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Principles of Fund Accounting

The Process Flow

Principles of Fund Accounting


The Process Flow
Judy Stench, 25,

She approaches an Independent Financial Advisor.

He explains to her all of the options available.

Judy decides to invest in

wants to save some


cash for the future.

JP Morgan Euroland Equity Fund


administrated by BNY-Mellon.

Principles of Fund Accounting


The Process Flow Funds Advantages
WHY INVEST IN A FUND ?

Principles of Fund Accounting


The Process Flow Funds Advantages
PROFESSIONAL MANAGEMENT

Principles of Fund Accounting


The Process Flow Funds Advantages
DIVERSIFICATION

Principles of Fund Accounting


The Process Flow Funds Advantages
ECONIMIES OF SCALE

Principles of Fund Accounting


The Process Flow Funds Advantages
CHOICE AND FLEXIBILITY

Principles of Fund Accounting


The Process Flow Funds Advantages
LIQUIDITY

Principles of Fund Accounting


The Process Flow Funds Advantages
PROVISION OF SHAREHOLDER SERVICES

Principles of Fund Accounting


The Process Flow Funds Advantages
REGULATORY SAFEGUARDS

Principles of Fund Accounting


The Process Flow Funds Disadvantages
WHY NOT INVEST IN A FUND ?

Principles of Fund Accounting


The Process Flow Funds Disadvantages
COST DESPITE NEGATIVE RETURNS

Advisor
Management Fees

Fund
Management

Marketing
Fees

Operating
Expenses

Commissions

Principles of Fund Accounting


The Process Flow Funds Disadvantages
LACK OF CONTROL

Principles of Fund Accounting


The Process Flow Funds Disadvantages
NAV UNCERTAINTY

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.

Principles of Fund Accounting


The Process Flow Fund Prospectus
What has helped Judy make decision
to invest in JP Morgan Euroland Equity Fund ?
The Fund Prospectus
(Investors Bible)

Prospectus is a legal document outlining the objectives,


structure and important disclosures relating to a fund.

Principles of Fund Accounting


The 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

Principles of Fund Accounting


The Process Flow Subscription
Next Step ?
Judy approaches Transfer Agency

and fills in application form:


Proves her identity
Proves where she lives
States how much she wants to invest

Principles of Fund Accounting


The Process Flow Transfer Agency
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.

Principles of Fund Accounting


The Process Flow Transfer Agency
Fund Accountant

Transfer Agency

Fund Manager
Will pass the same information
onto the Fund Accountant who
will account for the new shares
in the books of the fund.

Will pass onto the fund manager how much cash


has been invested so that he can now go out and spend it.

Principles of Fund Accounting


The Process Flow Fund Manager
Fund Manager
Bankers
Acceptance

Money Markets
Financial
Markets
Capital Markets

Repurchase
Agreements
Corporate Bond

Fixed Income
Markets

Convertible Bond

Equity Markets

Common Stock

Derivative
Markets

Financial Futures
Short Sales

Principles of Fund Accounting


The Process Flow Fund Manager
Money Market

Capital Market
Bonds
Interest payments
Get full cash back at maturity
Equities
Interim dividends
Price may go down as well as up

Derivatives
Safe investments

Very close to cash


Most will mature < 2 years

Hedge funds protect the underlying value of

investment
Speculator funds gamble with underlying
investment to produce higher growth

Principles of Fund Accounting


The Process Flow Fund Manager
Fund Accountant

Fund Manager

What trades he has performed

Custodian

and provides trade tickets


to allow the Fund Accountant

to book them onto the


accounting system.

What trades he has performed


Settlement dates

Principles of Fund Accounting


The Process Flow
Transfer Agency

Fund Accountant

Fund Manager

Pass on the details of the subscription

Custodian

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 Accounting


The Process Flow Fund Accountant
Recording of all the following:

Fund Accountant

Fund share transactions

Trades
Pricing information and market value calculation
Rate changes
Payment events (dividends/coupons)
Income determination
Fund expenses
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 Accounting


The Process Flow Net Asset Value (NAV)
Once the Fund Accountant has accounted for fund

shares, trades, incomes and expenses he will


calculate the NET ASSET VALUE of the fund.
Cash and cash equivalents
Investment Portfolio
Total Assets
NAV is sent to Transfer Agency
for the next days dealing.
Also NAV is sent to Bloomberg,

Liabilities

1,500,000.00 +
10,000,000.00 =
11,500,000.00
2,000,000.00

Total Net Assets

=
9,500,000.00

Shares outstanding

/
1,000,000.00

Financial Times, Reuters for


publication on their websites.

NET ASSET VALUE per share

=
9.50

Principles of Fund Accounting


The Process Flow Net Asset Value (NAV)

Funds share value will increase / decrease when


the overall value of securities
held by the fund increases / decreases.

DISTRIBUTIONS

Capital Gain distributions are made annually.


Income distributions (ex. dividends) are paid

to shareholders monthly / quarterly / annually.

Principles of Fund Accounting


The Process Flow

Fundamentals of Mutual Fund Accounting


Gorman J.F.
Hargadon J.M.

Wynne S.M.
McGraw Hill Custom Publishing (2004)