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.