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Principles of Fund AccountingThe Process Flow
wants to save some cash for the future.
Principles of Fund AccountingThe Process Flow
She approaches an Independent Financial Advisor.
Judy decides to invest in
JP Morgan Euroland Equity Fund
administrated by BNY-Mellon.
He explains to her all of the options available.
Judy Stench, 25,
WHY INVEST IN A FUND ?
Principles of Fund AccountingThe Process Flow – Funds’ Advantages
Principles of Fund AccountingThe Process Flow – Funds’ Advantages
PROFESSIONAL MANAGEMENT
Principles of Fund AccountingThe Process Flow – Funds’ Advantages
DIVERSIFICATION
Principles of Fund AccountingThe Process Flow – Funds’ Advantages
ECONIMIES OF SCALE
Principles of Fund AccountingThe Process Flow – Funds’ Advantages
CHOICE AND FLEXIBILITY
Principles of Fund AccountingThe Process Flow – Funds’ Advantages
LIQUIDITY
Principles of Fund AccountingThe Process Flow – Funds’ Advantages
PROVISION OF SHAREHOLDER SERVICES
Principles of Fund AccountingThe Process Flow – Funds’ Advantages
REGULATORY SAFEGUARDS
WHY NOT INVEST IN A FUND ?
Principles of Fund AccountingThe Process Flow – Funds’ Disadvantages
Principles of Fund AccountingThe Process Flow – Funds’ Disadvantages
COST DESPITE NEGATIVE RETURNS
Advisor Management Fees
FundManagement
MarketingFees
OperatingExpenses
Commissions
Principles of Fund AccountingThe Process Flow – Funds’ Disadvantages
LACK OF CONTROL
Principles of Fund AccountingThe Process Flow – Funds’ Disadvantages
In a fund, the price at which you purchase or redeem shares will depend on the fund's NAV, which the fund
might not calculate until many hours after you've placed your order. In general, mutual funds must calculate
their NAV at least once every business day, typically after the major U.S. exchanges close.
NAV UNCERTAINTY
Prospectus is a legal document outlining the objectives,
structure and important disclosures relating to a fund.
Principles of Fund AccountingThe Process Flow – Fund Prospectus
The Fund Prospectus
(Investors “Bible”)
What has helped Judy make decisionto invest in JP Morgan Euroland Equity Fund ?
Principles of Fund AccountingThe Process Flow – Fund Prospectus
Objectives and goals
Investment strategies and approaches
Portfolio instruments
Risk exposure and strategies
Operating expenses and fees
History and performance indicators
Parties to the fund (details, background etc.)
Explanations of all payments and services provided to shareholder
Responsibilities of component parties
Methods of investing (incl. Application form)
SAI (Statement of Additional Information) upon request
Next Step ?
…and fills in application form:
Proves her identity
Proves where she lives
States how much she wants to invest
Principles of Fund AccountingThe Process Flow – Subscription
Judy approaches Transfer Agency
Principles of Fund AccountingThe Process Flow – Transfer Agency
Anti Money laundering check
and ask for some documentation
if initial subscription is substantial.
Process the subscription
telling how many shares is received.
Send out confirmation letters.
Transfer Agency
Principles of Fund AccountingThe Process Flow – Transfer Agency
Transfer Agency
Will pass onto the fund manager how much cash
has been invested so that he can now go out and spend it.
Will pass the same information
onto the Fund Accountant who
will account for the new shares
in the books of the fund.
Fund Manager
Fund Accountant
Financial
Markets
Money Markets
Capital Markets
Fixed Income Markets
Equity Markets
Derivative Markets
Banker’s Acceptance
Repurchase Agreements
Common Stock
Corporate Bond
Convertible Bond
Financial Futures
Short Sales
Principles of Fund AccountingThe Process Flow – Fund Manager
Fund Manager
Money Market
Safe investments
Very close to cash
Most will mature < 2 years
Principles of Fund AccountingThe Process Flow – Fund Manager
Capital Market
Bonds
Interest payments
Get full cash back at maturity
Equities
Interim dividends
Price may go down as well as up
Derivatives
Hedge funds – protect the underlying value of
investment
Speculator funds – gamble with underlying
investment to produce higher growth
What trades he has performed
Settlement dates
Principles of Fund AccountingThe Process Flow – Fund Manager
Fund ManagerFund Accountant
CustodianWhat trades he has performed
and provides trade tickets
to allow the Fund Accountant
to book them onto the
accounting system.
Pass on the details of the subscription
Once the fund manager has spent the money he will send trade tickets with detail what instrument
he has bought, the price he has paid and the settlement date.
Principles of Fund AccountingThe Process Flow
Transfer Agency Fund Accountant Fund Manager
Custodian
Recording of all the following:
Fund share transactions
Trades
Pricing information and market value calculation
Rate changes
Payment events (dividends/coupons)
Income determination
Fund expenses
Principles of Fund AccountingThe Process Flow – Fund Accountant
Fund Accountant
Balances the books:
The subscription monies should all be spent by the Fund Manager
The Fund Accountant will inform the fund Manager if he has cash which he has not spent
Fund Accountant will account for dividends, interest and coupon payments and accrue in the fund
Principles of Fund AccountingThe Process Flow – Net Asset Value (NAV)
Cash and cash equivalents 1,500,000.00 +
Investment Portfolio 10,000,000.00 =
Total Assets 11,500,000.00
-
Liabilities 2,000,000.00
=
Total Net Assets 9,500,000.00
/
Shares outstanding 1,000,000.00
=
NET ASSET VALUE per share 9.50
Also NAV is sent to Bloomberg,
Financial Times, Reuters for
publication on their websites.
Once the Fund Accountant has accounted for fund
shares, trades, incomes and expenses he will
calculate the NET ASSET VALUE of the fund.
NAV is sent to Transfer Agency
for the next days dealing.
Principles of Fund AccountingThe Process Flow – Net Asset Value (NAV)
Income distributions (ex. dividends) are paid
to shareholders monthly / quarterly / annually.
Funds’ share value will increase / decrease when
the overall value of securities
held by the fund increases / decreases.
Capital Gain distributions are made annually.
DISTRIBUTIONS =
Fundamentals of Mutual Fund Accounting
Gorman J.F.
Hargadon J.M.
Wynne S.M.
McGraw Hill Custom Publishing (2004)
Principles of Fund AccountingThe Process Flow