Acting as the prime regulator of the financial market in India, the Securities and Exchange Board of India (SEBI) has put forth a mandate intended to infuse uniformity and consistency in valuation. The regulatory authority has asked mutual fund houses to employ the “waterfall” approach for the valuation of money market and debt securities.
Understanding the Waterfall Approach
The Waterfall approach comes into play in the wake of several instances where mutual fund houses have executed their own trades in relatively small quantities to value their entire holding of a particular security. To prevent such occurrences, SEBI has recommended the use of the Waterfall method.
The principle element of this method is that all traded securities need to be valued based on the traded yields. For government securities, including Treasury Bills (T-Bills), the method to be utilised is the Volume Weighted Average Yield (VWAY) for trades in the last hour of trading.
Facts about Volume Weighted Average Yield (VWAY)
The VWAY is a trading benchmark employed by traders to provide an average price at which securities have been traded throughout the day. This average takes into account both volume and price. The importance of VWAY lies in its ability to offer traders insights into both the trend and value of a security.
| VWAY Highlights |
|---|
| A trading benchmark used by traders |
| Provides an average trading price |
| Takes into account both volume and price |
| Offers insights into the trend and value of a security |
Valuation of Other Money Market and Debt Securities
The valuation of all other money market and debt securities, including government securities that have not been traded in the last hour, should be done based on the VWAY of all trades conducted during the day.
Insight into Money Market Fund
Money Market Mutual Funds (MMMF) are short-term liquid investments. They primarily invest in high-quality money market instruments such as T-Bills, Repurchase Agreements (Repos), Commercial Papers and Certificates of Deposits. By nature, a money market fund is an open-ended mutual fund.
These funds concentrate their investments in short-term debt securities like treasury bills and commercial paper. Additionally, debt securities funds also invest in fixed income securities like bonds and treasury bills. The major aim behind these investments is to offer investors higher returns with minimum risk.
