SECTION ONE : ACCOUNTING

 The importance of Accounting

 MF BS is different from a bank or a company. MF have
special requirements concerning accounting for the
fund’s assets, liabilities and transactions with
investors and other outside constituents such as
banks, securities custodians and registrars.
 Follow accounting policies laid down by SEBI
regulations 1996.
 Knowledge is essential to explain the scheme
performance to the investors
 Net Asset Value (NAV)
 Investors’ subscriptions are not accounted as liabilities
or deposits but as Unit Capital
 Investments made on behalf of the investors are
reflected on the assets side.
 Liabilities also form part of the balance sheet
 NAV is asset minus liabilities and divided by total
number of outstanding units.
 NAV = Assets - Liabilities
 NAV = Net assets of the scheme =
Number of units outstanding
Market value of investments + receivables + accrued
income + other assets -accrued expenses-payables-
liabilities
No.of units outstanding on NAV date
 DISCLOSURES
 Daily NAV for open-end schemes
 Weekly NAV for close-end schemes
 Those closed - end schemes which are not
mandatorily required to be listed in any stock
exchange may publish NAV at monthly or quarterly
intervals (for e.g. MIPs)
 A fund’s NAV is affected by
 Purchase and sale of investment securities

 Valuation of all investment securities held

 Other assets and liabilities

 Units sold or redeemed

 Valuation of investment securities must be at their

market prices.
 Other Assets includes any income due but not
received (for e.g. Dividend announced by a company)
 Other Liabilities includes expenses payable by the
fund (for e.g. Management fee to AMC)
 All income and expenses have to be “accrued” upto
the valuation date and included in the computation
of the NAV.
 Major expense such as management fees should be
accrued on a day to day basis, while others need not
be accrued, if non-accrual does not affect NAV by
more than 1%
 Sale or repurchase of units and sale or purchase of
investment securities must be recorded within 7 days
of the transaction provided the non-recording does
not affect NAV by more than 2%.
 Pricing of Units
 Repurchase price should not be lower than 93% of NAV (95% in
case of closed-end schemes)
 Sale price can not be higher than 107% of NAV
 The difference between the repurchase and sale price can not
be more than7% of the sale price
 Fees and Expenses
 The AMC may charge the scheme with a fees @1.25% for first
100 crores of weekly average net assets outstanding in the
accounting year and @1% of weekly average net assets in
excess of Rs.100 crores
 No load schemes may charge an additional management fee
upto 1% of weekly average net assets outstanding in the
accounting year.
 Initial expenses of launching schemes not to exceed 6% of
initial resources raised
 Total expenses excluding issue or redemption expenses but
including investment management and advisory fees are
subject to following limits
 First 100 crs of avg weekly net assets - 2.5%
 Next 300 crs of avg weekly net assets - 2.25%
 Next 300crs of avg weekly net assets - 1.75%
 For bond funds, the above percentages are required to be
lower by0.25%

 Initial Issue Expenses

 All expenses cannot be charged to a scheme in the first
year itself. SEBI permits amortization as follows.
 CE scheme, the initial issue expenses shall be amortized on
a weekly basis over the period of the scheme.
 OE scheme, initial issue expenses may be amortized over a
period not exceeding five years.
 Unamortised portion of expenses shall be included for NAV
calculation, considered as other assets.
  The investment advisory fee cannot be claimed on this asset.
Hence, they have to be excluded while determining the chargeable
investment management/advisory fees.
 While calculating the maximum amount of chargeable expenses,
the unamortised portion of the initial issue expenses will not be
included as part of the average weekly net assets figure.

 Disclosures and Reporting Requirements

 Annual report and annual statement of accounts
 Annual statement of account to be audited
 Must dos
 publish through an ad, scheme-wise annual report or an

abridged summary of the report

 mail the summary to all unit holders

 forward to SEBI, a copy of the annual report and other

information including details of investments and deposits held

by the fund.
 The fund shall furnish to SEBI once a year
 copies of audited annual schemewise SOA

 copy of six monthly unaudited accounts

 quarterly statement of movements in the net

assets for each scheme of the fund

 quarterly portfolio statement, including changes

from the previous periods for each scheme

 Publish
 unaudited financial results in one national English

newspaper and one in the language of the region

where the head office of the fund is situated.
 The trustee to make
 such disclosures to investors as are essential to

keep them informed about any information which

may have an adverse bearing on their investment.
 Specific half-yearly disclosures
 Expenses exceeding 10% of the total
 Portfolio
 Scripwise disclosure of NPAs
 Large unit-holdings (over 25% of the net assets)
 Indicate that unit-holders may seek annual report from the MF

Amortization:
 Initial Expenses charged over years
 Close ended schemes (Load basis): Amortized on a weekly basis
over the period of the scheme. E.g for a 5 yr. scheme, 260
weeks must be taken.
 Open ended schemes (Load basis): Amortized annually over a
period not greater than 5 years.
 Un-amortized portion to be added for NAV calculation. No AMC
fee on this.
 Accounting Policies
 Investments marked to market
 Unrealised appreciation can not be distributed
 Dividend received by fund should be recognised on the date the
share is quoted on ex-dividend basis and not on the date of
declaration.
 To calculate gain or loss on sale of investments, the average
cost method must be followed to determine the cost of
purchase
 Purchase sale to be recognized on the date of transaction and
not settlement
 Bonus/rights to be recognized on ex-bonus/ex-right day.

 Investments that are NPAs

 An asset shall be regarded as NPA, if the interest and/or
principal has been outstanding for more than one quarter from
the due date of receipt
 Income that accrues in such cases should be provided for and no
further accrual should be made for such investments.
 Provision for NPAs

3 months after classification as NPA: 10%

6…………………………………… : 30%
9…………………………………… : 50%
12…………………………………. : 75%
15………………………………….. : 100%
 SECTION TWO : VALUATION
Valuation of traded securities
 Valued at the last quoted closing price on the stock
exchange where it is principally traded
 IF not traded, then take the value at which it was
traded on the earliest previous day provided it is not
more than 30 days prior to valuation
Thinly traded equities
 Monthly trading value <Rs. 5 lakhs and volume < 50,000
 When a stock exchange declares an equity as thinly
traded
 When trading is suspended for less than 30 days, take
the last traded price
 When trading is suspended for more than 30 days, asset
management company to make valuation
 Thinly traded debt security
 Traded value < Rs. 15 crores in a month.
 Add value traded on all exchanges to compute
this figure.
 Such security to be valued using the method for
non-traded debt security.

 Valuation of Non-traded Securities

 Valuation of equity instrument is on the basis of
capitalization of earnings solely or in combination
with its balance sheet net asset value.
 Capitalization rate will be determined by
reference to the Price or earning ratios of
comparable traded securities with an appropriate
discount for lower liquidity to be used.
Valuation of Non-traded non-government debt with less than 182
days for maturity
 Upto 182 day maturity, valued as money market instrument
(cost + accrual of interest)
 Debt instruments are to be valued on YTM basis, the
capitalization factor being determined for comparable traded
securities with an appropriate discount for lower liquidity.
 Call money, bills purchases under rediscount and short term
deposits with banks are to be valued at (cost+accrual).
 Other money market instruments at yield at which they are
currently traded
Non-traded non-government debt with over 182 days to
maturity

Investment grade: Non-investment grade

YTM basis

Performing: Non-performing:
25% discount to face value Make provisions
Taxation Provisions
 Internationally, trusts are pass-through vehicles; hence,
they pay no tax.
 In India,
A mutual fund pays 22% tax on the income distributed
to unit holders
 This tax bears no relationship to the unit-holder’s tax
bracket.
 Income distributed by a fund is tax exempt in the
hands of investors
Tax rebate u/s 88 (now u/s-80 ccc)

 ELSS investment up to 10,000 tax rebate 20%

 Total investment upto 60,000 qualifies for
tax rebate to the extent of 20% of such
investment.
 Infrastructure MF investment upto 80,000
also 20%.
 Now – all under Rs.1 Lac of Sec.80 ccc
Capital Gains on Sale of Units
 If units are held for not more than 12 months, it
is short term capital asset, other wise long term.
(36 months for assets except shares and
securities)
 Tax law definition of capital gains = sale
consideration - (cost of acquisition + cost of
improvements + cost of transfer)
 If it crosses 12 months, then “indexation” is
applicable. The purchase price is marked up by
an inflation index.
Indexation
 Purchase price of a long term capital asset
after indexation is computed
 Cost of acquisition or improvement = actual cost of
acquisition or improvement * cost inflation index for the
year of transfer / cost inflation index for the year of
acquisition or 1981 which ever is later)
 Unit-holder can have a choice between:
 10% tax without indexation
 20% tax with indexation

 There is 2% surcharge
Indexation
Cost Inflation Index for 1999-2000: 389
An example:
Mr. H invests Rs. 2,00,000 in FY 97-98 MF units
After 1 year, he liquidates the asset to

get Rs. 2,40,000.

His returns would be:
CII 99-00 : 389, CII 97-98 : 331,
Ratio : 389/331 = 1.18
Indexed Cost (2,00,000 x 1.18) = Rs. 2,36,000
Capital Gains – Rs. 4,000
Long-term tax liability of Mr. H: Rs. 4,000 * 20% =

Rs.800/-
Schemes for capital gains tax exemption
 Capital gains tax of sale of long term capital
asset is exempt in section 54EC of IT Act
 if the amount of the gain is invested in bonds of
NABARD, NHAI, and REC within 6 months. These
must be held for at least 3 years, and during this
time, one cannot take loan/advance against
security of such bonds.
 Capital gains tax of sale of mutual funds, if long term
in nature, is exempt in section 54ED of IT Act if the
gain is invested in equity shares within 6 months.
These units must then be held for at least 1 year.
Wealth Tax

Ownership of units is not considered as

wealth in the wealth tax act,
therefore no wealth tax.
Special Provisions
 Offshore Fund Investors
 Income by way of dividend/long-term capital
gain on Indian MF units, purchased in foreign
currency is taxed at 10%
 NRIs
 Income on units of MF is exempt from tax
 FIIs
 Incomeby way of dividends on units not
purchased in foreign exchange is subject to
tax @ 20% and the person making payment
must make TDS at this rate.