Section 1 - Introduction to Fund Accounting
This section aims to show the student how money is invested into a fund and then how
it grows, giving them a return on the capital invested.
1.1 The process flow
What would you do if you suddenly came into a lump sum of money? Where would you
invest it? How do you make these choices??
Initially, you would employ the services of an independent financial advisor (IFA). He/She is
expert in all the products currently available on the market which will generate a return on
your investment. He/She should be able to talk you over a large portfolio of the products
available, explain the costs and risks involved in investing your money in that particular
product and finally assist you in making an informed decision.
To educate themselves, the IFA will summarise the Fund Prospectus for each of the
funds he/she is offering to sell to you. The Prospectus is the legal document outlining
the performance objectives, the fees payable to the various parties, the underlying
investments that it will invest in and other important disclosures relating to a fund
You will have covered the fund prospectus in great detail in the Transfer Agency section of
1.2 Investing your money
Once you have decided what fund you are investing your money into, you will have to
complete the applciation forms to enable you to invest in the fund. These will detail your
name, address, contact details, a declaration of your country of residency and proof of how
your cash was generated if it breaches anti-money laundering minimum investment rule.
You will also tick a box to confirm that you have read and understand the risks, fees and
returns you can expect from investing in the fund.
This application form is processed by the Transfer Agency department. They will ensure
that all the paperwork is in order, open a dealing account for you and then process your
initial subscription (investment) into the fund.
In return for the cash that you invest in the fund, you will receive shares. These are issued
to you at the prevailing price which will have any commissions due to the independent
financial advisor factored in (POP)
Once the transactions are all complete, the Transfer Agent will send you a trade
confirmation and a share ownership certificate. If ever you decide to redeem these shares
(i.e. convert them back into cash), you will need to quote your account numbers or unique
customer identification number as per this paperwork. At any stage of your investment you
can ring the Transfer Agent to get a valuation on your money.
It’s worth noting that if you need cash at any time, you can cash in all or part of your
investment – you just need to get in contact with the Transfer Agent who can process all of
this for you.
1.3 The Fund Accountant role
When the transaction to buy shares in the fund in return for money is received by the
Transfer Agent, he/she will advise the Fund Accountant of both the money amount being
received by the fund and the number of shares the investor is getting in return.
This money cannot be held in the fund for any length of time as it will generate no income for
The Fund Accountant will therefore inform the Investment Advisor that this money has been
received into the fund. He will go out into the stock market and buys some additional
securities to be added to the existing fund portfolio. Once he has ‘traded’ (i.e. bought
underlying stocks) he will send the fund accountant a copy of the trade ticket so that it can
be booked onto the accounting system that is used.
The Investment Advisor has the responsbility of expertly managing all investments. As he
/she will have strategies in place, his/her objective is to ensure that a return is generated on
this investment. He will be the expert in that particular market - he is expected to know
which stocks will generate returns, which ones would be a high risk investment. He will deal
with both high wealth individuals and collective investment schemes – the latter allowing
those with smaller amounts of cash to invest to also experience the advantages of
The Fund Accountant’s main responsibility s to maintain the books and records of the fund,
so he/she will generate all the accounting entries that are needed to ensure that both the
receipt of the money and the securities purchased are reflected.
The Fund Accountant will validate the additional investment as well as accrue any income
that is due to the fund on both this new investment and its existing underlying stock holdings.
He/she will ensure that all parties to the fund are paid for their services at the relevant
period in time
Once all his/her daily procedures are done, the fund accountant is responsible for
calculating the new net asset value per share. This is the share price that your investment is
valued at each day.
1.4 Other parties to the Fund involved in the daily process
Aside from the fund accountant and the investment advisor, all of this information is also
passed onto the Custodian. Custodians tend to be large banks. Typically this is the
physical bank account of the fund. Each day the custodian and the fund account will ensure
that the balances that they each have within the acounts are identical.. They also maintain a
list of all the securities that the fund currently owns which allows us to ensure that we have
performed the correct accounting.
In short, every function is performed by at least two parties to the fund. We have to ensure
that your investment is safeguarded. There are strict rules and regulations around dealing
with individuals cash, as you will see as we progress.
At the end of the day the Fund Accountant will communciate the Net Asset Value per share
to the transfer agent. This information is used to:-
o Calculate a POP to be used for the subscriptions/redemptions that are to be
performed the next dealing day.
o Allow investors to call the transfer agent and get a valuation on their investment at
that point in time.