was Rs 50.10. Investors who redeemed Rs 8 crore were underpaid about Rs 1.6 lakh; investors who bought Rs 12 crore received about 4,790 units too many, diluting the scheme by about Rs 2.4 lakh. The fund house restates the NAV, compensates the redeemers and the scheme from its own pocket, and reports the incident. Confirm the current threshold and process.
Step 1How wrong was the NAV?
Put the missing money over the units. A shop that forgets to count a Rs 3,200 payment due to it on a day its stock is worth Rs 16 lakh has understated what it is worth by 0.2%; small for the shop, but anyone who bought a share of it that day paid the wrong price. The fund was owed Rs 3.2 crore on 32 crore units, Rs 0.10 a unit, so the correct NAV was Rs 50.10 and the published Rs 50.00 was 0.20% too low. A dividend is an asset of the fund from the ex-dateThe first day a share trades without the right to the declared dividend. A fund holding the share at the close of the previous day is entitled to the dividend and books it as a receivable from the ex-date., whether or not the cash has arrived, which is why the accrual belongs in Tuesday's NAV.
Step 2Who lost and who gained?
Only the people who transacted at the wrong price. Investors who redeemed Rs 8 crore sold 16 lakh units at Rs 50.00 that were worth Rs 50.10, so they were underpaid about Rs 1.6 lakh. Investors who bought Rs 12 crore received 24 lakh units instead of the 23.95 lakh they should have, about 4,790 units too many, worth about Rs 2.4 lakh. Those extra units are a cost to everyone else in the fund, because the dividend is now shared across more units than it should be. Investors who held through the day are not harmed once Wednesday's NAV carries the correct figure; their statement was wrong for a night.
Step 3Is it material, and what follows from that?
Under the assumed policy, yes. An error of 0.20% is twice the 0.10% threshold, so the fund house must restate the NAV, make good the investors and the scheme, and report the incident to its trustees and the regulator. The order matters: the redeemers are paid their Rs 1.6 lakh by the fund house, not by the scheme, because the scheme's other investors did nothing wrong; and the scheme is compensated for the dilution the same way, either by the fund house paying in Rs 2.4 lakh or by reversing the excess units with the buyers' consent. Many policies also set a minimum per-investor amount below which no cheque is sent; confirm the current rule. Had the dividend been Rs 1.2 crore, the error would have been 0.075%, below the threshold: the NAV is still corrected and the error logged, but the compensation machinery does not start.
| Amount | Treatment | |
|---|---|---|
| Dividend not accrued | Rs 3.2 crore | Book the receivable on the ex-date |
| NAV error | Rs 0.10 a unit, 0.20% | Above the assumed 0.10% threshold: material |
| Redeemers, Rs 8 crore | Underpaid Rs 1.6 lakh | Paid by the fund house |
| Buyers, Rs 12 crore | 4,790 excess units, Rs 2.4 lakh | Scheme made whole by the fund house, or units reversed |
| Continuing holders | No loss once restated | Correct NAV from Wednesday |
Step 4What stops it happening again?
The control, not the apology. Dividend accruals should come from a corporate actions feed reconciled daily against the custodian's entitlements, with a four-eyes check on the NAV pack before release and a tolerance check that flags any day the NAV moves out of line with the portfolio's return. The interviewer is listening for whether you treat 0.2% as trivial. It is a small number and a serious event, because the NAV is the one price every investor relies on, and a fund house that gets it wrong twice loses the trustees' confidence. The limit: the threshold, the per-investor minimum and the reporting timetable are set by regulation and change; state the framework and confirm the figures.
Where candidates lose it
Candidates say everyone who held the fund on Tuesday lost 0.2%. Holders who did not transact lose nothing once the NAV is restated; the harm is confined to redeemers, who were underpaid, and to the scheme, which was diluted by that day's buyers.
The second miss is making the scheme pay the compensation. The error was the fund house's, so the fund house pays; otherwise the continuing investors would be charged for a mistake they did not make.
What the interviewer asks next
- The dividend had been accrued but the cash was received 20 days late. Is there any NAV issue?
- How would the answer change if the error had been found three weeks later, after many more transactions?
- What tolerance check would have caught this before the NAV was released?
Company names and figures are illustrative.