the process flow - mczuba.ue.wroc.pl · very close to cash most will mature < 2 years principles...

Principles of Fund AccountingThe Process Flow

wants to save some cash for the future.


She approaches an Independent Financial Advisor.

Judy decides to invest in

JP Morgan Euroland Equity Fund

administrated by BNY-Mellon.

He explains to her all of the options available.

Judy Stench, 25,

WHY INVEST IN A FUND ?

Principles of Fund AccountingThe Process Flow – Funds’ Advantages


PROFESSIONAL MANAGEMENT


DIVERSIFICATION


ECONIMIES OF SCALE


CHOICE AND FLEXIBILITY


LIQUIDITY


PROVISION OF SHAREHOLDER SERVICES


REGULATORY SAFEGUARDS

WHY NOT INVEST IN A FUND ?

Principles of Fund AccountingThe Process Flow – Funds’ Disadvantages


COST DESPITE NEGATIVE RETURNS

Advisor Management Fees

FundManagement

MarketingFees

OperatingExpenses

Commissions


LACK OF CONTROL


In a fund, the price at which you purchase or redeem shares will depend on the fund's NAV, which the fund

might not calculate until many hours after you've placed your order. In general, mutual funds must calculate

their NAV at least once every business day, typically after the major U.S. exchanges close.

NAV UNCERTAINTY

Prospectus is a legal document outlining the objectives,

structure and important disclosures relating to a fund.

Principles of Fund AccountingThe Process Flow – Fund Prospectus

The Fund Prospectus

(Investors “Bible”)

What has helped Judy make decisionto invest in JP Morgan Euroland Equity Fund ?

Principles of Fund AccountingThe Process Flow – Fund Prospectus

Objectives and goals

Investment strategies and approaches

Portfolio instruments

Risk exposure and strategies

Operating expenses and fees

History and performance indicators

Parties to the fund (details, background etc.)

Explanations of all payments and services provided to shareholder

Responsibilities of component parties

Methods of investing (incl. Application form)

SAI (Statement of Additional Information) upon request

Next Step ?

…and fills in application form:

Proves her identity

Proves where she lives

States how much she wants to invest

Principles of Fund AccountingThe Process Flow – Subscription

Judy approaches Transfer Agency

Principles of Fund AccountingThe Process Flow – Transfer Agency

Anti Money laundering check

and ask for some documentation

if initial subscription is substantial.

Process the subscription

telling how many shares is received.

Send out confirmation letters.

Transfer Agency

Principles of Fund AccountingThe Process Flow – Transfer Agency

Transfer Agency

Will pass onto the fund manager how much cash

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

Will pass the same information

onto the Fund Accountant who

will account for the new shares

in the books of the fund.

Fund Manager

Fund Accountant

Financial

Markets

Money Markets

Capital Markets

Fixed Income Markets

Equity Markets

Derivative Markets

Banker’s Acceptance

Repurchase Agreements

Common Stock

Corporate Bond

Convertible Bond

Financial Futures

Short Sales

Principles of Fund AccountingThe Process Flow – Fund Manager

Fund Manager

Money Market

Safe investments

Very close to cash

Most will mature < 2 years


Capital Market

Bonds

Interest payments

Get full cash back at maturity

Equities

Interim dividends

Price may go down as well as up

Derivatives

Hedge funds – protect the underlying value of

investment

Speculator funds – gamble with underlying

investment to produce higher growth

What trades he has performed

Settlement dates


Fund ManagerFund Accountant

CustodianWhat trades he has performed

and provides trade tickets

to allow the Fund Accountant

to book them onto the

accounting system.

Pass on the details of the subscription

Once the fund manager has spent the money he will send trade tickets with detail what instrument

he has bought, the price he has paid and the settlement date.


Transfer Agency Fund Accountant Fund Manager

Custodian

Recording of all the following:

Fund share transactions

Trades

Pricing information and market value calculation

Rate changes

Payment events (dividends/coupons)

Income determination

Fund expenses

Principles of Fund AccountingThe Process Flow – Fund Accountant

Fund Accountant

Balances the books:

The subscription monies should all be spent by the Fund Manager

The Fund Accountant will inform the fund Manager if he has cash which he has not spent

Fund Accountant will account for dividends, interest and coupon payments and accrue in the fund

Principles of Fund AccountingThe Process Flow – Net Asset Value (NAV)

Cash and cash equivalents 1,500,000.00 +

Investment Portfolio 10,000,000.00 =

Total Assets 11,500,000.00

-

Liabilities 2,000,000.00

=

Total Net Assets 9,500,000.00

/

Shares outstanding 1,000,000.00

=

NET ASSET VALUE per share 9.50

Also NAV is sent to Bloomberg,

Financial Times, Reuters for

publication on their websites.

Once the Fund Accountant has accounted for fund

shares, trades, incomes and expenses he will

calculate the NET ASSET VALUE of the fund.

NAV is sent to Transfer Agency

for the next days dealing.

Principles of Fund AccountingThe Process Flow – Net Asset Value (NAV)

Income distributions (ex. dividends) are paid

to shareholders monthly / quarterly / annually.

Funds’ share value will increase / decrease when

the overall value of securities

held by the fund increases / decreases.

Capital Gain distributions are made annually.

DISTRIBUTIONS =

Fundamentals of Mutual Fund Accounting

Gorman J.F.

Hargadon J.M.

Wynne S.M.

McGraw Hill Custom Publishing (2004)


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