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What are the Basics of Mutual Fund Accounting?

By Elle Jay
Updated: May 16, 2024

Mutual fund accounting tends to be complex, as it involves many levels of incoming and outgoing investments as well as government regulation, operating expenses, and fees. These funds can offer a comparatively safe form of investment in multiple securities for investors trying to maximize earnings and minimize risk. In accounting terms, mutual funds are made up of investor deposits and investment dividends on the plus side, and fund purchases and expenses on the minus side.

The mutual fund basics start with a number of different investors purchasing shares in a particular fund. Many mutual funds are open ended, which means the fund manager can sell an unrestricted number of shares. A closed-end mutual fund sells a fixed number of shares to investors via initial public offering (IPO). A fund manager usually manages mutual fund accounting procedures, which may be supervised by a board of directors.

Deposits into a mutual fund are pooled together and used to purchase securities that can include stocks, bonds, and short-term money market funds. The fund manager does the buying and selling for a mutual fund, basing investment decisions on the fund’s objectives, which are declared in the mutual fund prospectus. Nearly all mutual fund expenses are used to operate the fund, including paying the fund manager. All fund expenses are deducted from the total assets, so mutual funds with high operating costs may have lower returns than those with minimal operating costs.

Each individual investor owns a stake in a mutual fund, and earnings come from adding dividends and interest earned, minus fund expenses. A diversified mutual fund can gain dividends from stock ownership or interest from bond purchases. With mutual fund accounting, all fund profits are divided evenly between all investors and disbursed annually. Investors can choose to take dividend payments outright or reinvest the money back into the fund. Either way, shareholders are responsible for paying the taxes on mutual fund disbursements.

Mutual fund accounting is used to determine the net asset value (NAV) of a mutual fund, and this number usually changes daily. The NAV represents how much one share in a particular mutual fund is worth at a given time. Fund managers calculate the NAV by dividing the value of all securities a mutual fund owns by the number of shares the fund has outstanding. Potential investors can use the NAV to determine which mutual fund offers the best value.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
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