Accounting for Mutual Funds

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ACCOUNTING FOR MUTUAL FUNDS
Preprint · July 2024

DOI: 10.13140/RG.2.2.14773.90087
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Accounting for Mutual Funds
Author
Gourav Roy*
Key Topics
 Basic terminologies used in MF industry  NAV, NAV at cost, and NAV at market  Calculation of NAV
and other terms  Financial statements and Portfolio statements of MF schemes  Reading Portfolio
Statement for MF unit holders
*
Lecturer, Bangladesh Institute of Capital Market; Email: gouravroy.du@gmail.com
Ex-Official: Ministry of Power, Energy and Mineral Resources, Government of the Peoples’ Republic of Bangladesh;
Ex-Official: Post and Telecommunication Department (PTD), Government of the Peoples’ Republic of Bangladesh;
Research gate: https://www.researchgate.net/profile/Gourav-Roy
ORCID ID: https://orcid.org/0000-0001-9782-9103
Goggle Scholar: https://scholar.google.com/citations?view_op=list_works&hl=en&hl=en&user=Cor4gcMAAAAJ
GOURAV ROY 1
Accounting for Mutual Funds

Abstract
The chapter titled "Accounting for Mutual Funds" explores the complex financial concepts and
processes that regulate mutual funds, which are a crucial element of the investing industry. The
text commences by providing a concise overview of the basic framework and functioning of
mutual funds, emphasizing the responsibilities of crucial organizations such as fund managers,
custodians, and investors. The chapter highlights the distinct accounting criteria and legal
frameworks that provide transparency and safeguard the interests of investors. The primary
emphasis is on the assessment of mutual fund assets, which includes a wide range of instruments
such as stocks, bonds, and derivatives. The chapter elucidates the techniques employed for precise
asset valuation, including mark-to-market and amortized cost methodologies, and examines the
difficulties encountered when evaluating illiquid or intricate securities. The chapter also discusses
the computation of net asset value (NAV), an essential measure that defines the per-share value of
the fund and has an impact on investor choices. The text provides a comprehensive explanation of
the NAV computing method, which involves the identification of revenue, expenses, gains, and
losses. It also discusses the specific timing and frequency of NAV updates. In addition, the chapter
delves into the distinct financial reporting obligations that apply to mutual funds. This includes the
creation of financial statements such as the statement of assets and liabilities, the statement of
operations, and the statement of changes in net assets. Additionally, it discusses the requirements
for regulatory reporting and the significance of external audits in guaranteeing the precision and
reliability of financial data. The chapter explores the influence of legal advancements and industry
standards on mutual fund accounting, in addition to covering technical accounting topics. It
emphasizes the significance of adhering to the regulations established by organizations like the
Financial Accounting Standards Board (FASB) and the International Financial Reporting
Standards (IFRS). This chapter offers a thorough and detailed explanation of the accounting
standards that are necessary for the efficient management and transparent functioning of mutual
funds. It equips readers with the necessary information to understand and negotiate the complexity
of this important investing tool. A mutual fund is an investment vehicle in which a pool of investors
collectively put forward funds to an investment manager to make investments on their behalf. The
fund is regulated by the Securities Exchange Commission, or SEC. When involved with a mutual
fund, each investor benefits proportionally to the amount of money they invested. Mutual funds
are a great investment option for investors, both new and experienced. Since they pool the funds
from multiple investors and invest in a basket of different assets, mutual funds come with inherent
diversification. It also carries a slightly lower amount of investment risk compared to direct
investments as well.
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Keywords: Mutual Funds; Accounting; NAV; Portfolio Statements; Mutual Funds Unit Holders;
Capital Markets.
Figure 1: Cyclical Functions of Mutual Funds

The figure 1 says that the surplus unit of the economy when want to invest their idle money, having
know intention to actively manage any Investors’ Discretionary Account (IDA), rather trying to
follow the fund manager’ approach will invest their fund to any particular mutual fund. After that
the fund manager, alike other investments from other parties will accumulate the similar types of
funds and pool them together. After that, the fund manager will invest that in Bankers’
Discretionary Account (BDA), generate returns and will pass that to the investors.
1.0 Basic terminologies used in MF industry

The Different Kinds of Mutual Funds (Based on Asset Class of Investment) are the primary terms
to know while considering mutual funds as a prospective industry to invest:
1.1 Equity Funds
• Equity Funds predominantly invest in the stocks of different companies
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• Since these funds invest in the equity market, they tend to carry high amounts of investment
risk. That said, the potential for capital appreciation is also high with these kinds of mutual
funds.
• While the general theme of equity funds is the same throughout, not all of them are similar
or comparable to one another. While some equity funds may choose to invest in just one or
multiple sectors, other may try to mirror an index like the DS30.
• Equity Funds are either Active or Passive. In an Active Fund, a fund manager scans the
market, conducts research on companies, examines performance and looks for the best
stocks to invest. In a Passive Fund, the fund manager builds a portfolio that mirrors a
popular market index, say DSEX.
• Furthermore, Equity Funds can also be divided as per Market Capitalization, i.e., how
much the capital market values an entire company’s equity. There can be Large Cap, Mid
Cap, Small or Micro Cap Funds.
• Also there can be a further classification as Diversified or Sectoral / Thematic. In the
former, the scheme invests in stocks across the
• Thus, an equity fund essentially invests in company shares, and aims to provide the benefit
of professional management and diversification to ordinary investors.
And again, the equity mutual fund class is further divided into following types:
1. Large Cap Funds
2. Mid Cap Funds
3. Small Cap Funds
4. Multi Cap Funds
5. Large and Mid-Cap Funds
6. Contra or Value Fund
7. Focused Funds (Focused Multi Cap)
8. Dividend Yield Fund
9. ELSS (Equity Linked Saving Schemes) Tax Saver Funds
10. Sectoral Funds/Thematic Funds
11. International Funds
1.2 Fixed-Income Funds

• FIFs known as bond funds, fixed-income funds invest a major portion of the investors’
money into bonds issued by corporations and the government. Unlike equity funds that rely
on capital appreciation from share price growth, the goal of fixed-income funds is to
provide a steady source of income to investors.
• Also, the return-generating potential of fixed-income funds is not as high as equity funds.
However, fixed-income funds are considerably safer than equity funds. Due to the
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relatively safer nature of these funds and their ability to provide steady income, investors
try to include these funds into their portfolios along with equity funds.
• A debt mutual fund scheme invests a significant portion of its portfolio in fixed-income
securities like government securities (G-Sec), debentures, corporate bonds and other
money-market instruments.
• By investing money in such avenues, debt funds aim to lower the risk factor in your
investments. Different investors have different investment needs depending on their
financial situations, risk appetite and investment objectives. These funds offer different
category of funds for a wide range of investment needs.
• Debt Funds is a relatively stable investment avenue that could help to generate wealth.
Mutual Fund Debt Funds are also known as fixed income mutual funds.
1.3 Money Market Mutual Funds
• A money market mutual fund is a type of mutual fund that invests in high-quality, short-
term debt instruments, cash, and cash equivalents.
• Though not exactly as safe as cash, money market funds are considered extremely low risk
on the investment spectrum and thus carry close to the risk-free rate of return.
• A money market fund generates income (taxable or tax-free, depending on its portfolio)
but little capital appreciation.
• Money market funds invest in a variety of similar instruments, while money market
accounts exist in a single offering held at a bank or credit union and insured.
1.4 Hybrid Mutual Funds
• Balanced funds aim to strike a balance between equity and bond investing.
• They are long term funds that incorporate a mix of stocks and bonds in a given ratio. For
example, they might have 60% stocks and 40% bonds.
• Rebalancing these funds on a periodic basis adjusts their composition to prevailing
economic conditions.
• Some are rebalanced based on the investor’s goals. For example, they might incorporate a
more conservative approach close to retirement.
• A hybrid fund endeavors to create a balanced portfolio to offer regular income to its
investors along with capital appreciation in the long-term.
• The fund manager creates a portfolio according to the investment objective of the scheme
and allocates the funds in equity and debt instruments in varying proportions. Further, the
fund manager also buys or sells assets if the market movements are favorable.
1.5 Indexed Funds
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• Index funds aim to track the performance of a specific index.

• For example, the S&P, or TSX. Index funds follow the index and go up when the index
goes up and goes down when the index goes down. Index funds are popular as they
typically require a lower management fee compared to other funds (due to the manager not
needing to do as much research).
1.6 Specialty Funds
• Specialty funds focus on a very small part of a market such as energy, telecommunications,
healthcare, industrials, etc.
1.7 Systematic Investment Plan (SIP)
• Systematic investment plan for SIP, approach of investment in mutual fund schemes which
allows mutual fund investor to invest in mutual fund with a fixed amount every day, every
week, every month, every quarterly, based on his or her requirement. it is one of the most
popular investment approaches among mutual fund investors in Bangladesh and help them
to invest in equity market in a discipline manner for long term and also provide benefit of
rupee cost averaging to the mutual fund investors, with the same fixed amount during
downturn the greater number of units are bought in their investment portfolio.
• The systematic investment plan is not generally the actual investing but more of a kind of
saving, as from the regular savings of a mutual fund investor every month the amount is
deducted and being invested in equity market and the debt market through the mutual
funds.
• And it is many times being misunderstood that SIP is a form of investment among the
mutual fund investors, which is actually a mode of investment in a systematic manner in a
mutual fund.
• SIP is the systematic investment plan which also helps in reducing the overall risk held by
the mutual fund investors by investing in mutual funds in their investment portfolio through
the help of rupee cost averaging and also help them to gain the benefit of compounding in
long term.
• Systematic investment plan SIP also gives the mutual fund investors a complete flexibility
in investing systematically but to start investment with very low amount of rupees 100 or
500 depending on the various mutual fund houses, and not just that it also helps investor to
increase or decrease the SIP amount and also withdrawal partial or the full amount during
or after the SIP tenure is over.
• And that is why systematic investment plan is the best mode of investing in equity market
or debt market through mutual funds, and that’s why various schemes which allows a very
small investor also to invest with very low amount in a systematic and disciplined manner
for long term for creation of wealth which can lead to success and better return in long
term.
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• And also, the systematic investment plan has an edge over lump sum investment as it enjoys
the benefit of investing in all market cycles of the market, and also reduces the risk of
market volatility with the benefit of rupee cost averaging.
• It also helps investor to avoid timing the market and helping them to invest for a long term
through systematic investment plan, as the more time you give to the investment in the
market the more return is the more wealth is going to create for to the mutual fund investors
in long term with the power of compounding.
1.8 Systematic Transfer Plans
• The next systematic mode of investment in mutual fund is STP systematic transfer plan.
• As from the name itself it is clear that STP allows a mutual fund investor to transfer a fixed
or variable amount of unit of mutual fund at a pre define regular interval of time ranging
from weekly, monthly or quarterly.
• Systematic transfer plan is generally used by the mutual fund investor for transferring
money from debt Mutual Fund to hybrid or equity mutual funds, at the time when market
is very much volatile and we are not sure about the lump sum investment in equities so
what a mutual fund investor does here is parking their funds in liquid funds in lump sum
and give the instruction through systematic transfer plan to transfer certain amount
periodically to the desired equity or hybrid mutual funds.
1.9 Account Statement
An account statement is a statement showing details regarding all the mutual fund holdings within
a fund house of an investor. The statement details all the transactions executed by an investor
during a period. The statement includes information such as NAV (Net Asset Value) date, NAV
value, market value, etc.
1.10 Age of Fund
The age of the fund is the total time elapsed since the launch of the fund. For example, the well-
known XYZ Equity Tax Relief Fund was incepted on xx. Thus, the age of the fund is xx as of date.
A higher age of fund shows the track record of a fund.
1.11 Alpha Coefficient
Alpha is the excess return over the standard benchmark of a fund. Each fund tries to assess its
performance concerning a reference. This benchmark may be any regular index or may be
customized based on the fund structure. Thus, the alpha is the returns that are generated over and
above the benchmark.
A positive alpha indicates better performance of funds than the benchmark, whereas a negative
alpha indicates an underperformance of the fund when compared to the benchmark.
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1.12 Annual Return

An annual return is the percentage change in the NAV of a fund over one year. Depending on the
need of the investor, the annual return may or may not include dividends and bonus that may be
paid in a fund.
1.13 Annualized Returns
It is the absolute return over a period that may be either higher or lower than a year. The returns
are aggregated over a period of one year based on the run performance during the period.
For example,
In 2015 the DSEX opened at xx, and in 2018 the DSEX closed at xx. During 8 years, the DSEX
gained xx%, the same growth can be said as xx% annualized to give a clear picture.
1.14 Applicable NAV
Applicable NAV is used to process the buy and sell fund units. The fund houses in the industry
have outlined a cut-off time for different types of funds. This cut-off time allows the fund house
to execute a purchase or sale. If an application is submitted before the cut-off time, the processing
from the fund house happens the same day.
1.15 Asset Allocation
Asset allocation is the process of diversifying the risk in a portfolio or fund. The method involves
the distribution of fund corpus into different instruments such as stocks, bonds, debentures, etc.
depending on the fund objective in terms of risk and return.
1.16 Asset Management Company (AMC)
It is the investment manager for a fund. AMC is a company set up for managing the investment of
mutual funds, making investment decisions as per the objective, deed of Trust, and other activities
as per the Investment Management Agreement.
1.17 Average Credit Quality
The Average Credit quality measures the creditworthiness of debt securities held by a fund. It is
computed using the weighted average method by taking into account each security, its credit
quality, and its weight in the portfolio. The fund manager refers to the credit rating table for the
same. Also, any instrument of the government or cash is considered as AAA rating during the
remainder as per their rating.
1.18 Balance Maturity Tenure of a Scheme
It is used in close-ended schemes and is referred to as the balance term remaining until the
redemption of the scheme.
1.19 Balanced Funds
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Balanced Fund is a type of mutual fund that invests in both asset classes – equity and debt. These
funds belong to a hybrid category and generally comprise two-thirds equity portion and the
remainder in debt.
1.20 Bear Market
The period in which the market corrects continuously as the investors/market participants are on a
selling spree. This activity results in a declining share price over a stretched period.
1.21 Benchmark
Benchmark is the platform or the parameter which is considered as base. Also, termed as a
reference, a benchmark sets the minimum expectation of returns for an investor and fund manager.
A fund is then compared concerning this benchmark and positioned accordingly based on the
outperformance.
For example,
ABC Equity Fund is a large-cap fund that primarily invests in large-cap companies. The
benchmark is DSEX. Thus, the fund is compared with this benchmark while assessing its
suitability for an investor.
1.22 Beta
Beta measures the sensitivity of a stock or a fund to the market. Every instrument be it a stock, or
a fund behaves in tandem with the overall market. This association of the instrument and the
market is determined by beta. The market is assigned a beta of 1 as a reference.
For example,
If a fund has a beta of 1.2, it means that the fund’s performance will be intensified concerning the
market by 20%. This means if the market increases by 100 points, the fund increases by 120 points
(1.2 x 100).
Thus, the higher is the beta, the more sensitive is the stock or fund relative to the market. Also,
note that high beta stocks are not good always and bring in higher risk.
1.23 Blue Chip Stock
Blue chip stocks are the stocks of a large corporation with a track record of stable earnings,
dividend distribution, and strong brand recall.
For example,
Some of the blue chip stocks in BD are SQPH, GP, BATBC, etc. Also, blue chip stocks in the US
are Apple Inc., Alphabet Inc., Amazon Inc., etc.
1.24 Bond
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A bond is a financial instrument that bears a promise of paying interest to the investor (also known
as lenders). Moreover, these instruments promised to pay a specified sum of money due on a
specific date (maturity date) in the future.
1.25 Bonus
It is the allocation of additional units to investors based on their holding. In simple words, a bonus
is the corporation action by way of which the price of each unit of NAV is reduced and the number
of units an investor holds increases by the corresponding ratio to ensure the portfolio value remains
the same before and after the bonus.
1.26 Broker
A Broker is an intermediary who helps/guides an investor on different avenues of investment
available. It also facilitates the process of investment. Some of the notable brokers in Bangladesh
are – IDLC, LBSL, Shanta, etc.
1.27 Brokerage
It is the fee that is paid to the broker for the service provided. For example, in the case of mutual
funds, brokers act as distributors and sell units of the fund on behalf of the fund house. Thus, the
fund house pays a brokerage (usually a percentage of the transaction value) to the broker for getting
investments from investors.
1.28 DS30 Index
It is an index that reflects the price of the 30 companies that are listed on the Dhaka Stock Exchange
(DSEX). These 30 companies are usually the largest companies in the index and provide a good
representation of the overall market movement.
1.29 Bull Market
The period during which the price of stock keeps rising, and investors/participants are on a
continuous buying spree. The period generally results in a rising price for the shares.
1.30 Capital Gains
Capital gains are the profit realized upon the sale of securities, and other capital assets such as
mutual fund units. These gains are classified as short-term capital gains or long-term capital gains
depending on the period of holding the instrument.
In general, a period of over 12 months is considered long-term. However, the definition differs for
certain asset classes such as debt funds, etc. Also, based on the category of capital gain, a tax may
or may not be levied.
1.31 Close-Ended Schemes
Close-ended schemes are mutual fund schemes that have a defined maturity period. An investor
can invest in such schemes only during the first issue. An investor can exit the invest by two-
manner – either at maturity of the scheme or by selling the units if the scheme is listed on a stock
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exchange. The selling price in the case of listing could differ from the NAV due to the demand and
supply of units on the exchange.
In addition to the two exit options, some of the close-ended schemes also provide the option of
buying back. In this circumstance, the fund house opens a buyback window win which an investor
may decide to liquidate his/her investment. The regulation from market regulator BSEC mandates
that the fund house provides at least one of the two exit options to investors.
1.32 Corpus
Corpus is the total amount of money invested by all investors in a scheme. For example, IDLC has
a corpus of BDT 8913 crores as of May 31, 2019.
1.33 Cost of Churning/Turnover cost
It is the cost incurred when changes are made to a portfolio. The changes include buying and
selling of securities. The costs involved are broker fees, custodian charges, transaction fees,
registration fees, stamp duty, and the like.
1.34 Coupon rate
It is the annual rate of interest payable on a debt security. It is commonly expressed as a percentage
of the face value of the debt instrument.
For example,
If a company issues debt instruments of BDT 100 (face value) and pays BDT 8 as interest annually.
The instrument is then expressed as an 8 percent coupon.
1.35 Current Load
It is the load structure that applies to a fund currently. The load is nothing but the fee charged by a
fund house when an investor subscribes or redeems units of a fund.
1.36 Current Yield
The current Yield is the ratio of interest to the current market price of the bond. Usually expressed
in percentage, it is computed as –
Current yield = Annual interest / Current market price
For example,
If a bond of BDT 100 face value, 8% coupon paid annually, is currently priced at BDT 120, the
yield is computed to be 6.67%.
= ((8% x 100)/ 120) *100

= (8/120) *100
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= 6.67%
1.37 Custodian
Custodian is similar to a bank. Like a bank keeps the valuables and deposits of individuals, the
custodian keeps the securities and other assets invested.
1.38 Cut-off Time
All the transaction in a mutual fund that is regulated by BSEC, is processed at a particular NAV.
Every fund has a defined cut-off time which enables the fund house to process transactions
properly.
Thus, the cut-off time is the time before which any transaction made by an investor in the fund is
executed the same day. The trades placed post-cut-off time are completed the next day at the next
day’s NAV.
1.39 Debt/Income Funds
Mutual funds that invest in debt instruments are debt/income funds. The debt instruments include
corporate debentures, bonds of public sector undertaking (PSU), treasury bills, commercial paper,
corporate deposits, certificates of deposits, etc.
1.40 Discount
When the market price of a scheme goes below the actual NAV of the unit, the scheme is said to
be available at a discount.
1.41 Dividend Distribution Tax
Dividend Distribution Tax or the DDT is the tax payable by a mutual fund while distributing a
dividend to the unitholders.
1.42 Dividend Frequency
The periodicity of dividend payout is the dividend frequency. The terminology is more relevant in
the case of income/debt schemes such as the monthly income plan, etc.
These plans generally pay a dividend every month and are preferred by retired individuals who are
looking for monthly cash flow to meet needs.
1.43 Dividend History
It is the track record of the dividend paid by a fund.
1.44 Dividend Per Unit
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It is the total amount of dividend declared by a fund divided by the total number of units issued to
investors.
1.45 Dividend Plan
It is a mutual fund plan under which the fund house pays divided from time to time as and when
decided by the management of the fund.
1.46 Dividend Reinvestment
It is a mutual fund plan under which the dividend declared by the fund house for a particular
scheme is re-invested in the scheme itself. In this case, the dividend is not paid to the investor;
instead, the investors receive scheme units of the equivalent value. The NAV used to compute the
number of units is Ex-dividend NAV.
1.47 Dividend Warrant
It is an instrument that is issued by companies or fund houses for the payment of dividends.
1.48 Dividend Yield
Dividend Yield refers to the dividend earned per unit of the scheme as a percent of the current
price.
It is computed as –
Dividend yield = (Dividend per unit / current market price per unit) x 100
1.49 Dividends
A dividend is a portion of the profit that is distributed to investors periodically. Paying dividends
is not mandatory and is at the sole discretion of the management of the fund.
1.50 Entry Load
It is the charges that are levied by a fund house when an investor invests in a scheme — the
applicability of entry load results in a rising cost per unit. Entry load is not applicable in
Bangladesh anymore.
1.51 Equity Linked Savings Scheme
Equity Linked Savings Scheme (ELSS) is a type of equity mutual fund that invests in equity shares
of companies. This mutual fund comes with a lock-in period of three years and provides tax
benefits.
1.52 Ex-Dividend Date
It is the date since which dividend distribution is effective. Whenever a fund pays a dividend, the
NAV of the fund reduces by the amount equivalent to that of the dividend.
1.53 Ex-Dividend NAV
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The NAV after a fund declares the dividend is known as Ex-Dividend NAV. Whenever a fund pays
a dividend, the NAV of the fund reduces by the amount equivalent to that of the dividend and the
resultant value is known as Ex-Dividend NAV.
1.54 Exit Load
It is the charge that is levied by a fund house when an investor redeems his/her investment from
the fund. Collecting the charges while redemption results in the lowering of the NAV. Exit load is
commonly expressed as a percentage of NAV.
1.55 Expense Ratio
Managing a mutual fund involves multiple expenses such as management fees, transaction charges,
custodian fees, the salary of the fund manager and the research team, data subscription charges,
brokerage, and the like. All these expenses, when combined, give the total expenses of a fund.
Total expenses, when divided by the fund’s assets, gives the expense ratio.
A high expense ratio shows that the expense incurred towards managing the fund is high; this
results in a lowering of the returns.
1.56 Face Value
It is the original price of a unit of a scheme. Typically, the face value is BDT 10 in Bangladesh for
the majority of the schemes.
1.57 Fund Category
Depending on the assets in a mutual fund, the funds are categorized into different categories. This
categorization makes it easier for an investor and a fund manager to compare a fund with the
category average and its peers. The market regulator BSEC has tightened its guidelines
surrounding the categorization of the funds. Some of the categories are – Equity: Large Cap,
Equity: Multi-cap, Equity: ELSS, Equity: Small-cap, Hybrid: Aggressive, Hybrid: Balanced, etc.
1.58 Fund Family
Like a family represents a member who is generally blood relatives of each other. Similarly, a fund
family is all the schemes that are managed by one mutual fund.
1.59 Fund Management Costs
Every AMC levies a charge for the management of the fund. This charge is called the fund
management cost.
1.60 Fund Manager
A fund manager is a person who is appointed by the AMC to manage/take care of a fund. The fund
manager is empowered to make decisions concerning the portfolio in the best interest of the
investor and as per the objective of the fund.
1.61 Government Securities
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Securities that are issued by the Central Government and the State Government are known as G-
SEC. These securities have a sovereign rating as they are guaranteed by the government. Thus, the
risk involved is negligible.
1.62 Growth scheme
A scheme where investments are primarily made in equity and related instruments and the capital
gain is used for further investments to grow the NAV. These schemes do not provide a regular
dividend to the investor.
1.63 Guaranteed Returns
The return that is assured by the fund house is known as guaranteed returns. This is applicable in
certain income plans that comprise debt instruments. Launching such schemes is not easy and is
heavily regulated by the BSEC.
1.64 Income / Debt Funds
The funds that primarily invest in fixed income securities are known as Income / Debt Funds.
These funds seek to provide reasonable returns with low risk as the instruments are fixed-income
instruments with high credit ratings.
1.65 Index Funds
Mutual funds that are constructed to mirror the performance of an index are called index funds.
These funds provide flexibility to an investor who is willing to invest in indices such as DSEX,
DS30 etc.
1.66 Indexation
It is a method used to adjust the income by using a price index. This is done to maintain the
purchasing power of the public after inflation. The government specifies the use of an index-linked
to the wholesale price index.
The method of computing is –
(Original price x CII for the year of sale) / CII for the year of purchase
CII is nothing but the Cost Inflation Index.
For example,
For a scheme purchased in 2003 (year of purchase) for BDT. 100 and sold in 2018 (year of sale),
the cost price after indexation is computed as below –
= 100 * (230/105)
= 219.05
Assuming the index for the year of the sale, and year of purchase is 230 and 105 respectively.
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Indexation benefit is available only if the asset is held for more than 12 months.
1.67 Inflation
It is defined as the rise in the price of goods and services over time.
For example, milk was available at BDT 25 in 2008, and currently, it is priced at BDT 40 per liter.
This increment in price is nothing but inflation.
1.68 Inflation Risk
The risk related to the value of assets shrinking due to the shrinking of the currency value is known
as inflation risk. It is majorly used in analyzing debt funds and their viability, and also it helps
while assessing the attractiveness of a fund. Ideally, an investment should grow more than the
inflation rate to enable an investor to accumulate capital. For example, a product X that is priced
at BDT 100 today will be priced at BDT 105 tomorrow. Thus, if an investor is investing BDT 100
today, he should get more than BDT 105 tomorrow to meet his need for product X and also to save
the remainder.
1.69 International Funds / Emerging Market Funds
The funds that invest in the asses of companies/organizations in an emerging economy is called
the international fund/emerging market fund.
These are not permissible in Bangladesh due to regulations against investing abroad. Most of the
schemes of Foreign Institutional Investors (FIIs) investing in Bangladesh are funds of this type.
1.70 Investment Management
It is the method of investment analysis and execution of the plans while keeping in mind the
objective of investing.
1.71 Key Information Memorandum (KIM)
KIM is the official document that is issued by mutual funds before launching any fund. The
document details the characteristics of the proposed fund to its prospective investors. The
document also contains the information required by BSEC such as investment objective,
investment policy, philosophy, fees, etc.
1.72 Launch Date
The date on which a scheme is first made available for subscription is called the launch date.
For example, the launch date for ABC Fund is xx.
1.73 Liquidity
The assets, namely cash, and cash equivalents, are available instantly and quickly to meet the
expenses. It refers to the ability to convert an asset into cash immediately.
1.74 Load
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A charge, as a percentage of NAV, that may be levied by the fund house at the time of investing in
the scheme or redeeming the investment is called load.
1.75 Lock-In Period
The period during which the fresh investments made by an investor cannot be redeemed.
For example,
The lock-in period in ELSS is three years. This means that investment made in ELSS on Jan 1,
2019, cannot be redeemed before Jan 1, 2022.
1.76 Macaulay Duration
Macaulay Duration calculates the time an investor takes to regain the money he had invested in a
certain bond after taking into account interest receipts and principal repayment.
1.77 Management Expense Ratio
The ratio of the management expense to the total funds under management is the management
expense ratio. The number is usually specified in the offer document of the fund scheme.
1.78 Management Fee/Expense
It is the charge that is incurred towards the supervision and management of the portfolio. It is
generally expressed as a percentage of total funds in the scheme.
1.79 Market Risk
The risk that is posed by the market itself is called the market risk. This refers to the risk of price
volatility of security due to economic, political, or other market conditions.
1.80 Maturity or Maturity Date
The date on which a fund scheme becomes due and payable to the investor is called the maturity
date. It is generally applicable in the case of close-ended schemes.
1.81 Minimum Additional Investment
It is the minimum investment an investor needs to make for purchasing additional fresh units.
1.82 Minimum Subscription
It is the minimum amount required to be invested in purchasing units of a mutual fund scheme.
For example,
For ABC Blue chip Fund, the minimum subscription is BDT 5000.
1.83 Minimum Withdrawal
This is the minimal amount (smallest amount) that is allowed to be withdrawn (redemption) from
a fund at one time.
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1.84 Money Market

The market for very short-term securities is known as the money market. The instruments are debt
instruments that have a maturity of less than one year. Some of the instruments are Treasury Bills
and the like.
1.85 Money Market Instruments
The instruments of the money market are known as money market instruments. The instruments
include Commercial Papers, Treasury Bills, GOI Securities, etc. with a maturity of less than one
year.
1.86 Mutual Funds
An investment company that pools money from different investors and invests the money in varied
securities such as stocks, bonds, and money-market instruments is called a mutual fund. This
pooled investment is managed by a team of professionals under the leadership of a fund manager
or a portfolio manager.
1.87 Net asset value (NAV)
The value of the fund’s portfolio arrived at by subtracting the current liabilities from the market
value of the fund’s portfolio is known as NAV. The NAV is generally computed daily or weekly
unless other specified.
1.88 No-Load Mutual Fund or No-Load Scheme
The funds that do not charge any fees for subscription or redemption are known as a no-load mutual
fund or no-load scheme.
1.89 Non-Performing Investments
This is a part of the portfolio that is not making an interest payment or principal repayment in a
timely manner. The scenario is prevalent in debt funds. BSEC has now come up with a valuation
methodology that shall help investors.
1.90 Offer Document or Prospectus
It is the official document issued by mutual funds before the launch of a fund describing the
characteristics of the proposed fund to all its prospective investors. It contains the information
required by BSEC about issues such as investment objectives and policies, services, and fees.
1.91 Open-End Scheme
A mutual fund scheme where the purchase and sale of units are allowed continually.
1.92 Opening NAV
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Opening NAV is the NAV that is disclosed by the fund for the first time after its new fund offer
(NFO) closes.
1.93 Pay-out
The designated day on which the securities and funds are paid to the members by the clearinghouse
of the exchange.
1.94 Portfolio Management
Also known as the fund manager, a portfolio manager is a specialist employed by an AMC to
manage a scheme. It is the discretion of the fund manager at the end regarding the securities in
which a fund invests. A fund manager is responsible for working in the best interest of the investor
while keeping in mind the investment objective of the fund.
1.95 Premium
Premium is the condition where the market price of a unit is higher than its actual NAV. In such
instances, the unit is said to be trading in premium.
1.96 Prospectus
A prospectus is an offer document using which a mutual fund invites the public for subscription to
the units of the scheme. The document captures all the information about the fund, including the
profile of the fund manager and his/her team. The prospectus is aimed at providing a prospective
investor with all the relevant information that may help in making an informed decision.
1.97 Purchase Price or Offering Price
It is the price at which a fund’s units can be purchased. The asked or offering price is the net asset
value per unit plus sales charges if applicable.
1.98 Rating
A rating is a symbol that works as an indicator of the current opinion, of the capability of timely
servicing the debt obligation. The rating is arrived at using an objective framework depending on
the financials of a company and the information taken from the management about the operations
of a company. The rating is carried out to assess the creditworthiness of debt instruments, and/or
risk of loss in an investment.
1.99 Record Date
The date by which the investors are registered unitholders to be eligible to receive any future
dividend and/or capital gains distribution.
1.100 Recurring Investment Facility
It is an arrangement provided by the fund house where the regular purchase of a small or large
number of units is allowed. The plan also may provide for automatic reinvestment of dividends
and/or capital gains distribution.
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1.101 Redemption Fee

The fee that is levied as a back-end load and is imposed when an investor redeems his/her
investment is known as the redemption fee.
1.102 Redemption of Units
Buying back or cancellation of the units by a fund is known as redemption. The investor is paid a
consideration at the time of redemption, which is linked to the NAV of the scheme.
1.103 Redemption Price
The price at which open-ended schemes repurchase their units and close-ended schemes redeem
their units upon maturity. These prices are determined using NAV.
1.104 Risk-Adjusted Returns
The returns expected from an investment after adjusting for the risk involved in it are known as a
risk-adjusted return. The parameter is primarily used to compare two investment options,
particularly with different risk/return profiles.
1.105 R-Squared
‘r’ is the correlation coefficient. The square of the same is known as R-squared. The statistic shows
the proportion of the determining variables that are explained by others.
For example,
If the correlation between crop yield and rainfall is 0.7, then the R-squared is 0.7×0.7 = 0.49. This
means 49% of the behavior of food crop production is explained by rainfall while the remainder
is explained by other factors.
A higher R-squared is considered to be a good explanatory factor for the changes in the element
being explained. In a situation, this figure is not high; it indicates that there are other factors that
better explain the behavior of the variable in question.
1.106 Scheme Information Document (SID)
SID is an official document that is issued by mutual funds before the launch of a scheme. The
document captures the characteristics of the proposed fund. The document is generally used by
prospective investors to make an informed decision about investing. The document contains
information that is made mandatory by the BSEC. This includes information such as investment
objectives, investment philosophy, services, fees, and the like.
The document may also contain other information that may be relevant to the investor.
1.107 Sharpe Ratio
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Sharpe ratio measures the risk-adjusted returns of a fund. In simple words, the ratio measures the
variability of excess returns (excess return is defined as the returns over the risk-free rate). The
formula for the Sharpe ratio takes into consideration the fund’s returns over a risk-free investment
and divides the same by the standard deviation of returns.
Mathematically it is shown as –
Sharpe ratio = (R- Rf)/SD
R= Return on the investment instrument
Rf = Risk-free returns
SD = Standard Deviation of investment instrument
For example,
Assume a fund that generates an 18% annual return at a standard deviation of 6%. Considering the
risk-free rate at 8%, the Sharpe ratio is calculated as –
= (18-8)/6
= 10/6
= 1.67
The higher is the Sharpe ratio, the better is the fund. In the simplest language, the ratio shows how
much additional return an investor can expect for every degree of risk.
1.108 Standard Deviation

The standard deviation is one of the most commonly used statistics used for assessing risk. The
ratio measures the tendency of an instrument to deviate from its average returns. A low standard
deviation is better and shows higher consistency in the performance of the instrument, which is
closer to the average returns.
1.109 Systematic Withdrawal Plan (SWP)
SWP is a plan that enables an investor to withdraw a fixed amount at a regular interval (monthly,
bi-monthly, or quarterly). The withdrawal is as per the requirement of the investor as specified by
him/ her at the time of investment.
1.110 Total Assets Under Management
It is the total market value of all the investments of a fund as on a particular date.
1.111 Total Return
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It is the return on investment that is computed after taking into account capital appreciation,
dividends, interest, and individual tax consideration adjusted for present value. The performance
is generally expressed on an annual basis.
1.112 Trust
A trust is a legal arrangement under which property and assets may be held and managed for the
benefit of another person. The mutual funds in Bangladesh are registered under the Trusts Act.
1.113 Trustee
A person or a group of people who have overall supervisory authority over the fund manager is
known as the trustee. Trustees ensure that the fund managers keep to the deed and that the unit
price of the fund is fairly calculated and the assets of the fund are held safely.
1.114 Turnover
Turnover is the extent to which a fund’s portfolio is changed during a year. A high turnover
indicates that the number of securities in the fund has changed significantly. This also shows higher
investment expenses, which may lead to erosion of the value of the units.
1.115 Turnover Rate
The turnover rate is the measure of the fund’s trading activity. It is computed by dividing total
purchases or sales in a portfolio by the fund’s net assets during a period.
1.116 Unit Trust
A unit trust is a special type of bond fund that has a fixed portfolio. The shares or the “units” in
such a portfolio are sold at the time of the constitution of the fund. The portfolio remains the same
for the fund until the maturity of the underlying securities in the portfolio.
1.117 Value Stocks
Stocks that are found to be undervalued when valued using different valuation methods are known
as value stocks. These stocks tend to perform well if held for a long-term horizon.
The valuation method used varies depending on the analyst, but the common ones are price-to-
book (P/B), price-to-earnings (P/E) or discounted cash flow (DCF).
Value stocks tend to have lower P/E and P/B than the industry average.
1.118 Yield
Yield is the distribution from investment income. It is expressed as a percentage of the NAV or the
current market price. Unlike total return, the yield has only one component, which is the investment
income. It does not include the distribution of capital gains or capital appreciation of underlying
shares.
1.119 Yield Curve
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The graphical representation between yield and maturity time is known as the Yield Curve. The
yield curve shows the yield of fixed-income securities such as bonds, treasury bills, etc. with
varying maturity.
The curve is generally sloped upwards as the instruments with longer maturities usually have
higher yields.
1.120 Yield to Maturity
Yield to Maturity (YTM) is used to determine the return an investor tends to receive if a long-term,
interest-bearing investment such as a bond is held until maturity.
YTM takes into consideration the purchase price, redemption value, time to maturity, coupon
value, and coupon payment frequency.
1.121 Zero-Coupon Bond
It is a bond where there is no periodic interest that is paid to an investor. These bonds are sold at a
discounted price to their fair value to the investor. This discount becomes the return for the investor.
In such bonds, the investor receives only one payment upon maturity. In a straightforward manner,
FV = SP + Interest
Where, FV is the face value of the bond, SP is the Selling price to the investor.
An investor buys the bond at SP and receives FV upon maturity.
2.0 Net Asset Value Calculation and Other Terms Related to Mutual Funds
2.1 Adjusted NAV Calculation
The Net Asset Value of a unit is the Market value of mutual fund securities minus liabilities divided
by the total number of shares/units outstanding. The NAV is said to be “adjusted” when there is a
dividend involved.
For example,
Assume there is a fund with an NAV of 100 on Jan 1, 2018. The fund paid BDT 10 as dividends
during the year, and the closing NAV was BDT 150 on Dec 31, 2018. If you calculate the returns
by the NAV method, it would be –
= (150-100)/100
= 50%
But you have also received a divided which is not getting reflected in the returns. So, adjusted
NAV adjusts for such actions. The actual performance of the fund is based on an adjusted NAV
method –
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= (150+10)-100 / 100
= 60%
2.2 Average Cost Method
The average cost basis method is a system of calculating the value of mutual fund positions held
in a taxable account to determine the profit or loss for tax reporting. Cost basis represents the initial
value of a security or mutual fund that an investor owns. The average cost is then compared with
the price at which the fund shares were sold to determine the gains or losses for tax reporting. The
average cost basis method is commonly used by investors for mutual fund tax reporting. A cost
basis method is reported with the brokerage firm where the assets are held. The average cost is
calculated by dividing the total amount in dollars invested in a mutual fund position by the number
of shares owned.
Example 1: an investor that has $10,000 in an investment and owns 500 shares would have an
average cost basis of $20 ($10,000 / 500).
Example 2: You invested twice in a fund by putting in BDT 25000 each time. During the
transactions, you received 100 and 110 units respectively in both transactions. Thus, the average
cost of purchase is BDT 238.09, computed as below –
= total investment value / total units received
= (25000 + 25000/ (110+100)
= BDT 238.09
2.3 Performance Evaluation of Mutual Funds by Calculating Net Asset Value (NAV) at Cost
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 techniques 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 Mutual Fund Holdings − All Mutual Fund Liabilities
NAV of MF =
Number of Mutual Funds Units or Shares
Breaking Down the formula,
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NAV of MF = (Market value of Scheme′ s Investments + Receivables + Accrued Income

+ Other Assets − Accrued Expenses − Payables
− Other Liabilities )/(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 XYZ Scheme size Rs. 50,00,00,000 (BDT Fifty crores)
 Face value of units BDT 10
 No. Of Units (Scheme size) 5,00,00,000
 Face value of units Investments In shares
 Market value of shares BDT 75,00,00,000 (BDT Seventy-Five crores)
NAV (Market value of Investments / No. of units) = TK (75,00,00,000/5,00,00,000)

= TK 15
Thus, each unit of BDT 10 is worth BDT 15.
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 (BDT 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.
2.4 NAV for Mutual Funds vs. Stocks

While mutual funds are traded at NAV, stocks are traded at the market price. Here are some
differences between the two-
Mutual Fund NAV Stock Price

It is the per-unit cost of the mutual fund scheme It is the per-share cost of any company
It is a function of the assets, liabilities, and number It is a function of the demand-supply
of units of a mutual fund scheme forces in the market, macro, and micro-
economic situations, etc.
It is introduced as a part of the New Fund Offering It is introduced as a part of the Initial
(NFO) Public Offering (IPO) of the company
going public
Mutual funds are bought and sold at the current Stocks are traded in the stock market
day’s NAV through AMCs, distributors, banks, or
platforms like ET Money
NAV is not a measure of the mutual fund The stock price can be an indicator of the
performance company’s overall health
2.5 Role of NAV in the Performance of a Fund
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The NAV of mutual funds can be used to track the past performance of any mutual fund scheme.
The NAV does not have any impact on your returns. For example, a high or low NAV does not
make your returns higher or lower. If you study the growth or degrowth in NAV for any fund, it
tells you the fund’s growth pattern and helps you make better decisions. For example, if the NAV
of a fund grew from BDT 10 five years ago to BDT 150 today, that can mean that its Asset Under
Management (AUM) has increased and more people have invested in the fund and may have faith
in the fund manager. Apart from this, the performance of the fund has no relation to its NAV. NAV
is more relevant for an open-ended scheme than a closed-ended one because the former allows the
buying/selling of units at any time. Hence, the time at which you buy/sell is relevant because the
NAV value will be different each day.
2.6 Differences between NAV and Market Price
The NAV of mutual funds is nothing but the book value of the mutual fund scheme. It is purely a
function of the value of its assets, liabilities/expenses, and the number of units. In comparison, the
market price is that of the assets/securities that the mutual fund holds. It is the price at which these
securities are currently being traded in the market. The market price gets affected by many micro
and macroeconomic situations and investor sentiment. But the NAV value does not get directly
affected by the market changes, although the value of the assets it holds may get affected.
2.7 How NAV is Relevant to Investors?
When you are looking to invest in a fund, the NAV is just the per-unit price of buying the mutual
fund. It is not that a mutual fund scheme with a lower NAV is cheaper than any other. Over the
years, the fluctuation in NAV can give you a sense of which direction the fund is moving towards
or how it has performed in the past. But NAV is not comparable amongst mutual funds. Here is a
net asset value example. If fund A has a NAV of BDT 100 and Fund B has a NAV of BDT 10, it
does not mean that fund A is better than fund B. Let us see how-
Fund A Fund B
Current NAV BDT 100 BDT 10
Amount invested by you BDT 1000 BDT 1000
Number of units bought 10 100
20% growth in both NAVs BDT 120 BDT 12
Value of investment BDT 1200 (Rs 120×10 units) BDT 1200 (BDT 12×100 units)
Your investment’s value remained the same in both when both the schemes grew at the same pace.
Hence, the original NAV of the mutual fund is irrelevant but how it grows is relevant.
2.8 Calculation of NAV Using Market Value (Using Expense Ratio)
Here is how NAV calculation is done using the NAV formula:
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NAV= [Assets-Expenses (and/or liabilities)] / Number of outstanding units
Assets= Value of all the assets under the scheme + the cash holdings
Expenses= Payable money/interest (other liabilities) + expense ratio
While the expense ratio is the fund management fee, the liabilities can include any short-term or
long-term commitments. Here’s a hypothetical net asset value example to explain the NAV
calculation better.
Value of all assets (stocks + bonds + money market instruments) BDT 10,00,000
Expense Ratio 2%
Other liabilities BDT 1,00,000
Number of units 90,000
NAV= [10,00,000- (1,00,000+(2%/365) *10,00,000]/90,000= BDT 9.99
In the above NAV formula, the expense ratio is prorated to a single day and then calculated as a %
of the value of the assets. That’s how the net asset value calculation is done.
Some factors to keep in mind about the NAV calculation of mutual funds using the NAV formula-
 The NAV is calculated after the market closes each day because when it is open, the
transactions are still happening.
 The NAV of mutual funds is calculated and declared by the mutual fund house.
 The values of all the assets may not be affected by the market; these are assets like cash
derivatives.
3.0 Financial Statements and Portfolio Statements of Mutual Fund Schemes

In this segment, the author will discuss about a sample Asset Management Company’s particular
close end mutual fund. As open-end mutual fund’s financial statements would have been discussed
in another chapter, so, close end mutual funds will be discussed in this segment. ICB Asset
Management Company Limited, as a fund manager and ICM AMCL 2nd Mutual Fund has been
considered as the close end mutual fund to be discussed in this segment.
3.1 The Portfolio of ICB Asset Management Company’s Close End Mutual Funds
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Figure 3.1: The Portfolio of ICB Asset Management Company’s Close End Mutual Funds
The above figure 3.1 is the total portfolio of ICB AMC Limited’s close end mutual fund portfolio.
In this segment only Sl. No. 02 that is ICB AMCL Second Mutual Fund will be discussed using its
financial statements.
3.2 Operational Highlights of Close End Mutual Fund Managed by ICB AMCL
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Figure 3.2 Operational Highlights of Close End Mutual Fund Managed by ICB AMCL
We can see the NAV and Total Investment at cost price and market price in the figure 3.2.
3.3 The Basic Information about ICB AMCL Second Mutual Fund
In this segment, the readers will get to know the basic information, EPU and NAV per unit of
ICB AMCL Second Mutual Fund.
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Figure 3.3.1: The basic information of ICB AMCL Second Mutual Fund.
Figure 3.3.2: Year wise EPU and NAV per unit
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3.4 The Statement of Financial Position
Figure 3.4: Statement of Financial Position
 The balance sheet (also referred to as the statement of financial position) discloses what an
entity owns (assets) and what it owes (liabilities) at a specific point in time. Equity is the
owners’ residual interest in the assets of a company, net of its liabilities. The amount of
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equity is increased by income earned during the year, or by the issuance of new equity. The
amount of equity is decreased by losses, by dividend payments, or by share repurchases.
 An understanding of the balance sheet enables an analyst to evaluate the liquidity, solvency,
and overall financial position of a company.
 The balance sheet distinguishes between current and non-current assets and between
current and non-current liabilities unless a presentation based on liquidity provides more
relevant and reliable information. The concept of liquidity relates to a company’s ability to
pay for its near-term operating needs. With respect to a company overall, liquidity refers to
the availability of cash to pay those near-term needs. With respect to a particular asset or
liability, liquidity refers to its “nearness to cash.”. Some assets and liabilities are measured
on the basis of fair value and some are measured at historical cost. Notes to financial
statements provide information that is helpful in assessing the comparability of
measurement bases across companies.
 Assets expected to be liquidated or used up within one year or one operating cycle of the
business, whichever is greater, are classified as current assets. Assets not expected to be
liquidated or used up within one year or one operating cycle of the business, whichever is
greater, are classified as non-current assets.
 Liabilities expected to be settled or paid within one year or one operating cycle of the
business, whichever is greater, are classified as current liabilities. Liabilities not expected
to be settled or paid within one year or one operating cycle of the business, whichever is
greater, are classified as non-current liabilities.
 Trade receivables, also referred to as accounts receivable, are amounts owed to a company
by its customers for products and services already delivered. Receivables are reported net
of the allowance for doubtful accounts.
 Inventories are physical products that will eventually be sold to the company’s customers,
either in their current form (finished goods) or as inputs into a process to manufacture a
final product (raw materials and work-in-process). Inventories are reported at the lower of
cost or net realizable value. If the net realizable value of a company’s inventory falls below
it carrying amount, the company must write down the value of the inventory and record an
expense.
 Inventory cost is based on specific identification or estimated using the first-in, first-out or
weighted average cost methods. Some accounting standards (including US GAAP but not
IFRS) also allow last-in, first-out as an additional inventory valuation method.
 Accounts payable, also called trade payables, are amounts that a business owes its vendors
for purchases of goods and services.
 Deferred revenue (also known as unearned revenue) arises when a company receives
payment in advance of delivery of the goods and services associated with the payment
received.
 Property, plant, and equipment (PPE) are tangible assets that are used in company
operations and expected to be used over more than one fiscal period. Examples of tangible
assets include land, buildings, equipment, machinery, furniture, and natural resources such
as mineral and petroleum resources.
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 IFRS provide companies with the choice to report PPE using either a historical cost model
or a revaluation model. US GAAP permit only the historical cost model for reporting PPE.
 Depreciation is the process of recognizing the cost of a long-lived asset over its useful life.
(Land is not depreciated.)
 Under IFRS, property used to earn rental income or capital appreciation is considered to
be an investment property. IFRS provide companies with the choice to report an investment
property using either a historical cost model or a fair value model.
 Intangible assets refer to identifiable non-monetary assets without physical substance.
Examples include patents, licenses, and trademarks. For each intangible asset, a company
assesses whether the useful life is finite or indefinite.
 An intangible asset with a finite useful life is amortized on a systematic basis over the best
estimate of its useful life, with the amortization method and useful-life estimate reviewed
at least annually. Impairment principles for an intangible asset with a finite useful life are
the same as for PPE.
 An intangible asset with an indefinite useful life is not amortized. Instead, it is tested for
impairment at least annually.
 For internally generated intangible assets, IFRS require that costs incurred during the
research phase must be expensed. Costs incurred in the development stage can be
capitalized as intangible assets if certain criteria are met, including technological
feasibility, the ability to use or sell the resulting asset, and the ability to complete the
project.
 The most common intangible asset that is not a separately identifiable asset is goodwill,
which arises in business combinations. Goodwill is not amortised; instead it is tested for
impairment at least annually.
 Financial instruments are contracts that give rise to both a financial asset of one entity and
a financial liability or equity instrument of another entity. In general, there are two basic
alternative ways that financial instruments are measured: fair value or amortised cost. For
financial instruments measured at fair value, there are two basic alternatives in how net
changes in fair value are recognized: as profit or loss on the income statement, or as other
comprehensive income (loss) which bypasses the income statement.
 Typical long-term financial liabilities include loans (i.e., borrowings from banks) and notes
or bonds payable (i.e., fixed-income securities issued to investors). Liabilities such as
bonds issued by a company are usually reported at amortized cost on the balance sheet.
 Deferred tax liabilities arise from temporary timing differences between a company’s
income as reported for tax purposes and income as reported for financial statement
purposes.
 Six potential components that comprise the owners’ equity section of the balance sheet
include: contributed capital, preferred shares, treasury shares, retained earnings,
accumulated other comprehensive income, and non-controlling interest.
 The statement of changes in equity reflects information about the increases or decreases in
each component of a company’s equity over a period.
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 Vertical common-size analysis of the balance sheet involves stating each balance sheet item
as a percentage of total assets.
 Balance sheet ratios include liquidity ratios (measuring the company’s ability to meet its
short-term obligations) and solvency ratios (measuring the company’s ability to meet long-
term and other obligations).
3.5 Statement of Financial Performance
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Figure 3.5: Statement of Financial Performance
Key points to this reading include the following:
 The income statement presents revenue, expenses, and net income.

 The components of the income statement include: profit on sale of investment, dividend
from investment in securities, interest on bank deposits and bonds, different types of fees
and administrative expenses; other operating expenses; non-operating income and
expenses; gains and losses; non-recurring items; net income; and EPS.
 An income statement that presents a subtotal for gross profit (revenue minus cost of goods
sold) is said to be presented in a multi-step format. One that does not present this subtotal
is said to be presented in a single-step format.
 Revenue is recognized in the period it is earned, which may or may not be in the same
period as the related cash collection. Recognition of revenue when earned is a fundamental
principal of accrual accounting.
 An analyst should identify differences in companies’ revenue recognition methods and
adjust reported revenue where possible to facilitate comparability. Where the available
information does not permit adjustment, an analyst can characterize the revenue
recognition as more or less conservative and thus qualitatively assess how differences in
policies might affect financial ratios and judgments about profitability.
 The general principles of expense recognition include a process to match expenses either
to revenue (such as, cost of goods sold) or to the time period in which the expenditure
occurs (period costs such as, administrative salaries) or to the time period of expected
benefits of the expenditures (such as, depreciation).
 In expense recognition, choice of method (i.e., depreciation method and inventory cost
method), as well as estimates (i.e., uncollectible accounts, warranty expenses, assets’ useful
life, and salvage value) affect a company’s reported income. An analyst should identify
differences in companies’ expense recognition methods and adjust reported financial
statements where possible to facilitate comparability. Where the available information does
not permit adjustment, an analyst can characterize the policies and estimates as more or
less conservative and thus qualitatively assess how differences in policies might affect
financial ratios and judgments about companies’ performance.
 To assess a company’s future earnings, it is helpful to separate those prior years’ items of
income and expense that are likely to continue in the future from those items that are less
likely to continue.
 Under IFRS, a company should present additional line items, headings, and subtotals
beyond those specified when such presentation is relevant to an understanding of the
entity’s financial performance. Some items from prior years clearly are not expected to
continue in future periods and are separately disclosed on a company’s income statement.
Under US GAAP, unusual and/or infrequently occurring items, which are material, are
presented separately within income from continuing operations.
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 Non-operating items are reported separately from operating items on the income statement.
Under both IFRS and US GAAP, the income statement reports separately the effect of the
disposal of a component operation as a “discontinued” operation.
 Basic EPS is the amount of income available to common shareholders divided by the
weighted average number of common shares outstanding over a period. The amount of
income available to common shareholders is the amount of net income remaining after
preferred dividends (if any) have been paid.
 If a company has a simple capital structure (i.e., one with no potentially dilutive securities),
then its basic EPS is equal to its diluted EPS. If, however, a company has dilutive securities,
its diluted EPS is lower than its basic EPS.
 Diluted EPS is calculated using the if-converted method for convertible securities and the
treasury stock method for options.
 Common-size analysis of the income statement involves stating each line item on the
income statement as a percentage of sales. Common-size statements facilitate comparison
across time periods and across companies of different sizes.
 Two income-statement-based indicators of profitability are net profit margin and gross
profit margin.
 Comprehensive income includes both net income and other revenue and expense items that
are excluded from the net income calculation.
3.6 Statement of Changes in Equity
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Figure 3.6: Statement of Changes in Equity
Statement of Changes in Equity refers to the reconciliation of the opening and closing balances of
equity in a company during a particular reporting period. It explains the connection between a
company’s income statement and balance sheet. It includes all transactions not captured in these
two financial statements, such as dividend payments, equity withdrawal, accounting policy
changes, and corrections of prior period errors.
It is not considered an essential part of the monthly financial statements, and so is the most likely
of all the financial statements not to be issued. However, it is a common part of the annual
financial statements. The statement starts with the beginning equity balance, and then adds or
subtracts such items as profits and dividend payments to arrive at the ending balance. The
general calculation structure of the statement is as follows:
Beginning equity + Net income – Dividends +/- Other changes
= Ending equity
GOURAV ROY 37
3.6.1 Contents of the Statement of Changes in Equity

The transactions most likely to appear on this statement are as follows:
 Net profit or loss
 Dividend payments
 Proceeds from the sale of stock
 Treasury stock purchases
 Gains and losses recognized directly in equity
 Effects of changes due to errors in prior periods
 Effects of changes in fair value for certain assets
3.6.2 Preparation of the Statement of Changes in Equity
To prepare the statement, follow these steps:
 Create separate accounts in the general ledger for each type of equity. Thus, there are
different accounts for the par value of stock, additional paid-in capital, and retained
earnings. Each of these accounts is represented by a separate column in the statement.
 Transfer every transaction within each equity account to a spreadsheet, and identify it in
the spreadsheet.
 Aggregate the transactions within the spreadsheet into similar types, and transfer them to
separate line items in the statement of changes in equity.
 Complete the statement, and verify that the beginning and ending balances in it match the
general ledger, and that the aggregated line items within it add up to the ending balances
for all columns.
3.7 Statement of Cash Flows
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Figure 3.7: Statement of Cash Flows
3.7.1 Definition of Statement of Cash Flows
The statement of cash flows is one of the financial statements issued by a business, and describes
the cash flows into and out of the organization. Its particular focus is on the types of activities that
create and use cash, which are operations, investments, and financing. A smaller organization may
not release a statement of cash flows for internal use, preferring to only issue an income statement
GOURAV ROY 39
and balance sheet. However, it is a required part of the audited financial statements that are released
to lenders, creditors, regulators, and investors.
3.7.2 How to Use the Statement of Cash Flows
The statement of cash flows can be used to discern trends in business performance that are not
readily apparent in the rest of the financial statements. It is especially useful when there is a
divergence between the amount of profits reported and the amount of net cash flow generated by
operations. Many investors feel that the statement of cash flows is the most transparent of the
financial statements (i.e., most difficult to fudge), and so they tend to rely upon it more than the
other financial statements to discern the true performance of a business. They can use it to
determine the sources and uses of cash.
There can be significant differences between the results shown in the income statement and the
cash flows in this statement, for the following reasons:
 There are timing differences between the recordation of a transaction and when the related
cash is actually expended or received.
 Management may be using aggressive revenue recognition to report revenue for which cash
receipts are still some times in the future.
 The business may be asset intensive, and so requires large capital investments that do not
appear in the income statement, except on a delayed basis as depreciation.
3.7.3 Components of the Statement of Cash Flows
Cash flows in the statement are divided into the following three areas:
 Operating activities: These constitute the revenue-generating activities of a business.

Examples of operating activities are cash received and disbursed for product sales,
royalties, commissions, fines, lawsuits, supplier and lender invoices, and payroll.
 Investing activities: These constitute payments made to acquire long-term assets, as well
as cash received from their sale. Examples of investing activities are the purchase of fixed
assets and the purchase or sale of securities issued by other entities.
 Financing activities: These constitute activities that will alter the equity or borrowings of
a business. Examples are the sale of company shares, the repurchase of shares, and dividend
payments.
3.7.4 The Direct Method
There are two ways in which to present the statement of cash flows, which are the direct method
and the indirect method. The direct method requires an organization to present cash flow
information that is directly associated with the items triggering cash flows, such as:
 Cash collected from customers
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 Interest and dividends received
 Cash paid to employees

 Cash paid to suppliers
 Interest paid
 Income taxes paid
3.7.5 The Indirect Method
Few organizations collect information as required for the direct method, so they instead use the
indirect method. Under the indirect approach, the statement begins with the net income or loss
reported on the company's income statement, and then makes a series of adjustments to this figure
to arrive at the amount of net cash provided by operating activities. These adjustments typically
include the following:
 Depreciation and amortization

 Provision for losses on accounts receivable
 Gain or loss on sale of assets
 Change in receivables
 Change in inventory
 Change in payables
3.8 Notes to the Financial Statements
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Figure 3.8: A Part of Notes to the Financial Statements
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Financial statement notes are footnotes to the financial statements of the company. They list the
assumptions, methodology, and policies used to prepare the financial statements. Though most
companies prepare their financial statements following the generally accepted accounting norms,
there will always be certain aspects that are unique to a company. It is essential for investors,
analysts and others to properly understand the information. Reading the financial statement notes
gives you the background information required for an accurate understanding and interpretation of
the accounting notes.
Auditors also study the financial notes attached to the financial statements to understand if the
accountants who prepared them have used the right accounting principles. Since notes also disclose
assumptions that have been made during preparation, they can reveal any ambiguities in the
statement preparation.
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4.0 Portfolio Statement for MF unit holders

In this segment, the readers will get to understand the portfolio statement for mutual fund unit
holders. The portfolio statement is as follows:
Figure 4.1: Investment in Capital Market (Listed Securities)
In this segment I, shares of listed companies are shown which are held by IDLC AML. The
scheme’s name is IDLC Balanced Fund. The reader will find the fragmented values of all the asset
categories held at cost value and market value in different rates of returns in this segment.
Figure 4.2: Investment in Capital Market (Non-Listed Securities)
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In this segment II, investment in capital market securities (non-listed) are shown. This is blank
here as IDLC AML doesn’t invest any fund of the given scheme here.
Figure 4.3: Investment in Cash equivalents, Bank and Cash at Hands
IDLC AML also keeps some of its investment in the very liquid form like cash equivalents, bank
FDR and cash at hand so that it can meet any financial liquidity of the fund to readily meet any
redemption of the requested fund by the investors.
The chapter titled "Accounting for Mutual Funds" provides a comprehensive examination of the
fundamental financial principles and procedures necessary for effectively managing and reporting
on the activities of mutual funds. The chapter provides a comprehensive analysis of the complex
structure of mutual funds and the responsibilities of key participants. This analysis establishes a
solid basis for comprehending the specific accounting standards and regulatory frameworks that
regulate these investment vehicles. One key lesson from this chapter is the crucial significance of
precise asset appraisal. Due to the varied composition of mutual fund assets, which encompass
stocks, bonds, and derivatives, accurate valuation techniques such as mark-to-market and
amortized cost are essential. These procedures guarantee that the net asset value (NAV) precisely
represents the actual worth of the fund, thus informing investor choices and upholding market
integrity. The comprehensive elucidation of NAV computation is another fundamental aspect of
GOURAV ROY 45
this chapter. The chapter emphasizes the intricate and careful attention needed to accurately and
promptly update the Net Asset Value (NAV) by explaining the processes involved in recognizing
revenue, expenses, gains, and losses. Ensuring investor confidence and maintaining the overall
stability of mutual funds is of utmost importance. The financial reporting for mutual funds is
subject to comprehensive scrutiny, with a focus on the creation of essential financial statements
such as the statement of assets and liabilities, statement of activities, and statement of changes in
net assets. The chapter emphasizes the importance of these statements in offering a clear and
comprehensive understanding of the fund's financial condition and performance, which is crucial
for investors and regulatory adherence. The chapter emphasizes the importance of regulatory
compliance and industry best practices, highlighting the ever-changing regulatory landscape and
the necessity for mutual funds to conform to standards established by organizations like the
Financial Accounting Standards Board (FASB) and the International Financial Reporting
Standards (IFRS). The chapter explores the need of keeping up with legislative changes and
adopting best practices to ensure the fund's credibility and operational effectiveness. Overall, this
chapter provides readers with a thorough comprehension of mutual fund accounting, highlighting
the significance of accurate asset valuation, meticulous net asset value (NAV) calculation, clear
financial reporting, and rigorous regulatory compliance. Proficiency in these principles is essential
for the efficient administration and credibility of mutual funds, guaranteeing their status as a
dependable and appealing investment choice for various groups of investors.
Thank You!
GOURAV ROY 46
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ACCOUNTING FOR MUTUAL FUNDS

Preprint · July 2024

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Accounting for Mutual Funds

Accounting for Mutual Funds

Figure 1: Cyclical Functions of Mutual Funds

1.0 Basic terminologies used in MF industry

1.2 Fixed-Income Funds

• Index funds aim to track the performance of a specific index.

1.12 Annual Return

= ((8% x 100)/ 120) *100

1.44 Dividend Per Unit

1.84 Money Market

1.92 Opening NAV

1.101 Redemption Fee

1.107 Sharpe Ratio

1.108 Standard Deviation

1.111 Total Return

= (25000 + 25000/ (110+100)

Breaking Down the formula,

NAV of MF = (Market value of Scheme′ s Investments + Receivables + Accrued Income

NAV (Market value of Investments / No. of units) = TK (75,00,00,000/5,00,00,000)

2.4 NAV for Mutual Funds vs. Stocks

Mutual Fund NAV Stock Price

2.5 Role of NAV in the Performance of a Fund

2.8 Calculation of NAV Using Market Value (Using Expense Ratio)

Here is how NAV calculation is done using the NAV formula:

NAV= [Assets-Expenses (and/or liabilities)] / Number of outstanding units

Other liabilities BDT 1,00,000

Number of units 90,000

NAV= [10,00,000- (1,00,000+(2%/365) *10,00,000]/90,000= BDT 9.99

3.0 Financial Statements and Portfolio Statements of Mutual Fund Schemes

Figure 3.3.2: Year wise EPU and NAV per unit

3.4 The Statement of Financial Position

Figure 3.4: Statement of Financial Position

3.5 Statement of Financial Performance

Figure 3.5: Statement of Financial Performance

Key points to this reading include the following:

 The income statement presents revenue, expenses, and net income.

3.6 Statement of Changes in Equity

Figure 3.6: Statement of Changes in Equity

Beginning equity + Net income – Dividends +/- Other changes

3.6.1 Contents of the Statement of Changes in Equity

3.6.2 Preparation of the Statement of Changes in Equity

To prepare the statement, follow these steps:

3.7 Statement of Cash Flows

Figure 3.7: Statement of Cash Flows

3.7.1 Definition of Statement of Cash Flows

3.7.2 How to Use the Statement of Cash Flows

3.7.3 Components of the Statement of Cash Flows

 Operating activities: These constitute the revenue-generating activities of a business.

3.7.4 The Direct Method

 Cash collected from customers

 Interest and dividends received

 Cash paid to employees

3.7.5 The Indirect Method

 Depreciation and amortization

3.8 Notes to the Financial Statements

Figure 3.8: A Part of Notes to the Financial Statements