(And How Companies Should Deal with NAV Changes)

I was once asked a question in an interview that seemed straightforward at first, yet pointed to a practical issue that comes up often in corporate accounting.

“How should mutual fund investments be accounted for in company books? And what do we do with daily NAV changes?”

On the surface, this sounds simple. In practice, however, companies often end up with inconsistent or incorrect accounting, particularly when NAVs fluctuate on a daily basis.

This note explains the correct and commonly accepted accounting treatment, based on accounting standards and real-world practice.

How Mutual Fund Investments Are Classified

In company books, mutual fund investments are generally classified as financial assets. The exact classification depends on several factors, including:

• Intent of holding (short-term vs long-term)
• Type of mutual fund (debt vs equity)
• Applicable accounting framework (Ind AS vs non- Ind AS)

Most operating companies invest surplus funds in either liquid funds, debt funds or short duration / over-night funds. These are typically treated as current investments.

Which accounting standard applies?

Companies do not choose their accounting framework – it is determined by law.

Indian companies to which Ind AS applies must follow Ind AS 109 – Financial Instruments. Other Indian companies continue to follow AS 13 – Accounting for Investments.

Foreign parent companies may prepare their global financial statements under IFRS or US GAAP, but Indian entities are required to follow Indian accounting standards, based on applicability.

Initial accounting treatment – at the time of investment

When a company invests in mutual funds, the accounting entry is straightforward:

Investment in Mutual Fund – Debit
    To Bank A/c

The investment is recorded at cost and reflected under “Investments” in the balance sheet, usually as a current investment. At this stage, there is no income or gain – it is simply the deployment of surplus funds.

How should NAV changes be treated?

This is where most practical questions arise, largely because the treatment of NAV changes depends on the accounting framework the company follows. Broadly, there are two approaches, each driven by the applicable accounting standard.

Accounting treatment under AS 13 (Indian GAAP)

Under AS 13, mutual fund investments are valued at the lower of cost or fair value (NAV) at the reporting date.

In practice:

• If NAV is lower than cost at year end, the loss is recognised in the books
• If NAV is higher than cost, the gain is not recognised (conservative approach is followed)

Daily NAV fluctuations are not recorded and valuation is done only at reporting dates such as month-end or year-end.

Accounting treatment under Ind AS 109

Under Ind AS 109, mutual fund investments are treated as financial assets where such investments are classified as fair value through profit or loss (FVPL):

• The investment is carried at fair value (NAV)
• Both unrealised gains and unrealised losses are recognised in the profit and loss account

In this case, NAV changes are not merely tracked – they are accounted for as part of financial reporting.

When is profit actually realised?

Irrespective of the accounting framework, final profit or loss is realised only on redemption of mutual fund units.

At the time of redemption:

• Sale proceeds are compared with the carrying value in the books
• The difference is recognised as profit or loss
• Any earlier NAV adjustments naturally reverse or settle

A note on accounting policy and consistency

One point here is critical and often overlooked. Companies need to clearly define their accounting policy for mutual fund investments and apply it consistently year after year. Changing the treatment based on short-term market movements only creates confusion and weakens the credibility of the financials.

Closing thought

The accounting treatment of mutual fund investments in company books is not complex.
What creates confusion is assuming that every NAV movement requires an accounting entry. While NAV tracking can be useful for internal monitoring, accounting should always follow the applicable standard – and once an approach is adopted, it should be applied consistently.