A fund administrator is required to calculate the net asset value (NAV) per share every accounting period and, typically, once per year at a minimum
The manager of the mutual fund must then provide various information such as the value of assets and liabilities, as well as all costs borne by the mutual fund.
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The third step is to gather the expenses borne by the mutual fund and book provision in the accounting to make sure these costs are well apportioned over the different NAV periods (audit costs, custodian fees, administrator's fees, taxes, etc).
With these steps completed, the fund administrator has sufficient information at hand to calculate the total assets minus the total liabilities of the mutual fund - which gives the equity of the mutual fund - its own funds - this is the gross asset value (GAV).
Depending on the type of mutual fund held, the Offering Memorandum will specify the way in which the manager is to be remunerated and the fund administrator is required to calculate the management fee, performance fee or any other fees which are due to the manager of the mutual fund or its advisers.
The management fees are typically calculated on the gross asset value whereas performance fees are typically calculated as a percentage of the increase in the GAV over the period.
Once all fees are deducted, the fund administrator can calculate the net asset value of the fund.
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Formula for Net Asset Value
As a mutual fund is a pool of investments divided into shares to be purchased by investors each share contains a weighted portion of individual investment in the collective pool.
The following net asset value formula is used to calculate a mutual fund's NAV per share.
Some mutual funds have different categories of shares called share classes which are then considered as a separate portfolio within the mutual fund itself.
The fund administrator is then required to split the calculation of the NAV per each class of shares.
Performance fees are usually calculated to align the interest of the shareholders with that of the manager; this is the reason some adjustments are taken into account when the fund administrator calculates those fees in case of losses incurred by the mutual fund during a period of time. A mechanism of equalisation may be put in place.
Another method is the issuance of a new series of shares each time there is a subscription. Every month, the correct incentive fee accrual is calculated to each of the series separately. The fund administrator consolidates each of the series issued by the mutual fund into the lead series at the end of every accounting period.
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