Fund valuation methodologies are the structured approaches used to estimate the fair value of a fund’s underlying investments and, by extension, the value of every investor’s holding. The choice of method is not a technicality: applied to the same portfolio, different methodologies can produce materially different values, which is why both regulators and investors care a great deal about getting it right. This guide sets out the five core fund valuation methodologies, the factors that determine which one to use, and the Indian regulatory framework that governs valuation in practice.
Valuation in India is shaped by several overlapping laws, and the permissible method often depends on the purpose of the exercise. For a companion view of when a valuation report is legally mandatory across the Companies Act, FEMA, the Income-tax Act, SEBI rules, Ind AS and the Insolvency and Bankruptcy Code, see our guide to Fund Valuation Applicability in India. Here, the focus is on the methods themselves and how to select between them.
On this page
- 1. Why the choice of valuation methodology matters
- 2. Key factors in selecting a valuation method
- 3. The five core fund valuation methodologies
- 4. Comparing the methodologies at a glance
- 5. How to choose the right method
- 6. The Indian regulatory framework for fund valuation
- 7. Common challenges and mistakes
- 8. Emerging trends in fund valuation
- 9. Frequently asked questions
1. Why the choice of valuation methodology matters
A fund’s reported value drives real outcomes: the net asset value (NAV) at which investors subscribe and redeem, the performance fees a manager earns, the figures that appear in audited financial statements, and the basis on which regulators assess compliance. If the methodology is inappropriate or inconsistently applied, two consequences follow. First, value can be transferred unfairly between incoming and outgoing investors when units are priced incorrectly. Second, the valuation may fail to withstand scrutiny from auditors, tax authorities or the regulator. A defensible methodology, consistently applied and properly documented, is therefore the foundation of a credible valuation.
2. Key factors in selecting a valuation method
No single method is correct for every situation. The appropriate approach depends on the characteristics of the asset and the purpose of the valuation. The main factors are:
- Nature of the asset — whether it is listed or unlisted, operating or holding, asset-heavy or cash-generative.
- Stage and predictability — early-stage ventures with uncertain cash flows are treated differently from mature, profitable businesses. For how investors approach this in practice, see what valuation methods VCs prefer in India.
- Availability of inputs — reliable projections favour income approaches, while a deep set of comparable peers favours market approaches.
- Purpose and regulation — the law governing the transaction frequently prescribes or restricts the permissible method and the qualifications of the person who may sign.
- Reporting framework — fair-value standards such as Ind AS 113 and the IPEV Guidelines shape how value is measured and disclosed.
3. The five core fund valuation methodologies
3.1 Net Asset Value (NAV)
The Net Asset Value method values the fund (or a holding) as the fair value of its assets less its liabilities, divided by the number of units outstanding. It is the standard for funds holding primarily liquid, listed securities, where each position can be marked to market. NAV is transparent and easy to communicate, but it is only as reliable as the valuation of the underlying assets; for unlisted or illiquid holdings, those underlying values must themselves be estimated using one of the methods below. For example, a fund with assets of ₹460 crore and ₹60 crore of cash, against ₹120 crore of liabilities, has net assets of ₹400 crore; across 20 crore units, the NAV is ₹20 per unit.
3.2 Discounted Cash Flow (DCF)
The Discounted Cash Flow method estimates value as the present value of the cash flows an asset is expected to generate, discounted at a rate that reflects their risk. It is well suited to mature businesses with reasonably predictable cash flows and is widely used for unlisted companies. Its strength is that it is grounded in fundamentals; its weakness is sensitivity to assumptions, particularly the discount rate and the terminal value, which usually accounts for the majority of the result. In India, a DCF for unquoted equity shares under the Income-tax Rules is typically carried out by a merchant banker — see our note on the role of a merchant banker.
3.3 Market Multiple (Comparable Company)
The Market Multiple or Comparable Company method derives value by applying valuation multiples observed in comparable listed companies or recent transactions to the subject company’s financial metrics, such as revenue or earnings. It is quick, market-based and intuitive, and works best where a genuine set of comparable peers exists. The challenge lies in selecting truly comparable companies and adjusting for differences in size, growth, margins and liquidity.
3.4 Asset-Based valuation
The Asset-Based approach values a business as the aggregate fair value of its individual assets less its liabilities. It is most appropriate for asset-heavy businesses, holding companies and situations where the entity is worth more dismantled than as a going concern. It captures tangible value well but can understate the worth of businesses whose value lies in intangibles, brand or future growth.
3.5 IPEV-aligned fair value
For pooled vehicles such as private equity and venture capital funds, valuation is typically carried out in line with the International Private Equity and Venture Capital Valuation (IPEV) Guidelines. These are not a separate formula but a fair-value framework that guides how the methods above are applied to private investments, using concepts such as calibration and enterprise value. They are designed to be consistent with fair-value accounting standards and have become the reference point for AIF portfolio valuation in India.
4. Comparing the methodologies at a glance
The table below summarises where each method fits and its principal limitation.
| Method | Measures value via | Best suited to | Principal limitation |
|---|---|---|---|
| NAV | Assets less liabilities, per unit | Funds holding mainly listed, liquid securities | Only as reliable as the underlying asset values |
| DCF | Present value of projected cash flows | Mature businesses with predictable cash flows | Highly sensitive to discount rate and terminal value |
| Market Multiple | Peer multiples applied to financial metrics | Companies with genuine listed comparables | Finding and adjusting truly comparable peers |
| Asset-Based | Aggregate fair value of net assets | Asset-heavy and holding entities | Can understate intangible and growth value |
| IPEV-aligned | Fair value of private investments (framework) | Private equity and venture capital portfolios | Requires judgment; not a single mechanical formula |
In practice, valuers often apply more than one method and cross-check the results, particularly where a single approach is sensitive to assumptions.
5. How to choose the right method
As a starting point, the characteristics of the asset point towards a primary method, which regulation may then confirm or override.
6. The Indian regulatory framework for fund valuation
This is where fund valuation in India differs most from generic, global treatments of the topic. Several frameworks operate in parallel, and the one that applies depends on the purpose of the valuation.
6.1 Companies Act, 2013 and Registered Valuers
Under the Companies Act, 2013, valuations for corporate actions such as further issues of shares, mergers and certain related-party matters must be performed by a Registered Valuer governed by the Insolvency and Bankruptcy Board of India (IBBI) under the Companies (Registered Valuers and Valuation) Rules, 2017, administered by the Ministry of Corporate Affairs. For what this role involves, see our guide to the Registered Valuer in India.
6.2 Income-tax Act — Rule 11UA / Rule 57
The Income-tax Act, 1961 prescribes how the fair market value of unquoted shares is determined for tax purposes — for example under Section 56(2)(x) and Section 50CA — through Rule 11UA, which recognises methods including the net asset value basis and a DCF carried out by a merchant banker. The successor framework under the Income-tax Act, 2025 carries these provisions forward (commonly referenced as Rule 57). Current rules are published by the Income Tax Department. For how tax-driven valuation differs from valuation under company law, see Income Tax vs Companies Act valuation.
6.3 FEMA and RBI pricing guidelines
Cross-border transactions — the issue or transfer of equity instruments between residents and non-residents — must be priced at arm’s length using an internationally accepted pricing methodology, certified by a Chartered Accountant or a SEBI-registered Merchant Banker, in line with the pricing guidelines administered by the Reserve Bank of India. Our practical walkthrough is in FEMA Valuation Under RBI Guidelines.
6.4 SEBI framework for AIF valuation
For Alternative Investment Funds (AIFs), SEBI has moved from manager discretion to a standardised framework. Under the SEBI (Alternative Investment Funds) Regulations, 2012 and subsequent circulars, listed securities are valued on a mark-to-market basis while unlisted and complex instruments are valued using IPEV-aligned methods such as DCF or comparable companies. Key features include:
- Independent valuation — specified assets must be valued by an independent valuer registered with the IBBI and holding the requisite professional membership, with eligibility criteria clarified by SEBI in 2024.
- Frequency — Category I and II AIFs must value their investments at intervals not exceeding six months (a semi-annual minimum under Regulation 23), with many institutional-quality funds valuing quarterly; Category III funds, holding more liquid portfolios, value more frequently.
- Disclosure — the valuation methodology for each asset class must be disclosed in the fund’s Private Placement Memorandum.
More recently, AIF units are held in dematerialised form and net asset values are reported through depository infrastructure, improving consistency for investors. For why robust valuation matters to funds and their investors, see What Is Fund Valuation and Why It Matters for AIFs in India.
6.5 Ind AS 113 — fair value measurement
For financial reporting, Ind AS 113 establishes the fair-value framework — the market, income and cost approaches and a three-level fair-value hierarchy based on the observability of inputs — that underpins the figures in audited accounts.
6.6 Insolvency and Bankruptcy Code, 2016
Under the Insolvency and Bankruptcy Code, 2016, registered valuers estimate fair value and liquidation value to inform the resolution process, ensuring decisions rest on an independent assessment of worth.
Please note: Indian valuation rules — particularly the Income-tax provisions and SEBI circulars — are amended frequently. The references above are general and stated as at June 2026; the applicable provisions, permissible methods and valuer eligibility should be confirmed for the specific transaction and its date. This guide is not a substitute for professional advice.
7. Common challenges and mistakes
Even with the right method selected, valuation is demanding. Recurring challenges include:
- Valuing illiquid and early-stage assets where market evidence is thin and judgment is unavoidable.
- Over-reliance on a single method, especially one that is highly sensitive to assumptions such as the discount rate or terminal growth in a DCF.
- Selecting comparables that are not genuinely comparable, distorting a market-multiple result.
- Inconsistent application across reporting periods, which undermines comparability and investor trust.
- Inadequate documentation, leaving the valuation difficult to defend before auditors, tax authorities or the regulator.
- Conflicts of interest where the party preparing the valuation is not sufficiently independent.
8. Emerging trends in fund valuation
Several developments are shaping current practice:
- Standardisation and independence — SEBI’s framework for AIFs has reduced discretion and reinforced the role of independent, IBBI-registered valuers.
- Greater transparency — dematerialisation of AIF units and NAV reporting through depositories are giving investors a more consistent view of value.
- Evolving global guidance — the IPEV Guidelines continue to be updated, with the latest edition refining areas such as calibration, complex capital structures and secondary transactions.
- Heightened scrutiny of fair value — auditors and investors increasingly expect robust, well-evidenced fair-value measurements under Ind AS 113.
9. Frequently asked questions
Which fund valuation method is the best?
There is no single best method. The right approach depends on the asset and the purpose: for listed securities it is mark-to-market, for mature businesses often a DCF, for companies with good comparables a market multiple, and for private fund portfolios an IPEV-aligned fair-value approach. Valuers frequently use more than one method and reconcile the results.
Why does the terminal value dominate a DCF?
The terminal value captures all cash flows beyond the explicit forecast period, which is usually the larger part of an asset’s life. Because it commonly represents the majority of total value, the terminal growth rate or exit multiple should be conservative and cross-checked against market evidence.
Who can sign a fund or share valuation in India?
It depends on the purpose. Many corporate actions and AIF valuations require a Registered Valuer under the IBBI regime; valuations for FEMA and certain Income-tax purposes are certified by a Chartered Accountant or a SEBI-registered Merchant Banker. The applicable framework determines who may sign.
What is fair value?
Fair value is broadly the price that would be received to sell an asset in an orderly transaction between willing, informed market participants at the measurement date. It is the basis of value used by the IPEV Guidelines and by Ind AS 113.
How often must an AIF value its portfolio?
Category I and II AIFs must value their investments at intervals not exceeding six months under Regulation 23, though many value quarterly as best practice; Category III AIFs value more frequently given their more liquid portfolios. These are minimum requirements, and the precise position should be confirmed against the current SEBI circulars.
About Marcken Consulting
Marcken Consulting LLP is a valuation advisory and corporate compliance firm that assists funds, companies and investors in India with independent, defensible valuations and the regulatory compliance that surrounds them. We combine technical valuation expertise with current knowledge of the SEBI, Income-tax, FEMA, IBBI and Ind AS frameworks. Our work includes Registered Valuer reports under the Companies Act, SEBI AIF and portfolio valuations, Income-tax valuations under Rule 11UA / Rule 57, FEMA valuations for cross-border transactions, and merchant-banker-style DCF and comparable-company analyses.
Work with us
Need a defensible, regulator-ready fund or share valuation? To discuss an engagement, visit marckenconsulting.com.
Disclaimer
This article has been prepared by Marcken Consulting LLP for general information and educational purposes only. It does not constitute professional, valuation, legal, tax or investment advice and should not be relied upon as a substitute for advice tailored to specific facts. The methodologies and regulatory references are described in general terms and are stated as at June 2026; laws, rules and circulars change over time, and the applicable provisions, permitted methods and valuer eligibility must be confirmed for the specific transaction and its date. Any examples are illustrative.
