ACCOUNTING, VALUATION AND

TAXATION, INVESTOR SERVICES

 Investors have bought 20 crore units of a mutual fund
scheme at Rs. 10 each. The scheme has thus mobilized
20 crore units X Rs. 10 per unit i.e. Rs 200 crore.

 An amount of Rs. 140 crore, invested in equities, has

appreciated by 10 percent.

 The balance amount of Rs 60 crore, mobilized from

investors, was placed in bank deposits.

 Interest and dividend received by the scheme is

Rs8crore, scheme expenses paid is Rs 4 crore, while a
further expense of Rs1crore is payable.
 Particulars Amount(Rs.Cr)

Liabilities
A Unit Capital(20 crore units of Rs.10 each) 200
B Profits{Rs 8 crore (interest and dividend received) 3
minus Rs 4 crore (expenses paid) minus Rs 1 crore
(expenses payable)}
C Capital Appreciation on Investments held (10% of 14
Rs 140 Crore)
D Unit Holders Fund in Scheme(D=A+B+C) 217
E Expenses Payable 1
F Scheme Liabilities(F=D+E) 218
 Particulars Amount(Rs.Cr)

Assets
A Market Value Of Investments(Rs.140 Cr+10%) 154
B Bank Deposits {Rs 60 crore (original) plus Rs 8 64
crore (interest and dividend received) minus Rs 4
crore (expenses paid)}
C Scheme Assets(C=A+B 218
 The unit-holders’ funds in the scheme : “net assets”.
 Assets of the scheme are the investments held by it.
 Total assets=Assets of Scheme+ Accrued income(dividend or
interest due on securities held in the portfolio but not yet received,
and receivables, such as amount due on shares sold,)
 The scheme may have some short-term liabilities and accrued
expenses. The current liabilities include payables for securities
bought & borrowings for periods not exceeding 6 months to meet
liquidity needs.
 Net assets =amounts originally invested +the profits booked
in the scheme+ appreciation in the investment portfolio.
 Net assets increase :market prices of securities held in the
portfolio increase, even if the investments have not been sold
and profits realized.
 A scheme cannot show better profits by delaying payments.
 While calculating profits,
◦ all the expenses that relate to a period need to be considered, irrespective
of whether or not the expense has been paid.
◦ In accounting jargon, it is called accrual principle.
 Similarly, any income that relates to the period

will boost profits, irrespective of whether or not it

has been actually received in the bank account.

This again is in line with the accrual principle.

 NAV-Value of each unit of Scheme
 NAV=Net Assets
No.Of.Units
 NAV=Unit Holders Funds in Scheme
No.Of Units
=217 Crores
20 Crore
=10.85 per unit
 From the above, it follows that:
◦ Higher the interest, dividend and capital gains earned by
the scheme, higher would be the NAV.
◦ Higher the appreciation in the investment portfolio,
higher would be the NAV.
◦ Lower the expenses, higher would be the NAV.
 (A) Interest income
 (B) + Dividend income
 (C) + Realized capital gains
 (D) + Valuation gains
 (E) – Realized capital losses
 (F) – Valuation losses
 (G) – Scheme expenses
1.Calculate the NAV given the following
information:
 Value of stocks: Rs. 150 cr,
 Value of bonds: Rs. 67 cr
 Value of money market instruments: Rs. 2.36 cr,
 Dividend accrued but not received: Rs. 1.09 cr,
 Interest accrued but not received: Rs. 2.68 cr
 Fees payable: Rs. 0.36 cr,
 No. of outstanding units: 1.90 cr
 NAV = (Value of stocks + Value of bonds + Value
of money market instruments + Dividend accrued
but not received + Interest accrued but not
received – Fees payable) / No. of outstanding
units
 NAV = (150 + 67 + 2.36 + 1.09 + 2.68 – 0.36) / 1.90
= 222.77 / 1.90 = Rs. 117.25
2.Calculate the NAV given the following
information:
 Value of stocks: Rs. 230 cr,
 Value of money market instruments: Rs. 5 cr,
 Dividend accrued but not received:Rs.2.39 cr,
 Amount payable on purchase of shares: Rs. 7.5 cr
 Amount receivable on sale of shares: Rs. 2.34 cr
 Fees payable: Rs. 0.41 cr,
 No. of outstanding units: 2.65 cr
 NAV = NAV = (Current value of investments held
+ Income accrued + Current assets – Current
liabilities – Accrued expenses) / No. of
outstanding units
 NAV = (230 + 5 + 2.39 + 2.34 – 7.5 – 0.41) / 2.65 =
231.82 / 2.65 = Rs. 87.48
 The process of valuing each security in the investment
portfolio of the scheme at its current market value is
called ‘mark to market’ i.e. marking the securities to their
market value.
 NAV is meant to reflect the true worth of each unit of
the scheme, because investors buy or sell units on the
basis of the information contained in the NAV.
 Else,investment portfolio will end up being valued at
the cost at which each security was bought.
 What happens if the portfolio was not marked to market
and investors are issued units post the NFO also at the face
value of the unit?
 Marking to market helps investors buy and sell units of a
scheme at fair prices, which are determined based on
transparently calculated and freely shared information on
NAV.
 Unit capital: Rs. 100,000
 Face value/unit: Rs. 10
 No. of units issued: 10000 (Rs. 100,00 / Rs. 10)
 Net Assets: Rs. 150,000
 NAV: Rs. 15
Assume an investor buys 100 units when the NAV is Rs.15
and the units are issued to him at the face value of Rs. 10.
Post the purchase the scheme’s numbers will be as follows
 Unit capital: Rs. 101,000
 Face value/unit: Rs. 10
 No. of units: 10100 (Rs. 101,00 / Rs. 10)
 Net Assets: Rs. 151,000
 NAV: Rs. 14.95
Assume an investor redeems 100
 Assume an investor redeems 100 units when the NAV is Rs.
15 and the units are redeemed at the face value of Rs. 10. Post
the redemption the schemes numbers will look as follows
 Unit capital: Rs. 99,000
 Face value/unit: Rs.10
 No. of units: 9900 (Rs. 100,00 / Rs. 10)
 Net Assets: Rs. 150,000
 NAV: Rs. 15.15
 Issuing fresh units at a price lower than the NAV will
result in the post issue NAV coming down for all
investors.
 Redeeming units at price lower than the NAV will
increase the NAV for the remaining investors.
 Thus, marking to market helps investors buy and sell
units of a scheme at fair prices, which are determined
based on transparently calculated and freely shared
information on NAV.
 A distinctive feature of open-ended schemes is the
ongoing facility to acquire new units from the scheme
(“sale” transaction) or sell units back to the scheme (“re-
purchase transaction”).
 In the past, schemes were permitted to keep the Sale
Price higher than the NAV.
 The difference between the Sale Price and NAV was
called the “entry load”.
 Entry load is no longer permitted. So Sale Price =NAV.
 Schemes are permitted to keep the Re-purchase Price
lower than the NAV.
 The difference between the NAV and Re-purchase Price
is called the “exit load”.
 Schemes can also calibrate the load when investors offer
their units for re-purchase.
 Investors would be incentivized to hold their units
longer, by reducing the load as the unit holding period
increased.
 Load would be 4% if investor exit in year 1, 3% if
investor exit in year 2, & so on. Such structures of load
are called “Contingent Deferred Sales Charge(CDSC)”.
 Earlier, schemes had the flexibility to differentiate
between different classes of investors within the same
scheme, by charging them different levels of load.
 Further, all the money collected as loads were available
for the AMC to bear various selling expenses.
 There were liberal limits on how much could be charged
as loads.
 Current Position

 SEBI has banned entry loads.

 While charging exit loads, no distinction will be made among unitholders

on the basis of the amount of subscription

 No exit load will be charged on bonus units and units allotted on

reinvestment of dividend.

 Exit loads/CDSC have to be credited back to the scheme immediately &

are not available for the AMC to bear selling expenses.

 Upfront commission to distributors will be paid by the investor directly

to the distributor, based on his assessment of various factors including the
service rendered by the distributor.
 If an Investor invests Rs.25000 in a scheme of NAV of
Rs.43.21.Calculate the number of units alloted

Amount invested: Rs. 25,000

NAV: Rs. 43.21
Units allotted: Rs. 25,000 / Rs. 43.21 = 578.570 units
 SEBI has allowed a transaction charge per subscription of
Rs.10,000/- & above to be paid to distributor(balance will be
invested)
 No charges on Direct Investment
 If an Investor invests Rs.25000 in a scheme of NAV of
Rs.43.21. Transaction charge would be deductible at Rs. 150
(first time investor). Calculate the number of units allotted

 If an Investor invests Rs.25000 in a scheme of NAV of

Rs.43.21. Transaction charge would be deductible at Rs. 100 .
Calculate the number of units allotted
 SIP-TC are deducted only if the total commitment (i.e SIP
Amount * No. Of Installments) amounts to Rs.10000 or more.
Deducted in 4 Equal Installments
 TC will not be deducted for
◦ Purchase at designated collection centres,AMC & direct
◦ Amount less than 10000
◦ Transaction such as switches-no additional cash flows in
◦ Purchase though Stock Exchange
Opt-Out Option

 opt out of charging the transaction charge based on type

of the product e.g. they can decide not to charge it for debt
schemes.
 It shall be at distributor level & not investor level i.e. a
distributor cannot charge one investor, and choose not to
charge another investor.
Two kinds of expenses come up in creating and
managing a mutual fund:
 Initial Issue Expenses
 Recurring Expenses

Initial Issue Expense

 Incurred at the time of launching a scheme in an NFO.
 A one- time expense.
 borne by the AMC(prior to SEBI-MF Regulation Amendment 2008
it was taken from amount mobilised-6%).
Recurring Expense
 Fund running expenses incurred to manage the money raised
from the investors, can be charged to the scheme
 Various heads of expenses that are allowed is given under
regulation 52 of SEBI(MF)-Next Slide
 Expenses that are not permitted to be charged to the scheme shall
be borne by the AMC or sponsors.
 Expenditure in excess of the said prescribed total expense ratio
limit (including brokerage and transaction cost, if any) has to be
borne by the AMC or by the trustee or sponsors.
Heads of expenses under regulation 52 of SEBI(MF) –fungible in
nature
 Fees of various service providers
 Marketing & Selling Expenses-advertising & commission
 Expenses on statutory investor communication
 Listing fees & Depository Fees
 Insurance premium paid by fund
 Cost of storage & handling of gold-Gold ETF
 Service Tax
 Winding up costs for terminating a fund
The following expenses cannot be charged to the scheme:
 Penalties and fines for infraction of laws.

 Interest on delayed payment to the unit holders.

 Legal, marketing, publication and other general expenses not
attributable to any scheme(s).
 Fund Accounting Fees.

 Expenses on investment management/general management.

 Expenses on general administration, corporate advertising and
infrastructure costs.
 Depreciation on fixed assets and software development expenses.
 Daily Net Assets Equity Schemes Debt Schemes
(Rs in Crore)

On the first Rs. 100 2.50 percent 2.25 percent

crore of the daily net
assets
On the Next Rs 300 2.25 percent 2.00 percent
crore of the daily net
assets
On the next Rs 300 2.00 percent 1.75 percent
crore of the daily net
assets
On the balance of the 1.75 percent 1.50 percent
assets

 For FOF the total expenses should not exceed 0.75%

 For Index Funds – 1.5%
SEBI guidelines stipulate that dividends can be paid out of
distributable reserves.
In the calculation of distributable reserves:
 All the profits earned (based on accrual of income and expenses
as detailed above) are treated as available for distribution.
 Valuation gains are ignored. But valuation losses need to be
adjusted against the profits.
 SEBI has prescribed a conservative approach to its calculation &
ensures that dividend is paid out of real & realized profits, after
providing for all possible losses
 The trustees decide the quantum of dividend & record date.
 The record date :cut-off to determine the eligibility to receive the
dividend
 Within one day of the trustees’ decision, the AMC shall issue a public
communication giving the details of the dividend with record date.
 The record date shall be 5 calendar days from issue of notice by AMC.
 The public notice should clearly state that the NAV will decline
pursuant to the dividend pay-out and any statutory levy, if
applicable.
 Accounts & Auditor of the schemes need to be maintained distinct
from the AMC.
 Norms are prescribed on when interest, dividend, bonus issues, rights
issues etc. should be reflected for in the accounts.
 NAV is to be calculated upto 4 decimal places for index funds, liquid
funds and other debt funds.
 NAV for equity and balanced funds is to be calculated upto at least 2
decimal places.
 Investors can hold their units even in a fraction of 1 unit. However,
current stock exchange trading systems may restrict transacting on
the exchange to whole units.
 Equity shares of a company are not traded in the market on a day, or
they are thinly traded , a formula is used for the valuation.
 The valuation formula is based on the Earnings per Share of the
company, its Book Value, and the valuation of similar shares in the
market (peer group).
 Debt securities that are not traded on the valuation date are valued on
the basis of the yield matrix prepared by an authorized valuation
agency.
 The yield matrix estimates the yield for different debt securities based
on the credit rating of the security & its maturity profile.
 A MF trust is exempt from tax on its income and earnings
under section 10(23D) of the Income Tax Act.
 MF are exempt from tax.
 Securities Transaction Tax (STT) is applicable for equity &
equity MF Schemes
 Additional tax on income distributed (Dividend distribution
tax) is applicable on dividends paid by debt MF schemes.
 Taxability of capital gains, and treatment of capital losses is
different between equity and debt schemes, short & long term.
 No TDS on dividend payments/re-purchase payments to
resident investors.
 Withholding tax is applicable for some non-resident investors.
 Setting of capital losses against capital gains and other income
is subject to limitations to prevent tax avoidance.
 Investment in mutual fund units including Gold ETF & real
estate mutual funds is exempt from Wealth Tax..
 STT is not applicable on transactions in debt or debt-oriented
mutual fund (including liquid fund) units.
 Payable for equity schemes only & Not Payable for debt
schemes
 Payable for debt schemes only
 Not payable for equity schemes
 %+12% Surcharges+4% Education Cess
 28.84 & 34.608
 Indexation means that the cost of acquisition is adjusted
upwards to reflect the impact of inflation.
 The government comes out with an inflation index number
for every financial year to facilitate this calculation.
 Indexation benefit is available only in case of long term
capital gains
1.if the investor bought units of a debt-oriented mutual fund
scheme at Rs 10 and sold them at Rs 15, after a period of 3
years. Assume the government’s inflation index number was
400 for the year in which the units were bought; and 440 for
the year in which the units were sold. The investor would
need to pay tax based on indexation. Calculate tax
Indexed cost of acquisition is Rs 10 X 440 ÷ 400 i.e. Rs 11. The
capital gains post indexation is Rs 15 minus Rs 11 i.e. Rs 4 per
unit. 20 percent tax on this would mean a tax of Rs 0.80 per
unit.
 Government of India has entered into Double Taxation
Avoidance Agreements (DTAA) with several countries
 Withholding tax applicable for non-resident investors is the
lower of the rate specified in the income tax regulations or the
tax specified in the DTAA of the country where the investor is
resident
 Capital loss, short term or long term, cannot be set
off against any other head of income (e.g. salaries)
 Refers to buying stocks or units within 3 months before
and selling it within 3 months (9 months in case of units)
after the Record date.
 Price of the share decreases on the ex-date.
 Investors can take advantage of getting tax free dividend
by investing in shares for a short term and also book short
term capital loss by selling the shares after record date.
 This could then be used to set off the short term and long
term capital gains made during the year.
 THANK YOU