This document contains IB – Fund Accounting related questions and answers.
Q. What is Fund Accounting?
A. Fund accounting is the process of calculating the daily value of a fund (like mutual
funds, hedge funds, ETFs, pension funds) and ensuring the investors’ money is handled
accurately and transparently.
• Fund accounting means maintaining financial records of the fund.
• It ensures correct valuation, accurate profit/loss calculation, and fair unit price
for investors.
• The key output of fund accounting is NAV (Net Asset Value).
Q. What is a Fund?
• A fund is a pool of money collected from many investors.
• It is managed by a Fund Manager who invests the money in stocks, bonds, real
estate, etc.
• Investors earn profit when the value of the investments increases.
Q. Why Fund Accounting is Important
• Ensure investor trust
• Regulatory compliance (SEBI, SEC, etc.)
• Accurate pricing of investor units
• Avoids financial losses due to errors
Fund accounting is the backbone of investment funds. It ensures accuracy,
transparency, and trust by properly recording trades, valuing assets, calculating
NAV, and providing financial reports.
Q. What are the key Steps in Fund Accounting Process
i. Trade Capture / Trade Booking
• All buy and sell trades executed by the fund manager are recorded.
• Example: Buy 100 shares of Reliance at ₹2,500 each.
ii. Pricing of Securities
• Get market prices at the end of the day from exchanges.
• Example: Reliance closing price ₹2,520 → update valuation in the system.
iii. Income Accrual
• Record interest, dividends, or coupon income earned but not yet received.
• Example: Bond interest ₹10,000/month → record daily accrual.
iv. Corporate Actions
• Companies announce dividends, bonus shares, stock splits, mergers, etc.
• The fund accountant adjusts holdings accordingly.
v. Expense Accrual
Funds have expenses like:
• Management fees
• Custody charges
• Audit fees
These are deducted daily.
vi. Cash & Position Reconciliation
• Match records of accounting system with bank and broker records.
• Ensure any differences (breaks) are resolved.
vii. Calculate NAV
• After adjustments, NAV is calculated.
• Needs to be accurate because investors buy/sell units based on this number.
viii. NAV Review & Approval
• Supervisor reviews the NAV and approves it for release.
ix. Reporting
• Reports go to fund managers, investors, regulators, and auditors.
Q. Which are some of the important teams involved?
TEAM RESPONSIBILITY
FUND ACCOUNTING NAV calculation
CUSTODY Holds securities and cash
RECONCILIATION Matches transactions and balances
PRICING TEAM Provides correct market prices
CORPORATE ACTIONS Updates changes arising from corporate events
AUDIT / COMPLIANCE Ensures accuracy and regulations
Q. How is fund accounting different from corporate accounting?
i) Fund accounting focuses on investor units and NAV, not on profit of a company.
ii) Assets are mostly financial instruments (securities, derivatives) instead of fixed
assets/inventory.
iii) Valuation is usually mark-to-market daily, not historical cost.
iv) Heavy focus on unit pricing, subscriptions/redemptions, and regulatory rules for
funds.
v) Income and gains/losses are allocated pro-rata to investors.
Q. What is NAV (Net Asset Value)?
i) NAV = Total Assets − Total Liabilities of the fund.
ii) NAV per unit = NAV ÷ Number of outstanding units/shares.
iii) It is the price at which investors subscribe or redeem units in most open-ended
funds.
iv) Typically calculated daily for mutual funds, sometimes weekly/monthly for others.
Q. What are the key components of Total Assets of a fund?
i) Market value of investments: equity, bonds, derivatives, etc.
ii) Cash and cash equivalents (bank balances, T-bills, money market funds).
iii) Receivables: dividends receivable, interest receivable, securities sold but not yet
settled.
iv) Accrued income and any unrealised gain on derivatives.
Q. What are key components of Total Liabilities of a fund?
i) Payables: securities purchased but not settled, fees payable to
manager/custodian/admin.
ii) Accrued expenses: audit fees, admin fees, legal fees, etc.
iii) Distribution/dividend payable if declared but not yet paid.
iv) Any overdrafts or loans.
v) Unrealised loss on derivatives (if recorded as liability).
Q. What is AUM (Assets Under Management)? How is it related to NAV?
i) AUM is the total market value of assets managed by a firm or strategy.
ii) For a single fund, AUM ≈ NAV (Total Assets − Liabilities).
iii) For a fund house, AUM = sum of NAVs of all funds/portfolios.
iv) AUM is more of a business metric, NAV is a pricing/accounting metric.
Q. What is the role of a Fund Accountant?
i) Calculate daily NAV and publish it on time.
ii) Account for trades, income, expenses, FX, and corporate actions.
iii) Perform reconciliations: cash, positions, market values, and resolve breaks.
iv) Prepare financial statements and regulatory reports.
v) Liaise with custodian, investment manager, auditors, and clients.
Q. What is the cut-off time in fund accounting and why is it important?
i) Cut-off time is the time after which trades, cash flows, and prices belong to next NAV
date.
ii) Ensures consistency: all trades/prices used are for the same valuation date.
iii) Reduces back-dating and pricing errors.
iv) Helps operations (trading, settlements, pricing) follow a strict timetable.
Q. What is unitisation in fund accounting?
i) Unitisation is the process of converting NAV (total fund value) into per-unit price.
ii) It involves maintaining accurate units in issue and adjusting for
subscriptions/redemptions.
iii) Formula: NAV per unit = Fund NAV / Units in issue.
iv) Ensures fair allocation of income/gains between investors.
Q. What are the main reports produced by a fund accounting team?
i) Daily NAV pack (NAV calculation sheet, checks, sign-offs).
ii) Holdings/positions report.
iii) Cash report and cash reconciliation.
iv) Trial balance and general ledger.
v) Periodic financial statements (balance sheet, P&L, notes).
vi) Regulatory and client-specific reports.
Q. Explain the trade life cycle from the perspective of fund accounting.
i) Trade execution by portfolio manager.
ii) Trade capture in OMS and confirmation with broker.
iii) Trade enrichment: settlement details, commissions, taxes.
iv) Booking in accounting system on trade date (T).
v) Settlement on value date (T+1/T+2), cash and positions move.
vi) Reconciliation with custodian and rectification of breaks.
Q. What is the difference between trade date accounting and settlement date
accounting?
i) Trade date accounting: record transaction on the date trade is executed.
ii) Settlement date accounting: record transaction when cash/securities actually settle.
iii) Funds usually follow trade date accounting to reflect economic exposure correctly.
iv) Settlement date may still be used for cash ledger/bank statements.
Q. How do you account for a purchase of equity security?
i) Debit: Investments (at cost or fair value).
ii) Debit: Brokerage/Transaction costs (either capitalised or expensed depending on policy).
iii) Credit: Cash/Bank or Payable (for securities purchased).
iv) On subsequent dates, mark to market and recognise unrealised gain/loss.
Q. How do you account for a sale of equity security?
i) Debit: Cash/Bank or Receivable (for securities sold).
ii) Credit: Investments (at original cost).
iii) Recognise realised gain/loss = Sale proceeds − Cost.
iv) Mark remaining holdings at fair value for unrealised gain/loss.
Q. What are corporate actions? Give some examples.
i) Any event initiated by the company that affects securities and investors.
ii) Examples: dividends, bonus issue, stock split, rights issue, mergers, spin-offs.
iii) Can be mandatory (e.g., cash dividend) or voluntary (e.g., rights subscription).
Q. How do you account for a cash dividend received?
i) On ex-date: record dividend receivable and dividend income (if accrual basis).
ii) Entry:
• Debit: Dividend Receivable
• Credit: Dividend Income
iii) On payment date:
• Debit: Cash
• Credit: Dividend Receivable
Q. How is a stock split treated in fund accounting?
i) Stock split increases number of shares and reduces price proportionately.
ii) Total market value of holding usually remains same.
iii) Adjust quantity and cost per share; total cost remains unchanged.
iv) No P&L impact; it’s a notional/capital adjustment.
Q. How is a bonus issue (stock dividend) treated?
i) Investor receives additional shares free of cost.
ii) Total cost is spread over old + new shares.
iii) Per-share cost reduces; total carrying value generally unchanged.
iv) Usually no immediate P&L impact.
Q. How do you handle a rights issue if the fund decides to subscribe?
i) Recognise rights as an asset if they have market value.
ii) When exercised:
• Debit: Investment (new shares).
• Credit: Cash (subscription amount).
iii) If rights are sold:
• Debit: Cash.
• Credit: Gain on sale of rights.
Q. What controls do you perform around corporate actions?
i) Compare corporate action data from multiple vendors/custodians.
ii) Verify key terms: record date, ex-date, pay date, rate, options.
iii) Match entitlements (quantity, amount) with custodians.
iv) Review and approve bookings via maker–checker process.
Q. What is accrual accounting in the context of funds?
i) Recognising income and expenses when they are earned/incurred, not when cash is
received/paid.
ii) Interest and management fees are accrued daily.
iii) Ensures NAV reflects all earned income and incurred costs up to valuation date.
Q. How is interest income on a bond recorded?
i) Interest is accrued daily based on coupon rate and day count convention.
ii) Entry (daily/monthly):
• Debit: Interest Receivable
• Credit: Interest Income
iii) On coupon payment date:
• Debit: Cash
• Credit: Interest Receivable
Q. What is amortisation of premium/discount on bonds?
i) If bond is bought above par → premium, below par → discount.
ii) Premium is amortised (reduced) over remaining life, decreasing interest income.
iii) Discount is accreted (increased), boosting interest income.
iv) Keeps book value converging to redemption value.
Why Fund Accountants do This?
i) To match accounting income with real economic yield
ii) To show true performance of the fund
iii) To ensure asset valuation accuracy in daily NAV
iv) To comply with IFRS / GAAP / SEBI / US GAAP rules
Numerical Example: Premium Bond Amortisation
Bond Details:
PARAMETER VALUE
FACE VALUE ₹1,00,000
COUPON 10% annually
PURCHASE PRICE ₹1,05,000 (premium of ₹5,000)
MATURITY 5 years
METHOD Straight-line amortisation
Step-by-step Calculation
i) Total Premium Paid
= 1,05,000 − 1,00,000 = ₹5,000
ii) Amortisation per year
= 5,000 ÷ 5 = ₹1,000 per year
iii) Interest Coupon received each year
= 1,00,000 × 10% = ₹10,000
iv) Effective interest income recognised
= 10,000 − 1,000 = ₹9,000
Accounting Entries
Yearly amortisation entry
• Debit: Premium Amortisation Expense 1,000
• Credit: Investment in Bond 1,000
This reduces the carrying value:
YEAR BOOK VALUE
PURCHASE 1,05,000
END YEAR 1 1,04,000
END YEAR 2 1,03,000
END YEAR 3 1,02,000
END YEAR 4 1,01,000
END YEAR 5 1,00,000 (face value)
Discount Bond Example
Bond Details
PARAMETER VALUE
FACE VALUE ₹1,00,000
COUPON 6%
PURCHASE PRICE ₹95,000
MATURITY 5 years
i) Total Discount = 1,00,000 − 95,000 = 5,000
ii) Accretion per year = 5,000 ÷ 5 = 1,000
iii) Coupon income = 6% × 1,00,000 = 6,000
iv) Effective interest recognised = 6,000 + 1,000 = 7,000
YEAR BOOK VALUE
PURCHASE 95,000
END YEAR 1 96,000
END YEAR 2 97,000
END YEAR 3 98,000
END YEAR 4 99,000
END YEAR 5 1,00,000
Q. What are common fund expenses?
i) Management/advisory fee.
ii) Custody and fund administration fees.
iii) Registrar and transfer agent fees.
iv) Audit, legal, regulatory, and listing fees.
v) Performance/incentive fees.
vi) Other operating costs (printing, communication, etc., subject to fund docs).
Q. What is Journal Entry (JE) for management fee?
i) Typically, a % per annum on AUM (e.g., 1% p.a.).
ii) Accrued daily
iii) Entry:
• Debit: Management Fee Expense
• Credit: Management Fee Payable
Q. What is the TER (Total Expense Ratio)?
i) TER = Total ongoing expenses ÷ Average AUM.
ii) Measures cost burden on investors.
iii) Includes management fee, admin fee, custody, etc. (excluding some transaction costs
depending on jurisdiction).
iv) Lower TER is usually more attractive to investors.
Q. How do you treat performance fees?
i) Based on fund returns exceeding hurdle/benchmark or high-water mark.
ii) Calculated as a % of the outperformance or profit.
iii) Accrued as expense and payable:
• Debit: Performance Fee Expense
• Credit: Performance Fee Payable
iv) Often subject to detailed terms in fund documents.
Q. Explain ex-dividend date and record date.
i) Record date: date on which company checks shareholder register to decide who gets
dividend.
ii) Ex-dividend date: typically, 1 business day before record date; if you buy on/after ex-
date, you don’t get dividend.
iii) For funds, income is recognised from ex-date onwards.
Q. What is equalisation in fund accounting?
i) Mechanism to ensure fair allocation of income and gains between existing and new
investors.
ii) Prevents new investors from getting prior period income that they didn’t participate in.
iii) Can be implemented through equalisation adjustments to subscriptions/redemptions.
Q. What is distribution vs accumulation share class?
i) Distribution class: periodically pays out income (dividends) to investors.
ii) Accumulation class: retains income and reinvests it, increasing NAV instead of paying
cash.
iii) Accounting differs mainly in how income is allocated/distributed.
Q. What is fair value?
i) Price at which an asset could be exchanged between willing, knowledgeable parties in an
arm’s length transaction.
ii) For listed securities, usually the quoted market price.
iii) For illiquid/unlisted assets, valuation models or third-party pricing.
Q. How do you handle stale prices?
i) Stale price = price not updated for certain number of days.
ii) Trigger price checks and challenge with pricing vendor/custodian.
iii) Use alternative sources (broker quotes, models) if needed.
iv) Escalate and document valuation committee decisions.
Q. What is bid, ask, and mid-price in NAV calculation?
i) Bid price: price at which security can be sold.
ii) Ask price: price at which security can be bought.
iii) Mid price: (Bid + Ask) ÷ 2.
iv) Many funds use bid price for long positions, ask price for short positions, or mid as per
policy.
Q. Why is valuation time important for NAV?
i) All prices should be as of a specific cut-off time (e.g., market close).
ii) Ensures consistency and fairness between investors entering/exiting.
iii) Avoids mixing prices from different market sessions.
Q. What is swing pricing?
Swing pricing is a method used by mutual funds / investment funds to adjust the NAV
(price of units) slightly up or down when there are large buy or sell orders from investors.
If many investors suddenly redeem (sell) units, the fund may have to sell securities in the
market quickly.
Selling quickly costs money (brokerage, tax, price impact).
If the NAV is not adjusted, existing investors—who did nothing—end up paying the cost
indirectly.
So the fund reduces the NAV slightly (down swing) so that selling investors cover the
cost.
Similarly, if many investors subscribe (buy), the fund must buy securities and pay costs.
So the fund increases the NAV slightly (up swing) to make new investors bear the cost.
i) Adjusting NAV up or down when there are large net flows (subscriptions/redemptions).
ii) Objective: protect existing investors from trading costs due to others’ flows.
iii) Swing factor reflects estimated transaction costs (spread, brokerage, taxes).
Q. How are money market instruments valued?
i) Often at amortised cost-plus accrued interest (for very short-term instruments).
ii) Alternatively, discounted cash flow using market yield curves.
iii) Policy must follow regulation and be consistent.
Q. Why is independent pricing important?
i) Prevents conflict of interest (portfolio manager cannot mark their own prices).
ii) Enhances investor and regulator confidence.
iii) Reduces risk of mis-pricing and fraud.
Q. How do you deal with securities traded in different time zones?
i) Use local market close prices, adjusted for FX at fund valuation time.
ii) Consider stale price and fair-value adjustment if major events happen after market
close.
iii) Follow documented valuation policy.
Q. What is a price tolerance check?
i) Control to ensure price moves are within reasonable bounds.
ii) Compare today’s price with previous day (e.g., move >10% triggers alert).
iii) Also compare prices from multiple sources.
iv) Investigate and document any large or unusual movements.
Q. What is FX exposure in a fund?
i) Risk that NAV changes due to movements in currency exchange rates.
ii) Occurs when fund base currency differs from currency of underlying assets.
iii) Managed using FX forwards, options, or cross-currency swaps.
Q. How do you convert foreign holdings into base currency for NAV?
i) Step 1: Determine local currency market value of asset.
ii) Step 2: Obtain FX rate (base currency / local currency).
iii) Step 3: Base currency value = Local value × FX rate.
iv) Use consistent FX source and time cut-off.
Q. What is realised vs unrealised FX gain/loss?
i) Realised FX gain/loss - arises when foreign currency cash/position is actually
settled/closed.
ii) Unrealised FX gain/loss: revaluation of open foreign currency balances at new FX rates.
iii) Both affect P&L; unrealised is reversed/updated daily.
Q. What is a multi-currency fund?
i) Fund that offers multiple share classes in different currencies.
ii) Base accounting currency may be one (e.g., USD) but investor share classes in EUR,
GBP, etc.
iii) NAV per share is calculated separately per share class, using FX conversion from base
currency.
Q. How do you account for FX forward contracts in fund accounting?
i) Recognise mark-to-market (fair value) as asset or liability.
ii) Daily P&L from change in fair value and carry (forward points).
iii) On settlement, realise final FX gain/loss.
Q. What is currency hedging at share-class level?
i) Hedging FX risk of a specific share class against base currency.
ii) Use FX forwards/swaps to minimise currency fluctuations for that class.
iii) P&L from hedging is typically attributed to that share class only.
Q. What controls do you perform on FX rates used for NAV?
i) Check rates against independent sources.
ii) Tolerance checks (movement vs prior day).
iii) Ensure correct direction (e.g., USD/INR vs INR/USD).
iv) Confirm correct date/time and holiday calendars.
Q. How are foreign dividends handled?
i) Dividend declared in foreign currency.
ii) Recognise receivable and income in foreign currency, then convert to base currency
using FX rate at recognition date.
iii) Any difference between recognition and payment date becomes FX gain/loss.
Q. What is an FX translation reserve?
i) Reserve representing cumulative FX differences on net investment in foreign operations
(more common in consolidation).
ii) For single funds, FX differences typically go through P&L, but some structures use
reserves/equity.
Q. Example: If EUR 50,000 is worth USD at 1.10, what is the USD value?
i) Given rate: 1 EUR = 1.10 USD.
ii) USD value = EUR 50,000 × 1.10.
iii) USD value = USD 55,000.
Q. What is cash reconciliation?
i) Comparing cash balances and transactions between fund’s GL and custodian/bank
statements.
ii) Identify and investigate differences (timing, missing entries, wrong amounts).
iii) Essential control before releasing NAV.
Q. What is position/holding reconciliation?
i) Matching quantity of securities in fund’s books vs custodian’s records.
ii) Differences can arise due to trades not booked, corporate actions, fails.
iii) Must be investigated and resolved promptly.
Q. What is a break in reconciliation?
i) Difference between two sources (e.g., fund books vs custodian) that is not explained.
ii) Types: cash breaks, position breaks, FX breaks, price breaks.
iii) Breaks are logged, assigned, tracked, and resolved.
Q. What is a price variance check?
i) Compare prices from primary source vs secondary source.
ii) If variance exceeds threshold (e.g., >5%), investigate.
iii) Decide on appropriate source and document.
Q. Explain the maker–checker control.
i) Maker prepares or books transaction/NAV.
ii) Checker independently reviews, verifies, and approves.
iii) Reduces risk of errors and fraud.
Q. What is trial balance in fund accounting?
i) Listing of all ledger accounts with debit and credit balances.
ii) Debits must equal credits.
iii) Used to prepare financial statements and as a key control for NAV accuracy.
Q. What is a suspense account?
i) Temporary account used when posting entry where final classification is unclear.
ii) Should be cleared quickly after investigation.
iii) Large or ageing suspense balances are a control issue.
Q. What KPIs are used in fund accounting operations?
i) NAV accuracy (number of errors / restatements).
ii) Timeliness (NAV released before agreed cut-off).
iii) Break resolution time (for cash/position/price breaks).
iv) Client queries resolution time.
v) Volume processed per FTE.
Q. How do you handle a NAV error discovered after publication?
i) Quantify impact and compare with materiality/threshold limits.
ii) Decide if NAV correction/repricing and investor compensation is required.
iii) Inform client, management, and possibly regulators as per policy.
iv) Root cause analysis and preventive action.
Q. What is four-eye vs six-eye review?
i) Four-eye: two people review (maker + checker).
ii) Six-eye: additional reviewer or supervisor for high-risk funds/complex NAVs.
iii) Enhances control for critical processes.
Q. What are key financial statements for an investment fund?
i) Statement of Assets and Liabilities (Balance Sheet).
ii) Statement of Operations (P&L).
iii) Statement of Changes in Net Assets/Equity.
iv) Statement of Cash Flows (sometimes optional for certain funds).
v) Notes to accounts.
Q. What is included in Statement of Assets and Liabilities?
i) Investments at fair value and cost.
ii) Cash and cash equivalents.
iii) Receivables (dividend, interest, subscriptions).
iv) Payables (redemptions, fees, expenses).
v) Net assets representing unitholders’ equity.
Q. What is included in Statement of Operations (P&L)?
i) Investment income: dividends, interest.
ii) Realised and unrealised gains/losses.
iii) Total investment income (net of withholding tax).
iv) Expenses: management, custody, admin, other.
v) Net increase/decrease in net assets from operations.
Q. How are subscriptions and redemptions disclosed?
i) Shown in Statement of Changes in Net Assets.
ii) Opening Net Assets + Subscriptions − Redemptions + Net investment income = Closing
Net Assets.
iii) Also shown as units issued and units redeemed.
Q. What is the difference between realised and unrealised gain/loss in reporting?
i) Realised: from closed positions (sold securities, settled derivatives).
ii) Unrealised: from revaluing open positions at current fair value.
iii) Both appear in P&L, but are often separately disclosed.
Q. How are derivatives disclosed in financial statements?
i) Listed separately by type (futures, options, swaps).
ii) Fair values shown as assets or liabilities.
iii) Notional principal amounts often disclosed in notes.
iv) Accounting policy describes measurement and recognition.
Q. What is a fund prospectus and why is it important for accounting?
i) Legal document describing investment objectives, strategy, fees, and risk factors.
ii) Defines valuation policies, pricing, and expense caps.
iii) Accounting and operations must comply with terms in prospectus.
Q. What is an Offering Memorandum (OM)?
i) Detailed document for sophisticated/private investors describing fund terms.
ii) Includes subscription/redemption rules, valuation, fees, side letters.
iii) Accounting team uses OM as reference for applying correct terms.
Q. What is shadow accounting?
i) Independent replication of accounting records by a third party or internal team.
ii) Used to verify administrator/custodian NAV calculations.
iii) Helps detect errors or fraud.
Q. What are common audit points in fund accounting?
i) Valuation of securities.
ii) Existence and ownership confirmations from custodians/banks.
iii) Accuracy of income recognition and expense accruals.
iv) NAV calculation methodology and error handling.
v) Compliance with prospectus/OM and regulations.
Q. How are listed futures contracts accounted for?
i) Initial margin paid and variation margin movements daily.
ii) Daily mark-to-market through P&L.
iii) Contract value = contract size × futures price.
iv) On closing, final P&L realised via variation margin.
Q. What is the notional value of a derivative?
i) The underlying principal amount on which payments are based.
ii) Notional is off-balance sheet; fair value is on-balance sheet.
iii) Used for risk measurement and disclosures.
Q. How do you account for equity options (simple example)?
i) For purchased call/put:
• Debit: Derivative asset (premium).
• Credit: Cash.
ii) Fair value changes recognised in P&L.
iii) On expiry, if worthless, write off asset; if exercised, adjust underlying position.
Q. What is a swap (interest rate or total return swap) in fund context?
i) Contract to exchange cash flows: fixed vs floating rate, or total return vs financing cost.
ii) Fair value recorded as asset/liability.
iii) Periodic settlement flows recognised in P&L (interest, dividends, price movements).
Q. How do derivatives affect NAV volatility?
i) Derivatives are leveraged; small market moves cause large P&L swings.
ii) Daily mark-to-market can significantly impact NAV.
iii) Proper margin and collateral management is crucial.
Q. What is collateral management in derivatives trading?
i) Posting and receiving collateral (cash/securities) to mitigate counterparty risk.
ii) Collateral balances recorded separately from exposure.
iii) Daily margin calls and reconciliations.
Q. What is offsetting/close-out netting?
Offsetting or Close-out Netting is a legal agreement between two parties (for example, a
fund and a bank) that allows them to combine all positive and negative balances owed to
each other into a single net amount if one party defaults (goes bankrupt / fails to pay).
So instead of paying and receiving multiple separate amounts, only one final balance is
settled.
i) Contractual right to offset amounts owed between two parties upon default.
ii) Reduces counterparty credit exposure.
iii) Must be disclosed under accounting standards.
Q. How do you treat expired derivatives?
i) Remove derivative asset/liability from books.
ii) Recognise any remaining unrealised P&L as realised.
iii) Ensure all cash settlements are processed.
Q. What is Delta, and does fund accounting use Greeks directly?
i) Delta = sensitivity of derivative price to underlying price change.
ii) Mainly used by risk/portfolio management, not directly in accounting entries.
iii) However, large Delta exposures may justify valuation checks/risk disclosures.
Q. What documentation is important for derivative accounting?
i) ISDA Master Agreements.
ii) Confirmations and term sheets.
iii) Collateral support annexes.
iv) Valuation methodologies and models.
Q. Who are key stakeholders for a fund accountant?
i) Portfolio managers / investment managers.
ii) Custodians and prime brokers.
iii) Fund administrator and transfer agent.
iv) Auditors and regulators.
v) End clients/investors.
Q. What typical SLAs exist for NAV production?
i) NAV release time (e.g., by 8 pm local time).
ii) Break resolution timelines.
iii) Response time for client queries.
iv) Accuracy thresholds and error reporting timelines.
Q. How do you handle client queries about NAV?
i) Understand and acknowledge query clearly.
ii) Investigate NAV components (trades, prices, FX, fees, unit movements).
iii) Provide clear, data-backed explanation with supporting reports.
iv) Document query and resolution.
Q. What is an operating model in fund services?
i) Combination of people, process, systems, and controls used to deliver NAV and
reporting.
ii) Includes onshore–offshore split, automation level, workflow tools.
iii) Good model minimises risk and maximises scalability.
Q. How do you prioritise tasks on a NAV day?
i) Start with imports of prices, FX, and trades.
ii) Process corporate actions and accruals.
iii) Perform cash and position reconciliations.
iv) Run NAV, perform checks, resolve exceptions.
v) Get approvals and release NAV.
Q. What is data integrity in fund accounting?
i) Accuracy and completeness of all input data (trades, prices, FX, static data).
ii) Maintained via validations, edit checks, and reconciliations.
iii) Poor data integrity leads directly to wrong NAV.
Q. What is static data and why is it important?
i) Static data: non-transactional reference data (security master, account details, fee rates,
calendars).
ii) Drives calculations (e.g., coupon, fees, FX).
iii) Errors in static data can cause systemic errors across many NAVs.
Q. How do you handle a fee rate change in the system?
i) Get formal documentation / approval for new fee rate.
ii) Update static data in system with effective date.
iii) Test on sample data or shadow run.
iv) Monitor first few cycles for correctness.
Q. What qualities make someone successful in fund accounting?
i) Strong attention to detail and accuracy.
ii) Good understanding of financial products and markets.
iii) Ability to work under time pressure and tight deadlines.
iv) Strong reconciliation and analytical skills.
v) Clear written and verbal communication.
Q. What are common root causes of NAV errors?
i) Wrong prices or FX rates.
ii) Missed trades or corporate actions.
iii) Incorrect fee calculations or accruals.
iv) Static data issues (wrong security setup, wrong tax rates).
v) Manual errors in adjustments or journals.
Q. NAV Calculation – Basic
A fund has:
• Investments: 9,50,000
• Cash: 80,000
• Receivables: 20,000
• Payables (expenses): 50,000
• Units in issue: 1,00,000
Calculate NAV and NAV per unit.
i) Total Assets = 9,50,000 + 80,000 + 20,000 = 10,50,000.
ii) Total Liabilities = 50,000.
iii) NAV = 10,50,000 − 50,000 = 10,00,000.
iv) NAV per unit = 10,00,000 ÷ 1,00,000 = 10.00 per unit.
Q. Subscription Units Calculation
NAV per unit is 20. An investor subscribes for 5,00,000 cash. Entry charge is zero.
i) Units issued = Subscription amount ÷ NAV per unit.
ii) Units = 5,00,000 ÷ 20 = 25,000 units.
iii) Units in issue increase by 25,000.
Q. Redemption Amount Calculation
NAV per unit: 15. Investor redeems 10,000 units. Exit load: 1% of redemption amount.
I)Gross redemption = 10,000 × 15 = 1,50,000.
ii) Exit load = 1% of 1,50,000 = 1,500.
iii) Net cash paid to investor = 1,50,000 − 1,500 = 1,48,500.
iv) Exit load kept in fund or paid to AMC as per scheme rules.
Q. Interest Accrual on Bond
Face value: 10,00,000, coupon 6% p.a., paid semi-annually, 30/360 day count. How much
interest accrues in 30 days?
i) Annual interest = 10,00,000 × 6% = 60,000.
ii) Daily interest (30/360 basis) = 60,000 ÷ 360 = 166.6667.
iii) For 30 days: 166.6667 × 30 ≈ 5,000.
iv) Accrual entry after 30 days:
• Debit: Interest Receivable 5,000
• Credit: Interest Income 5,000
Q. FX Translation – Equity Holding
Fund base currency: USD. Holding: 2,000 shares of XYZ listed in GBP.
Price: GBP 10 per share. FX: 1 GBP = 1.30 USD.
i) Local value = 2,000 × 10 = GBP 20,000.
ii) Base currency value = 20,000 × 1.30 = USD 26,000.
iii) That’s the value used in NAV.
Q. Realised Gain on Equity
Fund bought 1,000 shares at 50 each. Later sold 600 shares at 70. Ignore fees.
i) Cost of 600 shares = 600 × 50 = 30,000.
ii) Sale proceeds = 600 × 70 = 42,000.
iii) Realised gain = 42,000 − 30,000 = 12,000.
iv) Remaining 400 shares cost = 400 × 50 = 20,000 (for future unrealised calc).
Q. Performance Fee Example
Fund started year with NAV 100, ended with NAV 120. Benchmark return 10%. Performance
fee: 20% of outperformance over benchmark (no high-water complications). Fund size:
10,00,000 units.
i) Fund return = (120 − 100) ÷ 100 = 20%.
ii) Outperformance vs benchmark = 20% − 10% = 10%.
iii) Outperformance in NAV terms = 10% of 100 = 10 per unit.
iv) Performance fee per unit = 20% of 10 = 2.
v) Total performance fee = 2 × 10,00,000 = 20,00,000.
Q. Money Market Instrument – Amortised Cost
Face value: 10,00,000, purchased at 9,80,000, maturity in 6 months (assume 180 days),
straight-line amortisation. How much discount is accreted in 30 days?
i) Total discount = 10,00,000 − 9,80,000 = 20,000.
ii) Daily accretion = 20,000 ÷ 180 ≈ 111.11.
iii) For 30 days: 111.11 × 30 ≈ 3,333 accreted.
iv) Book value after 30 days = 9,80,000 + 3,333 ≈ 9,83,333.
Q. Simple FX Forward MTM
Fund enters a 3-month forward to sell EUR 1,00,000 at 1.10 USD/EUR. After one month,
forward rate for remaining term is 1.08.
i) Original forward value (simplified): 1,00,000 × 1.10 = 1,10,000 USD (locked-in).
ii) Current forward value: 1,00,000 × 1.08 = 1,08,000 USD.
iii) MTM gain = Original − Current = 1,10,000 − 1,08,000 = 2,000 USD gain.
iv) Entry:
• Debit: Derivative Asset 2,000
• Credit: Unrealised FX Gain 2,000
Why is this a gain for the fund?
Think like this:
• You have a contract: “I can sell EUR at 1.10.”
• New market: “People can only sell EUR at 1.08.”
If at maturity the spot is around these forward levels:
• Others will sell EUR 1,00,000 and get USD 1,08,000
• You will sell EUR 1,00,000 and get USD 1,10,000
You are better off by USD 2,000 compared to the current market.
That extra advantage is what we call the Mark-To-Market (MTM) gain.