Mutual fund investments are one of the most popular ways to invest in the stock market. These funds collect money from multiple investors and use it to purchase securities ranging from equity shares to debt instruments. Since these funds invest in various securities, they naturally offer diversification and may even reduce market risk to a certain extent. This is one of the many reasons why most investors generally prefer to invest in mutual funds.
If you, like many other investors, plan to invest in a mutual fund, you need to be aware of the various terms associated with it. In this article, we’re going to look at the meaning of mutual fund units, how the price of a unit of a mutual fund is calculated and how they differ from equity shares.
What is a Unit in a Mutual Fund?
A unit in a mutual fund represents a share of ownership in the fund. When you hold units of a mutual fund, you essentially own a portion of the fund’s assets. That said, it is important to clarify that mutual fund units only represent the ownership in the fund and not in the fund’s underlying securities.
For example, let’s assume that a mutual fund invests 30% of its assets in debt instruments, 20% in company A, 20% in company B and 30% in company C. Now, if you purchase a unit of such a fund, you will own a portion of all of the fund’s assets in the above-mentioned percentage.
In the case of an open-ended mutual fund, there’s no limit to the maximum number of units that can be created. Mutual fund houses create more units as and when a new investor subscribes to the fund. In the case of close-ended mutual funds, however, there’s a maximum number of units. Once all of the stipulated units have been subscribed to, the issue is closed, and no further subscriptions from investors are entertained.
How Does a Mutual Fund Unit Price Work?
Now that you’re aware of the meaning of mutual fund units, let’s take a look at how their value is determined.
Similar to equity shares, each unit of a mutual fund is assigned a value. The value, known as the Net Asset Value or NAV, is determined using the following mathematical formula.
| Net Asset Value = [(Total Value of Assets in the Fund – Total Value of Liabilities in the Fund) ÷ Total Number of Units in the Fund] |
Here’s an example to help you understand how the price of a mutual fund unit works.
Assume that a mutual fund holds ₹200 lakh worth of assets in the form of equity and debt instruments. The fund’s total liabilities, including all possible expenses such as administrative expenses, fund manager’s fees and marketing and commission costs, come up to around ₹20 lakh. The total no. of units in the mutual fund as of the date of calculation is 4 lakh.
Substituting these values in the above-mentioned formula should give you the Net Asset Value or value per mutual fund unit.
Net Asset Value = ₹45 per unit [(₹200 lakh – ₹20 lakh) ÷ ₹4 lakh]
The Net Asset Value of a mutual fund doesn’t remain the same throughout. In fact, it fluctuates based on the changes in the value of the fund’s underlying assets. For instance, if the value of the fund’s underlying securities increases, the NAV of the fund is also likely to increase. On the contrary, if the value of the fund’s securities decreases, the NAV of the fund may also decrease.
Furthermore, as per the Securities and Exchange Board of India (SEBI), every mutual fund house is mandatorily required to calculate and publish the NAV of their funds at the end of every trading day.
How to Purchase Mutual Fund Units?
As an investor, you need to know how to purchase units of a mutual fund. Here’s a quick overview of the process you need to follow.
- Step 1: Open a demat on Angel One.
- Step 2: Log into your trading account using your user credentials.
- Step 3: Navigate to the mutual funds section of the portal.
- Step 4: Search for the mutual fund that you would like to invest in.
- Step 5: Place a buy order for the number of units you would like to purchase. Before placing the order, check if you have the requisite amount in your trading account.
Once the purchase order is executed successfully, the number of mutual fund units you purchased will be credited to the linked demat account.
Alternatively, you can also purchase units of a mutual fund even if you don’t have a demat and trading account. In such cases, you must fill out and submit a physical subscription form along with the necessary documentary evidence and the amount you wish to invest with the mutual fund house. Once the application is verified and processed, you will be allotted the mutual fund units and receive a Consolidated Account Statement (CAS) with the details of your investment.
Now, before you head out to purchase units of a mutual fund, there’s another major factor you need to consider, which is the Net Asset Value. The NAV at which the mutual fund units are allotted to you is dependent on whether the funds are transferred to the fund house before or after the mutual fund cut-off time.
If the funds are transferred to the mutual fund house before the stipulated cut-off time, the units will be allotted at the previous day’s NAV. On the other hand, if the funds are transferred to the mutual fund house after the stipulated cut-off time, the units will be allotted at the current day’s NAV, which is calculated only at the end of the trading session.
Difference between Equity Shares and Mutual Fund Units
At the outset, equity shares and mutual fund units might seem to share a lot of similarities. However, they also have their fair share of differences. Here’s a table outlining some of the key differences between the two.
| Particulars | Equity Shares | Mutual Fund Units |
| Ownership | Represents ownership in a company | Represents ownership in a mutual fund’s portfolio of securities |
| Diversification | Since equity shares belong to a particular company, there’s no diversification | Since mutual funds invest in a basket of different securities, there’s diversification |
| Investment Risk | Investment risk is usually higher with equity shares | Investment risk is usually lower due to the diversified nature of mutual funds |
| Voting Rights | Offer voting rights to the holder | Don’t offer any kind of rights to the holder |
| Volatility | Equity shares can be highly volatile | NAV of mutual fund units are not as volatile as equity shares |
| Liquidity | Liquidity can vary from one company to another | Mutual fund units are generally liquid and can be redeemed at any point in time |
Conclusion
With this, you must now be aware of what a unit in a mutual fund is and how its value is determined. Now, if you’re planning to invest in a fund, keep in mind that the NAV that’s allotted to you can vary depending on when you transfer the funds to the mutual fund house.
If you wish to get units at the previous day’s NAV, remember to ensure that the funds are transferred to the mutual fund house before the stipulated cut-off time for the fund. Otherwise, you will be allotted units at the current day’s NAV, which is calculated only after the trading day closes.
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FAQs
How is the value of a mutual fund unit determined?
The value of a mutual fund unit, also called the Net Asset Value (NAV), can be found by subtracting the total value of the liabilities incurred by the fund from the total market value of the assets held by the fund. Next, the resulting figure is divided by the total number of outstanding mutual fund units to calculate the NAV per unit.
Can the value of a mutual fund unit change?
Yes, the value of a mutual fund unit (NAV) can change if there are any fluctuations in the market value of the fund’s underlying securities. For instance, if the market value of the fund’s underlying securities goes up, the NAV of the fund may also rise and vice versa.
What is the minimum number of units I can purchase in a mutual fund?
The minimum number of units you can purchase in a mutual fund varies depending on factors like the minimum investment limit and the NAV of the fund. Since different funds have different limits, it is advisable to read through the offer document thoroughly before investing.
Are there any fees associated with buying or selling units in a mutual fund?
Yes, you will be levied certain charges when you purchase or redeem mutual fund units. Expense ratio and transaction fees are two of the most common fees that may be levied when you purchase units, whereas exit load and redemption fees may be levied when you redeem mutual fund units.
How often is the NAV of a mutual fund calculated?
According to the directives of the Securities and Exchange Board of India (SEBI), the Net Asset Value of a mutual fund is calculated and published after the end of every trading day.
