When an investor invests in a mutual fund scheme, the money becomes part of the scheme’s pooled assets. The scheme invests that money according to its stated investment objective and strategy. The investor participates in the scheme through units rather than directly holding each security in the portfolio.
What happens when you invest in a mutual fund?
A mutual fund brings together money from multiple investors and invests the pooled money according to the scheme’s mandate. The underlying portfolio may contain different securities or asset classes depending on the type and objective of the scheme.
- Investors contribute money to the scheme.
- The scheme pools money from multiple investors.
- The pooled money is invested according to the scheme objective and strategy.
- Investors receive units representing their holding in the scheme.
- The value of those units changes as the value of the underlying investments changes.
A simple example
Suppose a mutual fund scheme receives money from many investors. The pooled money may then be invested across securities according to the scheme’s mandate. Your investment represents a proportionate holding in the scheme through units.
What are mutual fund units?
Units represent an investor’s holding in the mutual fund scheme. The number of units received depends on the amount invested and the applicable NAV under the relevant transaction rules.
Definition
Definition
A mutual fund unit represents an investor’s proportionate holding in the scheme. The value of that holding changes as the value of the scheme’s underlying investments changes.
How does NAV work?
NAV stands for Net Asset Value. At a basic level, NAV represents the per-unit value of the scheme. A simplified way to understand it is: NAV = Net assets of the scheme ÷ Number of units.
The actual calculation and valuation follow the applicable regulatory and scheme framework. A change in the value of securities held by the scheme can therefore affect its NAV.
Where does the investor’s money go?
The answer depends on the scheme. A scheme may invest in different securities or asset classes according to its stated objective and strategy.
- Equity securities
- Debt and money-market instruments
- A combination of asset classes
- Other permitted investments according to the scheme mandate
Information
Important point
The portfolio follows the scheme mandate. Investors should understand what the scheme is designed to invest in before considering an investment.
Who manages the portfolio?
The portfolio is managed within the asset management company’s investment management framework and according to the scheme’s stated objective, applicable regulations, and disclosures.
Investors should read the relevant scheme documents rather than assuming that all mutual funds are managed in the same way.
What happens when you buy units?
The purchase process involves the applicable transaction mechanism and rules. The number of units allotted depends on the investment amount and applicable NAV, subject to the relevant cut-off time, transaction rules, and scheme terms.
Information
Important point
The NAV seen during the day should not automatically be treated as the NAV applicable to every transaction. Applicable cut-off and transaction rules should be checked for the relevant scheme.
What happens when you redeem?
When an investor redeems units, the units are redeemed according to the applicable process and the investor receives redemption proceeds based on the applicable NAV and scheme terms.
The amount received may also be affected by applicable charges, taxes, exit load where applicable, and other relevant rules.
What happens when markets move?
If the market value of securities held by a scheme changes, the value of the scheme’s portfolio can change. This can affect NAV and therefore the value of an investor’s holding.
Example
The basic mechanism
Market movement → Portfolio value changes → Scheme NAV changes → Value of investor’s holding changes.
Does a mutual fund create guaranteed returns?
No. A mutual fund is a market-linked investment vehicle. The outcome depends on the underlying investments and the period for which the investor remains invested. Past performance does not guarantee future performance.
Warning
Risk Alert
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Why can two mutual funds behave differently?
- Investment objectives may differ.
- Asset allocation may differ.
- Portfolio holdings may differ.
- Risk characteristics may differ.
- Investment strategies may differ.
- The intended investment horizon may differ.
Because of these differences, comparing mutual funds only by their recent returns can give an incomplete picture.
What should an investor understand before investing?
- What the scheme is designed to do.
- What it invests in.
- What risks it carries.
- What time horizon may be appropriate.
- What liquidity conditions apply.
- What costs and charges may apply.
- Whether the investment fits the investor’s goals and overall financial situation.
Summary
Editorial summary
A mutual fund is a process, not just a product. Money is pooled, invested according to a defined mandate, represented through units, valued through NAV, and affected by changes in the underlying portfolio. Understanding this mechanism gives investors a stronger foundation for evaluating different mutual fund categories later.