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Accruals
In accounting term accrual means accounting for assets or liabilities for services that are performed in the accounting period. The main accruals are receivables and payable.
Payable
In the context of an investment portfolio, account payable usually includes management fees, tax payable and any expenses that are used but not yet paid.
The computation of management fees is the most important item in payable Usually the fund manager will charged 2% per annum of the investment portfolio as management fee. Although fees can be deducted monthly, or quarterly, it is common practice for institutional fund to accrued management fee on a monthly basis.
To compute monthly management fees, the formula is:
Monthly Management Fees (Accrued) = 2% x total investment amount / 12
Accrued management fees will accumulate for 3 months and ready for deduction quarterly.
For mutual funds (or unit trusts) which need to be valued on a daily basis, management fee is accrued daily.
Another major component is custodian fees. The common practice is to accrue the custodian fees monthly regardless of went it is being deducted.
As usual, the computation for fee payable for mutual fund is computed daily.
Receivables
For an investment portfolio, account receivables usually include dividend receivables and interest receivables.
The fund accounting team will start computing dividend receivable when it is announced and credited into dividend receivable. The actual receipt of the dividend will be much later.
Assuming a portfolio owned 500,000 shares of GE stock. The quarterly cash dividend is $0.17 per share. The price of GE at exercise date is $23, the dividend is
Quarterly Cash Dividend Receivables = 500,000 x 0.17 = 85,000
Monthly Cash Dividend Receivables will be = 85,000 / 3
As fixed income interest rate does not vary, interest income is accrued immediately after the fixed income instrument was bought. Interest receivable is usually accrued every month.
Computation of fixed income receivables is:
Assuming the portfolio just bought 20 Year US Treasury Note for USD 10 million with coupon rate of 3%
Monthly Interest Receivable = 3% x 10,000,000 / 12
Capital Movement
Fund accounting team also need to track the inflow and outflow of investment fund. For institutional portfolio, capital movement is very minimal. For mutual fund or unit trust, capital movement occurs on a daily basis.
Injection or Subscription of Funds
When there is an additional capital injection for an institutional portfolio, re-balancing is required and additional fund is allocated according to the model portfolio. For fund accounting, there will be a credit in the capital and debit in cash or equity.
Additional consideration is required, such as; monthly accrued management fees will be prorated.
For mutual fund, fund subscription occurs daily. Fund managers may choose to re-balance the portfolio if the subscription is large enough. Most of the time, the fund managers may adopt a policy of re-balancing the portfolio weekly or monthly depending on the size of subscription.
Redemption or withdrawal of Funds
For institutional portfolio, fund withdrawal notice requires the fund managers to sell the equity and prepare the cash for withdrawal.
For mutual fund, daily redemption requires a few days for fund managers to liquidate the assets. As daily redemption occurs in a daily basis, it is usually common for mutual equity fund to maintain a larger portion of cash balances.
Please refer to additional post on Corporate Action, Fund Valuation and Profit and Lost Statement and Balance Sheet.
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