Mutual fund units are like the bricks of mutual funds. Knowing about mutual fund units is crucial if you're thinking about investing in mutual funds.
This article explains everything from the basics of mutual fund units to how they are priced and given out. It is written in a simple way to help you understand even if you are new to investing. Whether you are just starting out or want to know more about mutual funds, this guide will give you the information you need to feel confident about investing in mutual funds.
What is a unit in a mutual fund?
A unit of a mutual fund represents an investor's ownership in the mutual fund scheme. When you invest in a mutual fund, you essentially buy units of the fund. Each unit represents a portion of the total assets held by the mutual fund scheme. The value of each unit is determined by dividing the net asset value (NAV) of the mutual fund scheme by the total number of units outstanding.
For example, let us say a mutual fund scheme’s total assets minus any liabilities is Rs. 1,00,00,000 and there are 1,00,000 units outstanding. The net asset value (NAV) per unit would be Rs. 10 (Rs. 1,00,00,000 / 1,00,000 = Rs. 10). If you invest Rs. 10,000 in this mutual fund scheme, you would receive 1,000 units (Rs. 10,000 / Rs. 10 = 1,000 units).
As the value of the mutual fund's assets changes, so does the NAV per unit, reflecting the performance of the underlying investments. Investors can buy or sell units of the mutual fund based on the current NAV.
Different mutual fund categories for smart investing
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How does a mutual fund unit price work?
Understanding how mutual fund unit prices work is essential for investors. Each mutual fund is like a basket of different securities, and each unit represents a small part of that basket.
The value of a mutual fund is the total of all the securities it holds. So, the price of one unit is a fraction of that total value, determined by dividing the total value by the number of outstanding units.
This value per unit is called the Net Asset Value (NAV). It is calculated by subtracting any liabilities from the total value of assets and dividing by the number of unit-holders.
| NAV Formula = (Total value of assets – Total value of liabilities)/Number of unit-holders. |
For example, suppose the fund manager of XYZ Mutual Fund invests Rs. 15 lakh in stock A, Rs. 25 lakh in stock B, Rs. 5 lakh in corporate bonds, Rs. 30 lakh in government bonds, Rs. 10 lakh in stock C, Rs. 5 lakh in stock D, Rs. 8 lakh in cash derivatives, and Rs. 7 lakh in treasury bills. Additionally, the mutual fund carries a liability of Rs. 5 lakh.
Therefore, the total value of XYZ Mutual Fund would be Rs. (15 + 25 + 5 + 30 + 10 + 5 + 8 + 7 - 5) lakh, which equals Rs. 1 crore.
Now, let us say the number of holders are 1 lakh. So, the NAV of XYZ fund is equal to Rs. (1,00,00,000/1,00,000) or Rs. 100.
NAV is calculated at the end of each trading day, and it helps investors track the fund's performance over time.
How mutual fund units are calculated? See example
Mutual fund units are calculated based on the Net Asset Value (NAV) of the fund on the day of purchase. The NAV represents the per-unit market value of all the assets held by the fund, minus liabilities, and is calculated daily. To determine the number of units an investor will receive, the investment amount is divided by the NAV.
For instance, if an investor wants to invest Rs. 10,000 in a mutual fund with a NAV of Rs. 50, the calculation would be as follows:
NAV Formula = (Total value of assets – Total value of liabilities)/Number of unit-holders.
Number of Units = (10,000/50) = 200
Thus, the investor will receive 200 units of the mutual fund. It is important to note that there may be additional charges such as entry load, which can slightly affect the number of units allotted. In India, mutual fund units are allotted at the NAV of the day the application is processed, making it essential to consider market hours and fund cut-off timings. This straightforward calculation enables investors to understand their holdings and track their investment value over time.
Things to know about mutual fund units
- Mutual fund units represent ownership stakes in the mutual fund portfolio.
- The value of mutual fund units fluctuates based on the performance of the underlying securities.
- Mutual fund units are priced based on the Net Asset Value (NAV) of the fund.
- NAV is calculated by dividing the total value of the fund's assets minus liabilities by the number of outstanding units.
- Investors can purchase or redeem mutual fund units at the NAV price.
- Mutual fund units are offered in different classes, such as growth, dividend, each with its own fee structure and benefits.
- Mutual fund units can be held directly through a fund company or indirectly through a brokerage account.
How to purchase mutual fund units?
- Investors can purchase mutual fund units through various channels like online mutual fund platforms or brokers like the Bajaj Finserv Platform, Asset Management Companies or AMCs, or Registered Distributors.
- They can invest either through lump sum investments or systematic investment plans (SIPs).
How to redeem mutual fund units?
Redeeming mutual fund units in India involves selling the units back to the fund house. This can be done online through the mutual fund's website, the investor's account on the fund distributor's platform, or physically by submitting a redemption form at the fund house or an authorised centre.
To redeem online, log in to your account, select the fund and number of units to redeem, and confirm the transaction. The fund house will process the request, and the redemption amount, based on the current Net Asset Value (NAV), will be credited to your bank account within a few business days.
For physical redemption, fill out and submit the redemption form, specifying the number of units or amount to redeem. The process is similar, with the proceeds credited to your bank account.
Always check for any exit load charges or taxes that may apply before redeeming your units.
How to sell mutual fund units?
To sell mutual fund units in India, log in to your online investment account on the fund house or distributor’s platform. Select the mutual fund you wish to sell, specify the number of units or amount, and confirm the transaction. The fund house will process the request at the prevailing Net Asset Value (NAV), and the proceeds will be credited to your bank account within a few business days.
Alternatively, you can sell units by submitting a physical redemption form at the fund house or an authorised centre. Check for any applicable exit load charges or taxes before proceeding.
Difference between equity shares and mutual fund units
Equity shares represent ownership in a specific company, while mutual fund units represent ownership in a mutual fund scheme comprising various securities. Mutual fund units offer diversification and professional management, unlike equity shares, which are subject to individual company performance.
| Factors | Equity shares | Mutual fund units |
| Ownership | Represents ownership in a specific company. | Represents ownership in a mutual fund portfolio. |
| Diversification | Limited diversification, focused on one company. | Offers diversified investment across various securities. |
| Risk | Higher risk due to exposure to single company performance. | Lower risk due to diversification across multiple securities. |
| Management | No professional management, dependent on company's performance. | Professionally managed by fund managers. |
| Volatility | Subject to higher volatility based on company-specific factors. | Subject to lower volatility due to diversified portfolio. |
| Dividends | Receive dividends declared by the company. | Receive dividends distributed by the mutual fund if you invest in IDCW plan. |
Conclusion
Understanding mutual fund units is essential for investors as these units represent ownership stakes in the mutual fund portfolio and their value fluctuates based on the performance of the underlying securities. With various classes of mutual fund available, investors have options to suit their financial goals and risk tolerance. By understanding the fundamentals of mutual fund units, investors can make informed decisions and effectively manage their investment portfolios.
