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NAV Computation
Expense Accrual
Learning Outcome
5
Apply expense accruals in NAV and financial reporting.
4
Analyze the impact of accrued expenses on net assets and NAV.
3
Identify common expenses accrued by investment funds.
2
Explain how fund expenses are recognized before payment.
1
Understand the concept and purpose of expense accrual in accounting.
What is Expense Accrual?
Expense accrual is the daily recognition of fund expenses, ensuring NAV reflects the true cost of running the fund.
What Expenses are accrued?
A mutual fund or AIF incurs several categories of recurring expenses.
Management Fee
Management Fee is paid to the AMC for managing investments and is typically the fund's largest expense.
Audit Fee
Audit Fees are accrued daily to spread the annual audit cost fairly among all investors.
Trustee Fee
Trustee Fees are paid for fund oversight and regulatory compliance, and are accrued daily.
Custodian Fee
Custodian Fees are paid for safeguarding fund assets and are accrued daily based on assets under custody.
Custodian Fee
RTA Fees are accrued daily for maintaining investor records and processing transactions.
Custodian Fee
Other Expenses include legal, regulatory, banking, printing, and operational costs permitted under SEBI guidelines.
Accruing the Management Fee (Practical Approach)
Worked Example
A mutual fund has:
Total Assets = ₹100,00,000
Outstanding Units = 10,00,000 units
Daily Management Fee = ₹5,000
No other liabilities = 0
NAV = (Total Assets − Total Liabilities) ÷ Outstanding Units
Step 1: NAV Before Accrual = (₹100,00,000 − ₹0) ÷ 10,00,000 = ₹10.00
Step 2: Net Assets After Accrual = ₹100,00,000 − ₹5,000 = ₹99,95,000
Step 3: NAV After Accrual = (₹99,95,000 − ₹0) ÷ 10,00,000 = ₹9.995
Step 4: Impact on NAV = ₹10.000 − ₹9.995 = ₹0.005 per unit decrease
Formula:
Interpretation:
-
Management fee accrual creates a liability.
-
Net assets reduce from ₹100,00,000 to ₹99,95,000.
-
NAV falls from ₹10.00 to ₹9.995.
-
NAV reflects the true cost of fund management before payment.
Summary
5
Ensures accurate NAV and fair expense allocation.
4
Higher expenses reduce net assets and NAV.
3
Accrued expenses are recorded as liabilities.
2
Includes management, audit, and operating expenses.
1
Expense accrual records expenses when incurred.
Quiz
How do accrued expenses affect a mutual fund's NAV?
A. Increase NAV
B. Have no effect on NAV
C. Reduce net assets and lower NA
D. Increase liabilities and NAV simultaneously
Quiz-Answer
How do accrued expenses affect a mutual fund's NAV?
A. Increase NAV
B. Have no effect on NAV
C. Reduce net assets and lower NA
D. Increase liabilities and NAV simultaneously
Fixed Income Portfolio Strategy - Expense Accrual
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