Mutual Fund Accounting Procedures

The U.S. Securities and Exchange Commission regulates mutual funds' accounting procedures.
i Jupiterimages/ Images

Mutual funds are an attractive investment if you want the advantage of a professional money manager and a well-diversified portfolio at an affordable price. A mutual fund is an investment company that pools the money of shareholders and invests it in stocks, bonds, money-market instruments, and other assets. The accounting procedures, methods and practices a mutual fund uses give investors the tools they need to make informed investment decisions.

Regulatory Agency

Mutual funds are regulated by the U.S. Securities and Exchange Commission, which requires funds to follow specific accounting procedures. The Investment Company Act of 1940 compiles the main body of accounting and reporting rules that mutual funds must follow. However, it is important to understand that money invested in mutual funds is not guaranteed or insured by either the SEC or the Federal Deposit Insurance Corp.

Net Asset Value

The SEC requires that all mutual funds provide a daily assessment of their net asset value. This means mutual funds must provide a daily accounting of the value of their portfolio based on current market prices. This information is crucial for you as an investor, because it allows you to calculate the gains or losses generated by the fund's investments and compare its performance to that of other funds.

Trade Day Plus One Accounting

When mutual funds calculate their net asset values, they use an accounting method called trade day plus one, or T+1. This accounting method, sanctioned by the SEC, uses old portfolio information to calculate current net asset value. For example, a fund manager may apply today's share prices on the assets the fund owned yesterday, regardless of whether the information is current.

Amortized Cost

If you want a low-risk investment that you can redeem at any time, mutual funds that invest in short-term money market instruments might be a good option. These funds invest only in high-quality, short-term investments issued by governmental institutions.

To keep their value stable, money market funds use an accounting procedure called amortized cost. This method, also sanctioned by the SEC, allows money market mutual funds to calculate their assets at the price they were bought, not their current value. Any interest earned by the fund's portfolio is then reported as a daily dividend to investors. This way the fund can maintain a stable price regardless of market fluctuations.

the nest