Key Accounting and Reporting Requirements

Mutual funds in India are required to maintain their books on an accrual basis, meaning that income and expenses are recognised when they are earned or incurred, not when cash changes hands. This ensures that the valuation of the fund reflects its true economic position at any point in time.

All assets (equities, debt, cash, receivables, etc.) and liabilities (pay‑ables, accrued expenses, unrealised gains/losses) must be recorded accurately. The accounting standards prescribed by the Accounting Standards Board (ASB) and SEBI’s Mutual Fund Regulations guide the classification and measurement of each item.

For the NISM exam, you will often be asked to compute NAV or expense ratios using the figures disclosed in the fund’s statement of assets and liabilities. Mis‑reading the basis of accounting (cash vs. accrual) is a frequent trap that leads to wrong answers.

• Accrual accounting captures accrued dividends before they are paid, which directly affect NAV.
• All expenses, including audit fees, custodian charges, and marketing costs, must be reflected in the expense ratio.

The Net Asset Value per unit is the cornerstone of mutual fund pricing. It represents the price at which investors buy or sell units on any business day. NAV is derived by subtracting total liabilities from total assets and then dividing the result by the number of units outstanding.

Key components include market value of securities, cash and cash equivalents, accrued income (such as dividends and interest), and any unrealised gains or losses. Liabilities consist of expenses payable, redemption amounts pending, and any borrowings. The number of units is the aggregate of all investor holdings after accounting for subscriptions, redemptions, and unit splits.

Exam relevance: NISM frequently asks you to compute NAV given a simplified balance‑sheet snapshot. Remember that the formula uses *average* assets for the reporting period when calculating NAV for a specific day, but the basic per‑unit NAV uses the closing figures of that day.

The Total Expense Ratio (TER) expresses all operating expenses of a mutual fund as a percentage of its average net assets. It includes management fees, custodian charges, audit fees, marketing expenses, and any other costs incurred to run the scheme.

SEBI mandates that TER be disclosed in the scheme’s Key Information Memorandum (KIM) and updated quarterly. The figure is calculated on an annualised basis, but the denominator uses the average net assets over the reporting period to smooth out inflows and outflows.

For the exam, you may be given total expenses and average net assets and asked to compute TER. Remember that TER is *not* limited to management fees – all expenses count.

SEBI requires mutual funds to publish NAV on a daily basis on their website and through approved distributors. In addition, a monthly statement of assets, liabilities, and performance must be filed with the regulator.

Quarterly, funds must submit a detailed financial statement, including a profit & loss account, balance sheet, and cash flow statement. An annual report, audited by a certified chartered accountant, is mandatory and must be made available to investors.

Exam focus: Questions often test the frequency of each disclosure (daily NAV, monthly statement, quarterly financials, annual audited report) and the specific items that must appear in each report.

Every mutual fund scheme must be audited by a chartered accountant who is a member of the Institute of Chartered Accountants of India (ICAI). The auditor examines the fund’s books, verifies NAV calculations, and checks compliance with SEBI’s accounting standards.

The auditor’s report, along with the financial statements, must be filed with SEBI within 30 days of the quarter‑end. Any material deviation from prescribed accounting policies must be disclosed in the annual report.

For the exam, remember the timelines (30 days post‑quarter, 90 days post‑year‑end) and the role of the auditor in confirming the correctness of NAV and expense disclosures.