What is Mark to Market (MTM)?
MTM, full form Mark to Market, is a valuation approach that ensures an investor’s holdings are adjusted to mirror the asset's fair market value, based on prevailing market conditions. MTM is crucial in areas like stock trading, mutual funds, and accounting, as it helps track gains or losses daily, providing a more accurate representation of an entity’s financial position. Let’s find out more about it.
What is Mark to Market (MTM)?
Mark to Market (MTM) is a financial accounting method used to evaluate the value of an asset or liability based on its current market price, instead of its purchase price. This method ensures that the value reflects real-time market conditions, providing a clear view of the fair value of assets or liabilities. In the context of stock markets, MTM is often used for trading accounts and mutual funds to show the daily profit or loss.
Why is Mark to Market Needed?
MTM in trading and mutual funds is crucial in maintaining transparency and accuracy in financial reporting. In markets where prices fluctuate frequently, like the stock or futures markets, MTM provides a real-time valuation, ensuring that financial statements reflect the current market realities. For example, if you own shares in a company and the stock price rises, the MTM will adjust the value of your portfolio to reflect the gain, and similarly for losses.
MTM is particularly significant in industries like trading and financial services, where the value of assets can shift drastically in short periods. It also helps in margin trading where positions are marked daily to assess potential risks or profits.
Mark to Market: An Example
One common example of MTM is in futures contracts. If you hold a futures contract that has fluctuating market prices, your broker will update your account balance daily to reflect the gains or losses. This continuous adjustment helps ensure that traders are aware of their market position. For mutual funds, MTM is used to reflect the net asset value (NAV), which changes based on the market value of the fund’s holdings.
Here's a table that shows how daily price changes affect the account balance through Mark to Market (MTM) in the share market:
Day | Futures Price | Change in Value | Gain/Loss | Cumulative Gain/Loss | Account Balance |
1 | ₹ 1,000 | - | - | - | ₹ 50,000 |
2 | ₹ 1,020 | ₹ 20 | ₹ 2,000 | ₹ 2,000 | ₹ 52,000 |
3 | ₹ 1,010 | ₹ -10 | ₹ -1,000 | ₹ 1,000 | ₹ 51,000 |
4 | ₹ 1,030 | ₹ 20 | ₹ 2,000 | ₹ 3,000 | ₹ 53,000 |
5 | ₹ 1,025 | ₹ -5 | ₹ -500 | ₹ 2,500 | ₹ 52,500 |
Key Takeaways for Each Day
Day 1: The starting futures price is ₹1000, and the account balance is ₹50,000.
Day 2: The futures price increases to ₹1020, giving a profit of ₹2,000, resulting in a new account balance of ₹52,000.
Day 3: A price drop to ₹1010 causes a loss of ₹1,000, reducing the cumulative gain to ₹1,000.
Day 4: The price rises to ₹1030, resulting in a gain of ₹2,000, raising the cumulative gain to ₹3,000.
Day 5: The price decreases slightly to ₹1025, resulting in a small loss of ₹500, with a final balance of ₹52,500.
Mark to Market in Accounting
In accounting, Mark to Market accounting requires businesses to value their assets or liabilities at their current market price on financial statements. This means that a company's financial records would reflect the actual value of assets or liabilities at a specific point in time, avoiding inflated or outdated valuations. For assets like stocks, bonds, or commodities, this adjustment helps in portraying a more accurate financial health of the business.
However, MTM accounting can also lead to volatility in financial reports, as frequent price fluctuations may result in sharp changes in asset valuations. This volatility may affect how stakeholders perceive a company's stability.
Mark to Market in Financial Services
In financial services, MTM is critical for both investors and regulators. It helps brokers, fund managers, and traders understand their positions in real-time. For example, if you are involved in derivatives trading or options trading, MTM calculations are done daily to ensure that each investor’s position reflects the market's actual state. This is important because it helps assess risks and ensures that margin requirements are maintained.
Furthermore, financial institutions like banks use MTM to assess their holdings, especially for securities and loans. This method helps them make better financial decisions by understanding the current value of their assets.
Mark to Market in Investing
For investors, MTM ensures that their portfolios reflect the true market value of their investments. In mutual funds, for instance, the net asset value (NAV) is calculated using MTM, which adjusts daily based on market performance. This helps investors see how their investments are performing at any given time.
MTM is particularly useful for short-term investors and traders who need real-time updates to make decisions about buying or selling. For long-term investors, while the day-to-day MTM changes may not be as critical, they still provide a realistic overview of portfolio performance.
Pros of MTM
Real-time Valuation: Provides an up-to-date value of assets or liabilities, which is critical for decision-making.
Transparency: Ensures financial statements reflect the actual market conditions, helping investors or companies avoid inflated asset values.
Risk Management: MTM helps in assessing the risk involved in investments by reflecting their true market value.
Cons of MTM
Market Volatility: MTM can introduce significant fluctuations in financial reports, especially in volatile markets, making it challenging for companies to maintain a stable financial outlook.
Unrealised Gains or Losses: MTM reflects unrealised gains or losses, which might not translate into actual profit or loss until the assets are sold.
Alternatives to Mark to Market
While MTM is widely used, alternatives like Historical Cost Accounting are sometimes preferred. In this method, assets are valued at their original purchase price rather than current market value. This provides stability to financial reports but may not reflect the actual value in today's market.
Another alternative is Fair Value Accounting, which is similar to MTM but focuses more on an estimate of what the asset would fetch in a market sale. Fair Value considers more factors than just the market price.
Wrapping it Up
Mark to Market (MTM) is a vital accounting method that reflects the real-time value of assets or liabilities, ensuring transparency and accuracy in financial reporting. Widely used in stock markets, trading, and financial services, MTM helps you stay informed about the actual value of your investments, but it also introduces volatility in financial statements. Understanding the pros and cons of MTM can help you make more informed decisions in both investing and accounting contexts.
More Related Articles
Can Mutual Fund Schemes Invest in Upcoming IPOs?
18 July 2025 | 7 mins read
Can Mutual Fund Schemes Invest in Upcoming IPOs? - H1 Initial Public Offerings (IPOs) have become a buzzword among investors looking for high-growth opportunities. Whether it’s a unicorn startup going public or a reputed company entering the equity market, IPOs attract substantial interest. But what about mutual funds — can they participate in IPOs? And if yes, how does it impact you as an investor in a mutual fund? This article explores the role of mutual funds that invest in IPOs, the process behind such investments, and how you can benefit from this strategy. You’ll also gain insights into how fund managers evaluate IPO opportunities and which mutual funds are more likely to invest in them. Role of Mutual Funds in Equity Markets - H2 Mutual funds play a vital role in India’s equity markets. Managed by professional fund managers, these pooled investment vehicles collect money from multiple investors and allocate it across a portfolio of stocks, bonds, or other assets based on the fund's mandate. In the context of equity investing, mutual funds: Provide diversification to small investors Help in price discovery and market depth Act as long-term institutional investors Reduce risk through strategic asset allocation Given their market presence and influence, mutual funds also participate in IPOs, often subscribing to large portions of new issuances. But this activity is more nuanced than simply bidding for shares. Are Mutual Funds Allowed to Invest in IPOs? - H2 Yes, mutual funds in India are allowed to invest in IPOs — both in the primary market (where shares are first issued) and in the secondary market (where stocks are traded after listing). This means mutual funds can apply for shares during an IPO’s book-building process just like retail investors, high-net-worth individuals (HNIs), and institutional investors. SEBI regulations allow fund managers to allocate a portion of the fund’s assets to IPOs, provided the investment aligns with the scheme's objectives and risk profile. For instance: A large-cap fund may only invest in IPOs of companies expected to be included in large-cap indices A multi-cap or flexi-cap fund has more flexibility to take exposure across market capitalisations, including IPOs An ELSS fund (Equity-Linked Savings Scheme) can also participate in IPOs if it aligns with its tax-saving and equity investment objective So, the short answer is: Yes, mutual funds can and do invest in IPOs — but not all funds, and not always. Why and When Do Mutual Funds Invest in IPOs? - H2 Investing in IPOs offers mutual fund managers several strategic advantages, including: 1. Access to Early Growth Potential - H3 Many IPOs are of young, fast-growing companies. By investing early, mutual funds aim to capture the growth upside before the stock gains mainstream popularity. 2. Price Arbitrage Opportunities - H3 If a mutual fund believes that the IPO is underpriced relative to its intrinsic value, it may invest with the intent of benefiting from listing gains or long-term appreciation. 3. Portfolio Enhancement - H3 Some IPOs bring fresh sector exposure or innovation to the market. Fund managers may invest to diversify or rebalance the portfolio with new-age businesses, like fintech or EV startups. 4. Long-Term Bets - H3 Fund managers often look at IPOs with a long-term lens. The goal isn’t always listing gains but building a position in a company expected to perform well over years. 5. Demand and Liquidity Trends - H3 In bullish markets, IPOs tend to be oversubscribed and see strong listing premiums. Mutual funds may participate to ride the market momentum, especially when investor confidence is high. Factors Fund Managers Consider Before Investing in IPOs - H2 While IPOs are exciting, they are also risky and speculative, especially for companies with no prior listing record. Fund managers conduct rigorous due diligence before deciding to allocate your money to an IPO. Here are the key factors considered: 1. Company Fundamentals - H3 This includes examining the company’s: Revenue and earnings trends Debt levels and capital structure Profit margins and business scalability Competitive advantage and market share 2. Valuation Metrics - H3 Fund managers analyse: Price-to-Earnings (P/E) ratio Price-to-Book (P/B) ratio Enterprise Value to EBITDA (EV/EBITDA) These are compared with listed peers in the same sector. 3. Promoter and Management Track Record - H3 A critical evaluation is made on the credibility, governance standards, and historical performance of the promoters and top management. 4. Utilisation of IPO Proceeds - H3 Fund managers study how the company plans to use the funds—whether for debt repayment, expansion, or general corporate purposes. 5. Macroeconomic and Sector Trends - H3 Sectoral outlooks, regulatory policies, and broader market sentiments also influence IPO investment decisions. 6. Anchor Book Participation - H3 Strong interest from anchor investors (like global funds or sovereign wealth funds) signals confidence in the issue, making it more attractive for mutual fund participation. Best IPO Mutual Funds: What to Look For - H2 If you're keen on gaining exposure to IPOs through mutual funds, it's important to choose the right type of fund. While there’s no official category called “IPO mutual funds,” some schemes actively participate in upcoming IPOs. Here’s what you should look for when selecting such a fund: 1. Fund Category and Investment Mandate - H3 Start by checking the category of the fund. Flexi-cap, multi-cap, and mid-cap funds generally have more leeway to invest in IPOs. These funds are not restricted to a single market capitalisation and often aim to capture high-growth opportunities, making them ideal for IPO exposure. 2. Track Record of Participating in IPOs - H3 Review the fund’s portfolio history. Some mutual funds consistently allocate a portion of their assets to new listings. You can find this information in the fund’s monthly factsheet or portfolio disclosure. Look for funds that have a pattern of investing in IPOs over time—not just as a one-off move. 3. Fund Manager's Experience and Strategy - H3 A skilled fund manager makes a significant difference. The manager's ability to evaluate IPO valuations, industry potential, and company fundamentals is crucial. Look for funds managed by professionals with a proven track record in equity investing and a sound IPO selection approach. 4. Diversification and Risk Management - H3 An ideal fund won’t rely heavily on IPOs alone. Instead, it will use IPO investments as part of a broader equity strategy. Ensure that the fund holds a well-diversified portfolio alongside its IPO allocations to reduce volatility and balance risk. 5. Consistent Performance Over Market Cycles - H3 While past performance isn’t a guarantee of future returns, funds that have consistently performed well across different market cycles often reflect strong management and strategy. Look at long-term performance metrics like 3-year or 5-year returns instead of just recent gains. 6. Transparency and Reporting - H3 Good IPO-investing funds are transparent about their holdings. Choose funds that provide detailed disclosures about their portfolio, including new IPO allocations, so you can track how your money is being deployed. Also, read the scheme information document (SID) to understand the fund’s mandate and whether it allows active IPO participation. Should You Invest in a Mutual Fund That Invests in IPOs? - H2 Pros: Access to IPOs without applying individually Professional due diligence and analysis Built-in diversification Potential to capture high-growth opportunities Cons: IPO investments may not always succeed May increase portfolio volatility Returns can be affected by market timing and sentiment If you're a long-term investor, funds that occasionally invest in IPOs can be a good addition to your portfolio — but don’t chase IPO exposure alone. Always assess the fund holistically. Conclusion - H2 Yes, mutual fund schemes in India can and do invest in IPOs, but they do so strategically — not emotionally or impulsively. Fund managers assess multiple factors before deciding to put your money in newly-listed companies. As a retail investor, you benefit from their expertise and risk management process without having to analyse IPOs on your own. If you're looking for exposure to IPOs but want to avoid direct stock-picking, investing in a mutual fund that invest in IPO offers a smart, diversified route. However, always match the fund’s strategy with your risk tolerance, time horizon, and financial goals.
Mistakes People Make While Investing and How to Fix Them
10 July 2025 | 7 mins read
Investing can be one of the most effective ways to build wealth over time. Whether you’re investing in mutual funds or stocks, the goal is simple: earning returns that beat inflation and help you achieve financial freedom. However, investing isn’t just about selecting the right stocks or funds — it’s also about avoiding costly mistakes that can slow your progress down.
How Can ELSS Funds Be Redeemed? Rules for ELSS Withdrawal
26 June 2025 | 9 mins read
Equity-linked Savings Schemes (ELSS) are a type of mutual fund in India that provide tax relief under Section 80C of the Income Tax Act. ELSS have a three-year lock-in period, during which the amount invested cannot be withdrawn. It is important for investors to know the ELSS redemption process, rules, and tax implications while making their financial plans. This article explores the intricacies of ELSS mutual fund redemption, shedding light on the procedures and considerations.
FAQ
What is Mark to Market (MTM)?
Mark to Market (MTM) is a method used to assess the value of an asset or liability based on its current market price, ensuring that financial statements reflect real-time valuations.
What is MTM in the stock market?
MTM in the stock market refers to the daily adjustment of an asset’s value based on its market price. It ensures that investors see the actual market value of their holdings.
How does Mark to Market work in trading? - H3
In trading, MTM adjusts the value of open positions daily, ensuring the portfolio reflects current market conditions. It helps traders see their profit or loss based on daily price fluctuations.
What are the advantages of Mark to Market?
MTM provides real-time valuations, ensuring transparency in financial reporting. It allows better risk assessment and ensures that financial statements reflect the actual value of assets or liabilities.
Are there any disadvantages to Mark to Market?
The main drawback of MTM is its volatility. Constant market fluctuations can cause sharp changes in asset valuations, which may introduce instability in financial reports.
How is MTM used in mutual funds?
In mutual funds, MTM is used to calculate the Net Asset Value (NAV). It adjusts the value of fund holdings daily based on their current market price, ensuring that investors see accurate portfolio performance
What is the full form of MTM in the share market?
MTM stands for "Mark to Market" in the share market. It refers to the daily adjustment of the value of assets based on their market price.
Why is Mark to Market important in accounting?
MTM ensures that assets or liabilities on a company's balance sheet reflect their true market value, offering more accurate financial reporting and decision-making.
What is an example of Mark to Market?
An example of MTM is in futures trading, where positions are adjusted daily based on the market price of the underlying asset, showing daily gains or losses in real-time.
What alternatives exist to Mark to Market?
Alternatives to MTM include Historical Cost Accounting, which values assets at their purchase price, and Fair Value Accounting, which estimates the value based on potential market sale conditions.