Custody and fund accounting demystified: A beginner’s guide

Custody and fund accounting are critical components of financial management, particularly for High-Net-Worth Individuals (HNIs) and institutional investors managing substantial assets. As the financial sector evolves, understanding these concepts is crucial forwealth preservation, financial reporting, and investment tracking.

This guide provides a comprehensive overview of custody services and fund accounting, highlighting their roles, benefits, and strategic considerations for effective financial management.

What is fund accounting?

Fund accounting is a specialised accounting method used by entities managing funds designatedfor specific purposes. It is widely utilised by governments, non-profits, and investment funds to ensure financial accountability. Unlike traditional accounting, which focuses on profitability, fund accounting emphasises transparency and compliance with regulatory and donor-imposed restrictions.

Key features of fund accounting

Fund accounting has distinct characteristics that differentiate it from conventional accounting methods. These features ensure structured financial management, regulatory adherence, and strategic fund allocation.

• This ensures clarity in fund allocation for purposessuch as program activities, capital projects, or endowments.
• Financial reporting and compliance: Fund accounting involves detailed financial reporting tailored for investors, donors,and regulatory bodies. This enhances transparency and facilitates compliance with frameworks such as International Financial Reporting Standards (IFRS), Generally Accepted Accounting Principles (GAAP), and the Securities and Exchange Board of India (SEBI).

While fund accounting tracks financial activities, custody services focus on the safekeeping and administration of these assets. Let’s explore custody services in detail.

What is custody service?

Custody services involve the safekeeping and management of financial assets, such as securities, cash, and alternative investments. Custodians,typically banks or specialised financial institutions,serve as intermediaries, ensuring the security, settlement, and regulatory compliance of financial transactions.

To better understand its application, let’s examine some key features:

• Asset protection: Custodians employ robust security measures, including security safeguards, cybersecurity protocols, and insurance mechanisms to mitigate risks such as theft, fraud, and cyberattacks.
• Transaction processing and settlements: Custodians oversee trade settlements, corporate actions and cash management, ensuring seamless execution of investment strategies. They play a vital role in clearing and settlement processes across global financial markets.
• Regulatory compliance and reporting: Custodians help mitigate complex regulatory requirements by providing compliance solutions and tailored reporting. Regulatory oversight by SEBI ensures the integrity of custody services.

The intersection of custody services and fund accounting

Custody services and fund accounting work in tandem to support asset management. While fund accounting tracks and reportsfund movements, custody services ensure the safekeeping and administration of these assets. Together, they create a structured framework for investment management, risk mitigation, and regulatory compliance.

Best practices for custody services and fund accounting

For HNIs and institutional investors, effective custody and fund accounting strategies go beyond compliance. They serve as integral components of wealth management. Implementing best practices enhances asset security, ensures regulatory adherence, and optimises financial transparency.

. Choose the right custodian

Choose a custodian with a strong reputation, extensive security infrastructure, and expertise in handling complex asset classes such as private equity, hedge funds, and cross-border investments.

. Implement robust fund accounting systems

Use specialised fund accounting software to streamline portfolio management, track multi-currency investments, and ensure compliance with evolving financial regulations.

. Maintain transparency and accountability

Regular audits, customised investor reports, and adherence to governance best practices foster trust among stakeholders and regulatory authorities.

. Stay ahead of regulatory changes

Compliance with evolving financial regulations is crucial. SEBI, the Reserve Bank of India (RBI), and global regulatory bodies set guidelines for asset management, reporting, and custody services. Keeping abreast of these developments ensures risk mitigation and legal compliance.

Conclusion

A deep understanding of custody services and fund accounting is essential for HNIs and institutional investors aiming for secure and efficient financial management. Custody services safeguard wealth, while fund accounting ensures transparency and compliance.

By understanding the principles and best practices of custody services and fund accounting, investors can enhance the security, transparency, and efficiency of their financial operations, thereby achieving their financial goals and ensuring compliance with regulatory requirements.