accounting & taxes on mutual fund

1. Dr. Ankit Jain 1

2. NAV is the value of each unit of the scheme.
Net Assets = Total assets + Accrued Income –
Current Liability – Accrued Expenses
Dr. Ankit Jain 2

3.  Investors have bought 20 crore units of a mutual fund
scheme at Rs 10 each. The scheme has thus mobilized
20 crore units X Rs10 per unit i.e. Rs 200 crore.
 An amount of Rs 140 crore, invested in equities, has
appreciated by 10%. The balance amount of Rs 60
crore, mobilized from investors, was placed in bank
deposits.
 Interest and dividend received by the scheme is Rs
8crore, scheme expenses paid is Rs 4 crore, while a
further expense of Rs 1 crore is payable.
 Calculate Net Asset Value ?
Dr. Ankit Jain 3

4.  NAV is Rs 10.85 per unit.
 From the above, it follows that:
 Higher the interest, dividend and capital gain earned by
the scheme, higher would be the NAV.
 Higher the appreciation in the investment portfolio,
higher would be NAV.
 Lower the expenses, higher would be the NAV.
Dr. Ankit Jain 4

5. Dr. Ankit Jain 5

6. Calculate the NAV given the following information:
 Value of stocks: Rs. 150 cr,
 Value of bonds: Rs. 67 cr
 Value of money market instruments: Rs. 2.36 cr,
 Dividend accrued but not received: Rs. 1.09 cr,
 Interest accrued but not received: Rs. 2.68 cr
 Fees payable: Rs. 0.36 cr,
 No. of outstanding units: 1.90 cr
Dr. Ankit Jain 6

7. Q. Calculating net asset value would be a mutual fund
with assets of Rs 1 million, liabilities of Rs 1,00,000, and
1,00,000 outstanding shares.
Q. If a scheme has 45 cr units issued and has a FV of Rs.
10 and NAV is at 11.13, unit capital (Rs. Cr) would be
equal to …….?
Dr. Ankit Jain 7

8.  The process of valuing each security in the
investment portfolio of the scheme at its market value
is called ‘mark to market’ i.e. marking the securities
to their market value. Why is this done?
 The NAV is meant to reflect to true worth of each
unit of the scheme, because investors buy or sell units
on the basis of the information contained in the NAV.
 If investments are not marked to market, then the
investment portfolio will end up being valued at the
cost at which each security was bought.
Dr. Ankit Jain 8

9.  Valuing shares of a company at their acquisition cost,
say Rs15, is meaningless, if those shares have
appreciated to, sayRs50.
 If the scheme were to sell the shares at the time, it
would recover Rs50 – not Rs15.
 When the NAV captures the movement of the share
from Rs15 to Rs50, then it is meaningful for the
investors.
Dr. Ankit Jain 9

10.  In the past, schemes were permitted to keep the Sale
Price higher than the NAV. The difference between the
Sale Price and NAV was called the “entry load”.
 If the NAV of a scheme was Rs11.00 per unit, and it
were to charge entry load of 1%, the Sale Price would
be Rs11 + 1% on Rs11 i.e. Rs11.11.
 Entry load is no longer permitted. So Sale Price is the
same as NAV.
Dr. Ankit Jain 10

11.  Schemes are permitted to keep the Re-purchase Price
lower than the NAV.
 The difference between the NAV and Re-purchase
Price is called the “exit load”.
 If the NAV of a scheme is Rs11.00 per unit, and it were
to charge exit load of 1%, the Re-purchase Price would
be Rs11 – 1% on Rs11 i.e. Rs10.89.
Dr. Ankit Jain 11

12. Dr. Ankit Jain 12

13. Transaction Charges will not be deducted for the following:
 Purchase/Subscription submitted by investor at the designated
collection centers or through AMC’s website and which are
not routed through any distributor.
 Purchase/ Subscription through a distributor for an amount
less than Rs. 10,000.
 Purchase/Subscriptions through any stock exchange.
 Transactions such as Switches, STP i.e. all such transactions
wherein there is no additional cash flow at a mutual fund level
similar to Purchase/Subscription.
Dr. Ankit Jain 13

14. Types
Initial
Issue
Expenses
Recurring
Expenses
Dr. Ankit Jain 14

15.  These are one-time expenses that come up when the
scheme is offered for the first time (NFO).
 Now these expenses borne by the AMC not the
investors.
Dr. Ankit Jain 15

16. It is also known as ongoing expenses and Fund Running
expenses. SEBI has stipulated the following annual limits
on recurring expenses (including management fees) for
schemes other than index schemes:
Dr. Ankit Jain 16

17.  Fees of various service providers, such as Trustees, AMC,
Registrar & Transfer Agents, Custodian, & Auditor
 Selling expenses including scheme advertising and
commission to the distributors
 Expenses on investor communication, account statements,
dividend / redemption cheques / warrants
 Listing fees and Depository fees
 Service tax
Dr. Ankit Jain 17

18. Management fee : SEBI has prescribed that funds can
charge a maximum of 1.25 per cent of an investor’s
average daily net assets up to Rs 100 crore and 1 per cent
on the balance amount.
Index Fund : Index funds can charge a maximum of 1.5
per cent as expense ratio.
Management Fees of Index Fund is 0.75%%.
Management Fees of Debt & Equty fund 1.5%
Dr. Ankit Jain 18

19. Q. Calculate maximum amount of recurring expense if
Net Assets is Rs 1000 crore invested in equity.
Dr. Ankit Jain 19

20. The following expenses cannot be charged to the scheme:
 Penalties and fines for infraction of laws.
 Interest on delayed payment to the unit holders.
 Legal, marketing, publication and other general
expenses not attributable to any schemes.
 Fund Accounting Fees.
 Expenses on investment management/general
management.
 Expenses on general administration, corporate
advertising and infrastructure costs.
 Depreciation on fixed assets and software development
expenses.
Dr. Ankit Jain 20

21.  NAV is to be calculated up to 4 decimal places in the
case of index funds, liquid funds and other debt funds.
 NAV for equity and balanced funds is to be calculated
up to at least 2 decimal places.
Dr. Ankit Jain 21