EN
A mutual fund unit represents an investor's proportionate ownership in a mutual fund scheme. When you invest money in a mutual fund, you receive units based on the scheme's Net Asset Value (NAV).
The number of units you receive depends on the amount invested and the applicable NAV.
For example, if you invest ₹10,000 in a mutual fund with an NAV of ₹50 per unit, you would receive 200 units, assuming there are no applicable charges.
Key Takeaways
- A unit represents a proportionate interest in a mutual fund scheme.
- NAV shows the scheme's per-unit value.
- The investment amount and applicable NAV determine the number of units allotted.
- Investors may purchase units through a lump sum or a Systematic Investment Plan (SIP).
- Investors may hold units in Demat form or through a Statement of Account (SOA).
- Transaction timing and fund realization affect the applicable NAV.
What is a Mutual Fund?
A mutual fund pools money from multiple investors and invests it in assets such as shares, bonds, or money-market instruments. The portfolio is managed according to the investment objective stated by the scheme.
An equity mutual fund, for example, may spread the collected money across shares of several companies. Each investor participates in the performance of the combined portfolio rather than directly owning every security.
A mutual fund unit represents the investor’s proportionate share in that scheme.
How is the Price of a Mutual Fund Unit Calculated?
The price of a mutual fund unit is called its NAV. NAV is calculated after adjusting the scheme’s assets for its liabilities.
The following formula is generally used:
NAV = (Total value of assets − Total liabilities) ÷ Total outstanding units
The table below applies the formula to a hypothetical mutual fund:
| Calculation item | Value |
| Total assets | ₹200 lakh |
| Total liabilities | ₹20 lakh |
| Outstanding units | 4 lakh |
| NAV per unit | ₹45 |
The resulting NAV is calculated as follows:
NAV = (₹200 lakh − ₹20 lakh) ÷ 4 lakh = ₹45 per unit
The NAV changes when the value of the scheme’s underlying investments, income, expenses or liabilities changes. Mutual fund schemes generally calculate and disclose their NAV for every business day.
Mutual Fund and Rupee Cost Averaging
Rupee cost averaging occurs when an investor places the same amount into a mutual fund at regular intervals. A lower NAV provides more units, while a higher NAV provides fewer units for the same investment amount.
The number of units allotted is calculated using the following formula:
Units allotted = Investment amount ÷ Applicable NAV
The table below shows how a monthly investment of ₹5,000 buys a different number of units as the NAV changes:
| Investment period | Investment amount | Applicable NAV | Units allotted |
| First instalment | ₹5,000 | ₹50 | 100 |
| Second instalment | ₹5,000 | ₹40 | 125 |
| Third instalment | ₹5,000 | ₹62.50 | 80 |
| Total | ₹15,000 | Not applicable | 305 |
The three instalments provide a total of 305 units for an investment of ₹15,000. The average acquisition cost is approximately ₹49.18 per unit.
The applicable NAV for each purchase depends on the transaction and fund-realisation rules. For most schemes other than liquid and overnight funds, the same business day’s NAV generally applies when a valid request and the full investment amount reach the scheme before the relevant cut-off time.
A later business day’s NAV may apply when the money reaches the scheme after the cut-off. Liquid and overnight funds follow separate rules.
Rupee cost averaging spreads purchases across different NAV levels. It does not guarantee returns or prevent losses when the value of the scheme declines.
Applicable NAV & SEBI Cut-off Timings
The NAV assigned to your purchase or redemption request depends on the exact time your transaction is placed and when the funds reach the Asset Management Company (AMC).
| Scheme Category | Transaction Type | SEBI Cut-off Deadline | Applicable NAV |
| Equity, Hybrid & Debt Funds | Purchase / Switch-in | 3:00 PM |
• Same Day Closing NAV (if request & funds reach AMC before 3:00 PM) • Next Business Day Closing NAV (if request or funds arrive after 3:00 PM) |
| Equity, Hybrid & Debt Funds | Redemption / Switch-out | 3:00 PM |
• Same Day Closing NAV (if request submitted before 3:00 PM) • Next Business Day Closing NAV (if request submitted after 3:00 PM) |
| Liquid & Overnight Funds | Purchase / Switch-in | 1:30 PM |
• Previous Business Day Closing NAV (if request & funds reach AMC before 1:30 PM) • Same Day Closing NAV (if request or funds arrive after 1:30 PM) |
| Liquid & Overnight Funds | Redemption / Switch-out | 3:00 PM |
• Same Day Closing NAV (if request submitted before 3:00 PM) • Next Business Day Closing NAV (if request submitted after 3:00 PM) |
How can You Purchase Mutual Fund Units?
Mutual fund units can be purchased through an Asset Management Company (AMC), an authorised investment platform, or a registered distributor.
The usual purchase process involves the following steps:
- Complete the required Know Your Customer (KYC) process.
- Select a scheme based on its objective and risk level.
- Choose a lump-sum investment or an SIP.
- Enter the amount to be invested.
- Review the scheme, plan, and payment details.
- Pay through an accepted payment method.
- Check the allotment confirmation or account statement.
A Demat account is not compulsory for every mutual fund purchase. Investors may also hold units through an SOA, depending on the scheme and investment channel.
Difference Between Mutual Fund Units and Equity Shares
| Basis | Equity shares | Mutual fund units |
| Ownership | Interest in one company | Interest in a mutual fund scheme |
| Exposure | Linked to the selected company | Linked to the scheme’s portfolio |
| Pricing | Changes during market hours | Generally based on applicable NAV |
| Diversification | Requires investment across different securities | Depends on the scheme’s portfolio |
| Voting rights | May provide shareholder voting rights | No direct voting rights in portfolio companies |
| Risk | Includes company-specific and market risks | Depends on the scheme’s assets and strategy |
| Purchase method | Usually traded through a stock exchange | Usually purchased through the fund or an authorised channel |
An Exchange-Traded Fund (ETF) works differently because its units can also be bought and sold on a stock exchange during market hours.
What Should You Check Before Buying Units?
A mutual fund should be assessed through its scheme features rather than its NAV alone.
The following factors can help an investor examine a scheme before purchasing units:
- Investment objective: States what the scheme seeks to achieve and where it intends to invest.
- Riskometer: Indicates the level of risk associated with the scheme.
- Asset allocation: Shows how the scheme distributes money across different asset classes.
- Expense ratio: Represents the recurring operating expenses charged to the scheme.
- Exit load: Refers to a charge that may apply when units are redeemed within a specified period.
- Lock-in period: Sets the period during which the units cannot be redeemed.
- Investment horizon: Refers to the period for which the investor plans to remain invested.
- Direct or regular plan: Indicates whether the investment is made directly with the fund or through a distributor.
A low NAV does not make one mutual fund cheaper than another. NAV shows the value of one unit, not whether the scheme is undervalued or likely to earn a higher return.
How Can Mutual Fund Units Be Redeemed?
Mutual fund units can be redeemed by submitting a request through the fund house or investment platform.
An investor can generally choose from the following redemption options:
- Redeem a specified amount
- Redeem a selected number of units
- Redeem the entire eligible holding
The redemption value depends on the applicable NAV and any exit load or tax liability. A lock-in period may restrict redemption until the specified period ends.
Conclusion
A mutual fund unit records an investor’s proportionate holding in a scheme. NAV shows the value assigned to each unit. The unit count alone does not show how well an investment has performed. Scheme risk, portfolio composition, costs, investment period, and changes in NAV must also be considered.
