MUTUAL FUND ACCOUNTINGPOLICIES-SOME THOUGHTS
Mutual Fund is a Fund established in the form of a trust by a sponsor to raise money by the trustees through the sale of units to the public under one or more schemes for investing in securities in accordance with the regulations. Thus, a mutual fund collects money from the investors, issues certificates to them known as units and invests the money collected in securities so as to achieve mutual benefits in terms of capital appreciation in such securities. It is a non-depository, non-banking financial intermediary, which acts as an important vehicle for bringing wealth holders and deficit units together indirectly. Mutual funds are distinct from portfolio management schemes and are essential vehicles for collective investment in stock market, risk diversification and expert management advice of the fund managers.
Performance Evaluation of Mutual Funds:
Any meaningful evaluation of performance will necessarily have to measure total return per unit of risk or the ability to earn superior returns for a given risk class. There are various statistical techniques to measure this factor. One of the technique estimates the realized portfolio returns in excess of the risk free return, as a multiple of the factor of the portfolio. The factor of portfolio, in turn, measures the systematic or undiversifiable risk of the portfolio, the relation to the market index.
Mutual funds sell their shares to public and redeem them to current net asset value (NAV) which is calculated as under-
Total market value of all MF holdings – All MF liabilities
NAV of MF = ————————————————————-
No. of MF units or shares
OR
Market value of Scheme’s Investments + Receivables +
Accrued Income + Other Assets – Accrued Expenses – Payables - — Other Liabilities
NAV of MF = ——————————————————————————-
No. of Units outstanding under the Scheme
The net asset Value of a mutual fund scheme is basically the per unit market value of all the assets of the scheme. To illustrate this better, a simple example will help.
Scheme name PQR
Scheme size Rs. 30, 00, 00,000 (Rs. Thirty crores)
Face value of units Rs. 10
No. Of Units (Scheme size) 3,00,00,000
Face value of units
Investments In shares
Market value of shares Rs. 87,00,00,000 (Rs Eighty seven crores)
NAV (Market value of
Investments / No. of units) = Rs. 87, 00, 00,000
———————–
300, 00,000
= Rs.29
Thus, each unit of Rs. 10 is worth Rs. 29.
Simply stated, NAV is the value of the assets of the assets of each unit of the scheme, or even simpler value of one unit of the scheme. Thus, if the NAV is more than the face value (Rs. 10), it means the money has appreciated and vice versa.
NAV also includes dividends, interest accruals and reduction of liabilities and expenses, besides market value of investments.
Presentation of accounts:
Mutual funds, should prepare scheme wise balance sheet as per Annexure IA and IB of Eleventh Schedule of SEBI (Mutual Funds) Regulations 1996. As per regulation 54, every mutual fund or asset management company shall prepare in respect of each financial year an annual report and annual statement of accounts of the schemes and funds.
The balance sheet shall give scheme wise particulars of its assets and liabilities and shall contain particulars as per Eleventh Schedule. It should also disclose accounting policies relating to valuation of investments and other important items. Under each type of investment, the aggregate carrying value and market value of non-performing investments shall be disclosed. It should also indicate the extent of provision made in revenue account for the depreciation /loss in the value of non -performing investments. It shall also disclose per unit Net Asset Value (NAV) as at the end of accounting year. Previous year figures should also be given against each item.
It should also indicate the appropriation of surplus by way of transfer to reserves and dividend distributed. It should also contain -
Provision for aggregate value of doubtful deposits, debts and outstanding and Accrued income. Profit or loss in sale and redemption of investment may be shown on a net basis. Custodian and registrar fees. Total income and expenditure expressed as a percentage of average net assets, calculated on a weekly basis.
Scheme wise balance sheet normally contains the information under following groups -
Asset side – Investments, Deposits, Other Current Assets, Fixed Assets, Deferred revenue expenditure
Liability side – Unit capital, Reserves and surpluses, Loans, Current liabilities,
Accounting Policies:
Accounting policies of mutual fund schemes are somewhat different from those of an industrial concern. Ninth schedule to SEBI (Mutual Fund) Regulations 1996 deal with accounting policies and standards to be adopted by a mutual fund.The accounting policies generally cover the following areas -
1. Basis of accounting
The fund maintains its books of account on an accrual basis.
2. Portfolio Valuation
Investment is stated at market/fair value at the balance sheet date/date of determination. In valuing the scheme’s investments.
(i) Securities listed on a recognized stock exchange are valued at the last quoted price on the principal exchange on which the security is traded.
(ii) Money market instruments are valued at fair value as determined in good faith by Asset Management Company (AMC)
3. Securities Transactions
Investment securities transactions are accounted for on a trade date basis. The scheme uses the average cost method for determining the realized gain or loss on sale of investments.
4. Investment Income
Dividend and interest income are recorded on an accrual basis.
5. Deferred Revenue Expenditure
Initial issue costs comprise those costs directly associated with the issue of units of the scheme and include brokerage/incentive fees on issue of units, advertising and marketing costs, registrar fees and expenses and printing and despatch cost, which are being amortized over a period of ten financial years.
6. Dividend Equalization Reserve
The net distributable income relating to units issued/repurchased is transferred from/to Dividend Equalization Reserve for Dividend Plan for determining the net surplus/deficit transferred to /from Unit Premium Reserve.
The Scheme does not intend to declare dividends or make any other distribution in respect of units held under the Growth Plan and accordingly has not accounted for Dividend Equalization in respect of this plan during the year.
7. Unit Premium Reserve
Upon issue and redemption of units, the net premium or discount to face value of units is adjusted against the Unit Premium Reserve of the Scheme, after an appropriate portion of the issue proceeds and redemption payout is credited or debited respectively to the Dividend Equalization Reserve.
The Unit Premium Reserve is available for dividend distribution except to the extent it is presented by unrealized net appreciation in value of investments and deferred revenue expenditure.
8. Agent’s Commission
Agents commission expenses are not considered as distribution charges.
