Mutual Funds Daily Accrual

Hello,

Can someone explain the daily accrual process for a mutual fund with some numerical examples, or point to an example that does (I am unable to fund one). Right now the only thing I understand is that different investors will get a different distribution based on when they subscribed to the fund (at least up to the first distribution), however how is that calculated? Is it based on distributions received from the underlying bonds for example, or it factors in accrual of what has not been received yet…

former mutual fund accountant here:

If you purchased this fund mid quarter, you will not participate in the distribution of income up to the time you purchased into the fund. Someone invested in since the beginning of the quarter will get the full amount. It is based on both accrual accounting & cash received. The “earnings” of the fund are based on accrued income, but you cant pay out more than you have cash on hand either. Most funds keep this accrued income in a separate bucket called many things but you can just consider it your undistributed income. When the distribution is made, it comes from this bucket and does not impact the NAV of the fund (generally, can differ based on type of distribution & fund set up)

^OP is talking daily accrual funds

i don’t work in ops so I can’t give you an example. some bond funds have 400+ holdings so I imagine the daily accrual calculation is a pain. if you call the firm where your position is held, someone will have each rate

“A bond fund calculates a daily accrual rate for the shares outstanding, and shareholders only earn income for the days they actually hold the fund. For example, if you buy a bond fund two days before the fund’s month-end distribution, you would only receive two days’ worth of income that month. On the other hand, if you sell a fund part-way through the month, you will still receive a partial distribution at the end of the month, pro-rated for the days you actually held the fund.”

Thanks for both answers, anyone knows who common this daily accrual method is? I recently ran accross the concept so I checked the funds in my portfolio and most according to bloomberg terminal do not follow this, I am using a dvd_last_type (if I remember correctly). Hardly any come back as accrual despite many being bond funds (most bond funds come back as Income which according to the help desk means they are not daily accrual).

However some references on the web make it sound like all bond funds follow this method… Also any advantages for this method? Let us say a fund does not employ this method and eveyone gets the same div, the investor who buys at a later date would purchased at the NAV which is still fair… why the complexity for the daily accruals…

Thanks

*Also as a follow up please, if the fund is daily accrual and the investor is exiting the fund. Do they get the amount that has accrued to them paid along with the NAV when they exit? Do they get their portion later when the fund actually pays, or do they get nothing and miss out on that distribution (last one sounds unreasonable).

They would get the amount when the fund does a distribution based on my understanding, its not entirely like accrued income on a bond