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Fund Accounting Procedures with Practical Examples

Fund Accounting Procedures with Practical Examples

What is Fund Accounting?

Fund accounting is a specialized accounting process used by investment funds, mutual funds, hedge funds, and pension funds. It prioritizes accurate Net Asset Value (NAV) calculation, compliance, and transparency over profit measurement.

Key Objectives

  • Accurate NAV calculation
  • Regulatory and tax compliance
  • Allocation of income and expenses
  • Timely financial and investor reporting

Fund Accounting Process – Step by Step

1. Trade Booking

Trades are recorded in the accounting system after execution by the portfolio manager.

Example: Fund buys 1,000 Infosys shares at ₹1,500 each. This is recorded as a purchase.

2. Trade Settlement & Validation

Confirm trades with brokers and custodians. Monitor settlement (T+1, T+2).

Example: Citi confirms a trade is settled correctly with no failure.

3. Cash Reconciliation

Match internal ledger cash balances with custodian bank accounts daily.

Example: ₹15 Cr received in custodian statement vs ₹14.9 Cr in ledger; ₹0.1 Cr adjustment made.

4. Income & Expense Accrual

Accrue dividends, interest income, custodian fees, audit fees, etc.

Example: ₹2,00,000 dividend from SBI + ₹50,000 audit expense accrued for the month.

5. Corporate Actions Processing

Handle dividends, splits, mergers, and rights issues timely.

Example: HDFC announces ₹5 dividend for 10,000 shares = ₹50,000 booked as income.

6. NAV Calculation

Total Assets - Liabilities ÷ Units = NAV

Example: Assets = ₹50 Cr, Liabilities = ₹2 Cr, Units = 10 Lakh → NAV = ₹48

7. Security Valuation

Daily valuation of listed and unlisted securities using pricing models.

Example: Listed equity valued using NSE closing price, bonds via yield curves.

8. Financial Reporting

Prepare financial statements (Trial Balance, Balance Sheet, P&L) and send to investors or auditors.

Example: Month-end P&L and NAV report shared with SEBI and clients.

9. Tax & Compliance

Ensure proper tax provisioning and adherence to regulatory standards (SEBI, FATCA, AIF norms).

Example: Short-term capital gain tax calculated on equity sales and booked.

Conclusion

Fund accounting is the backbone of investment operations. Accuracy, compliance, and timeliness are non-negotiable. A good fund accountant ensures every rupee is tracked, verified, and reported—keeping investors informed and regulators satisfied.

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