# What does mark-to-market mean?

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Mark-to-market is an accounting concept is used for reflecting current fair market worth of an asset or a fund. The accounting method implemented on a day-to-day basis factors in movements in the price of different assets such as stocks, bonds etc . Hence, the procedure assist in precise determination of the portfolio value on any given day. In case you choose to trade on the day when stock market shifts either northwards or southwards, effective return for you will be the same as market return.

Through, mark to market requisite credit or debit of funds in the margin account is made depending on the particular day's trading. Investors often used the methodology to ensure that their margin account meet minimum margin maintenance requirement. In case the current market value of their held portfolio falls, traders may receive a margin call. Also, the method defends traders against probable contract default.

Calculation of Mark to market

Consider an example wherein 100 shares of X company are purchased for Rs 50 on day 1; on day 2 another lot of 100 shares is purchased at a price of Rs. 52; trader sells 50 shares on the 3rd day at Rs. 53; and the remaining 150 shares on the 4th day at a price of Rs. 53.50. Closing price for X share is Rs. 50.5, Rs. 51.5, Rs. 54 and Rs. 54 on 1st, 2nd , 3rd and 4th trading day.

MTM for each day is calculated as below:

For the 1st day- Transaction MTM for a given day+Prior MTM= (50.5-50.0)* 100= Rs. 50

For the 2nd day- (51.5-52)*100 = (Rs 50)

Prior MTM - (51.5-50.5)* 100= Rs. 50

Total MTM for the 2nd day= Rs 0.

For the 3rd day- (54.0- 53.0) *-50 = (Rs 50)

Prior MTM - ( 54-51.5) * 200 = Rs. 500

Total MTM - Rs 450

For the 4th day - ( 54- 53.5)* -150 = (Rs 75)

Prior MTM- (54-54) *50 = Rs 0

MTM for 4th day = (Rs. 75)

So, the total MTM comes out to be Rs 425.

How mark-to-market methodology works?

In case of mutual funds, marking-to-market is done on a day-to-day basis at the closing of the market, which provides investors with an idea pertaining to the NAV of the fund. For fixed-income funds that invests in low maturity money-market instruments, current price is not available always especially on a daily basis. And the portfolio is constructed to realize accrual return depending on the interest on such-fixed return money market instruments. So, a specific process is followed for the valuation of the same.

In contrast, as the prices of the stocks into which equity funds invest is known on a daily basis, such funds are market-to-market easily.

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