Fund Accounting Basics for Finance Staff in Asset Management

Fund accounting is a distinctive discipline within finance, central to the asset management sector, and one that a finance professional moving into asset management encounters as something genuinely different from the corporate accounting they may be used to. Where corporate accounting concerns the finances of a trading business, fund accounting concerns the accounting for investment funds — the pooled investment vehicles that asset managers run on behalf of investors — and it has its own concepts, its own rhythms, and its own priorities. For a finance professional in or joining the asset management sector, understanding the basics of fund accounting is important, because it is the accounting that underpins the funds the business exists to manage, and it differs in important ways from the corporate accounting elsewhere. This guide introduces the basics of fund accounting for finance staff in asset management.

This guide is written for finance professionals in or joining asset management who want to understand the basics of fund accounting. It covers what fund accounting is and how it differs from corporate accounting, the central concept of net asset value, what fund accounting involves in practice, the role of the various parties, and what finance staff need to understand. It is an introduction to the discipline aimed at finance professionals rather than a detailed technical manual, and the specifics of fund accounting depend on the funds, their structures, and the applicable requirements, for which the relevant standards, the fund documentation, and specialist expertise are the references. The aim is the foundational understanding a finance professional needs to grasp what fund accounting is and how it works, as an orientation to a discipline central to the asset management sector.

What Fund Accounting Is and How It Differs

Fund accounting is the accounting for investment funds — the pooled vehicles through which investors’ money is collected and invested — concerned with accounting for the fund’s assets, its investments, its income and expenses, and the interests of the investors in it. It differs from corporate accounting, which concerns the finances of a trading business, because a fund is not a trading business but an investment vehicle, and the accounting reflects this different nature. Where corporate accounting focuses on the business’s trading, its profit, and its financial position as a going concern, fund accounting focuses on the fund’s investments, their value, the income they generate, and the value of the investors’ interests in the fund.

This different focus gives fund accounting its distinctive character. The central concern is the value of the fund and the investors’ interests in it, rather than the profit of a trading business. The accounting revolves around the fund’s investments and their valuation, the calculation of the fund’s value, and the accounting for the investors’ subscriptions, redemptions and interests. The rhythms differ too, with fund accounting often oriented around the regular calculation of the fund’s value rather than the periodic reporting cycle of corporate accounting. A finance professional moving from corporate accounting to fund accounting therefore encounters a discipline with a different focus and different concepts, which must be learned. Understanding that fund accounting is the accounting for investment funds, differing from corporate accounting in its focus on the fund’s value and the investors’ interests rather than a trading business’s profit, is the foundation of understanding the discipline, and it explains why fund accounting feels different to a finance professional used to corporate accounting.

The Central Concept: Net Asset Value

At the heart of fund accounting is the concept of net asset value (NAV) — the value of the fund, calculated as the value of its assets less its liabilities — which is central to fund accounting in a way that has no exact equivalent in ordinary corporate accounting. The NAV represents what the fund is worth, and it is fundamental because it determines the value of the investors’ interests: an investor’s stake in the fund is worth their share of the NAV, so the NAV is what values the investors’ holdings, prices their subscriptions and redemptions, and measures the fund’s performance. Calculating the NAV accurately is therefore central to fund accounting, because so much depends on it.

The calculation of the NAV involves valuing the fund’s assets — principally its investments — and deducting its liabilities, to arrive at the net value of the fund, which is then divided among the investors according to their holdings to give the value per share or unit. This calculation is often performed regularly — the NAV is calculated at defined valuation points, which for many funds is frequent — because the NAV is needed to price the investors’ dealings and to report the fund’s value on an ongoing basis. The regular, accurate calculation of the NAV is a central activity of fund accounting, and much of the discipline revolves around it. Understanding that the NAV is the central concept — the value of the fund that determines the investors’ interests and drives so much of fund accounting — is the key to understanding the discipline, because the NAV is what fund accounting is largely about. A finance professional in asset management must understand the NAV, because it is central to the accounting for the funds the business manages, and its accurate calculation is fundamental.

What Fund Accounting Involves in Practice

In practice, fund accounting involves a range of activities centred on maintaining the fund’s accounts and calculating its value. It involves accounting for the fund’s investments — recording them, valuing them, and accounting for the transactions in them as the fund buys and sells — which is central because the investments are the fund’s principal assets. It involves accounting for the fund’s income and expenses — the income the investments generate, the fees and costs of running the fund — which affect the fund’s value and the investors’ returns. And it involves accounting for the investors’ dealings — their subscriptions into the fund and redemptions out of it — which change the fund’s size and the investors’ holdings.

Central to the practice is the calculation of the NAV at the valuation points, bringing together the valuation of the assets, the liabilities, and the resulting net value, to price the fund and value the investors’ interests. This regular NAV calculation is a defining rhythm of fund accounting, often requiring the accounts to be brought to a state where the NAV can be struck accurately at each valuation point. Fund accounting also involves the reporting on the fund — to investors, to the regulator where applicable, and to others — and the various controls and reconciliations that ensure the fund’s accounting is accurate, which matters greatly because the NAV and the investors’ interests depend on it. Understanding what fund accounting involves in practice — accounting for the investments, the income and expenses, the investors’ dealings, the regular NAV calculation, and the reporting and controls — gives a finance professional a picture of the discipline’s activities. The practice centres on maintaining the fund’s accounts accurately and calculating its value regularly and correctly, which is the essence of fund accounting work.

The Role of the Various Parties

Fund accounting in asset management typically involves various parties, and understanding their roles helps a finance professional understand how fund accounting is organised. The asset manager runs the fund — making the investment decisions and managing the fund — but the fund accounting itself is often performed by a specialist administrator or by a dedicated fund accounting function, reflecting its specialist nature. In many arrangements, a fund administrator — a specialist third party — performs the fund accounting, including the NAV calculation, on behalf of the fund, while in others the asset manager performs it in-house. The finance professional in asset management may work with the administrator, oversee the fund accounting, or be involved in performing it, depending on the arrangement.

Other parties are typically involved too. A depositary or custodian holds the fund’s assets and provides oversight, adding a layer of protection and independence. Auditors audit the fund. And the regulator, where the fund is regulated, oversees it. These parties together form the structure within which the fund operates and is accounted for, providing the specialist functions, the oversight, and the protection that funds require. A finance professional in asset management works within this structure, and understanding the roles of the various parties — the asset manager, the administrator, the depositary or custodian, the auditors, the regulator — helps them understand how fund accounting is organised and where their own role fits. The involvement of these various parties is a distinctive feature of the fund world, reflecting the specialist nature of fund accounting and the importance of oversight and protection in managing investors’ money. Understanding the structure is part of understanding fund accounting in asset management.

What Finance Staff Need to Understand

A finance professional in asset management needs to understand the basics of fund accounting to work effectively in the sector, even if they are not performing the detailed fund accounting themselves. They need to understand what fund accounting is and how it differs from corporate accounting, so they grasp the distinctive nature of the accounting that underpins the funds. They need to understand the NAV and its centrality, because it is fundamental to the funds and to so much of what the business does. And they need to understand, at a basic level, what fund accounting involves and how it is organised, so they can work within the fund world and with the parties involved.

The depth of understanding a finance professional needs depends on their role — those directly involved in fund accounting need detailed, specialist knowledge, while those in other finance roles in asset management need enough understanding of fund accounting to work effectively in the sector and understand the funds the business manages. A finance professional moving into asset management should develop the level of fund accounting understanding their role requires, drawing on the specialist expertise, the fund documentation, and the relevant standards for the detail. Understanding what finance staff need to understand about fund accounting — the nature of the discipline, the NAV, the basics of the practice and the structure, to the depth their role requires — helps a finance professional orient themselves to the asset management sector and its distinctive accounting. Fund accounting is central to asset management, and a finance professional in the sector needs to understand its basics, developing deeper knowledge where their role requires it. The finance professionals who understand fund accounting well are valuable in the asset management sector, because it is a specialist discipline central to the sector’s work. This connects to the broader regulated-sector context covered in our guide on a first job at an FCA-regulated firm.

The Importance of Accuracy in the NAV

A point worth emphasising for a finance professional in asset management is the importance of accuracy in the NAV, because so much depends on it and errors have real consequences. The NAV determines the value of the investors’ interests, prices their subscriptions and redemptions, and measures the fund’s performance, which means an error in the NAV can misprice the investors’ dealings — causing some investors to pay too much or receive too little — and misrepresent the fund’s value and performance. An inaccurate NAV therefore directly affects the investors, potentially to their detriment, which is why the accurate calculation of the NAV is treated with such importance in fund accounting.

This importance means that the NAV calculation must be performed accurately and with appropriate controls, checks and oversight, because the consequences of an error fall on the investors and on the integrity of the fund. The valuation of the assets must be sound, the calculation correct, and the resulting NAV verified, because errors could misprice the investors’ interests. NAV errors, where they occur, can require correction and can have consequences for the fund and the investors affected. A finance professional involved in fund accounting must therefore appreciate the importance of NAV accuracy and perform or oversee the NAV calculation with the care it demands. Understanding the importance of accuracy in the NAV — because errors affect the investors and the fund directly — underscores why the NAV calculation is central to fund accounting and why it must be done accurately. The accuracy of the NAV is fundamental, and a finance professional in asset management must appreciate its importance and the care its calculation requires.