Mutual fund investments: How is the NAV of schemes calculated

A mutual fund is a pool of money professionally managed by money managers. They collect money from investors to buy securities like stocks, bonds and money market instruments. It provides individual investors with access to diverse, professionally managed portfolios. Mutual funds give an economical option to participate in a diverse range of stocks without incurring transaction costs for each stock held. These funds are usually better suited for long-term investors.

What is a unit in a mutual fund?

Mutual fund units are calculated based on the Net Asset Value of the fund. When you invest in a mutual fund, your money is converted into units at the fund’s Net Asset Value (NAV) at the time of purchase. The value of each unit is calculated by dividing the mutual fund scheme’s Net Asset Value (NAV) by the total number of outstanding units.

For example, if a mutual fund scheme’s total assets minus any liabilities are ₹ 1,00,00,000, and there are 1,000,000 units outstanding. The NAV for each unit would be ₹ 10 (₹ 1,00,00,000 divided by 1,00,000). If you deposit ₹ 10,000 in this mutual fund plan, you will earn 1,000 units (₹ 10,000 divided by ₹10).

The NAV per unit fluctuates in line with the value of the mutual fund’s assets, representing the performance of the underlying investments. The units of mutual funds are bought and sold based on the current NAV.

How does a mutual fund unit price work?

Understanding how mutual fund unit pricing functions is critical for investors. Mutual fund units are allocated at the NAV on the day the application is processed. A mutual fund’s value is equal to the sum of all of its securities. Thus, the price of one unit is a fraction of the overall value, calculated by dividing the total value by the number of outstanding units. This value per unit is known as the Net Asset Value (NAV). It is determined by subtracting any liabilities from the total value of assets and dividing by the number of unit holders.

The asset component of mutual funds covers the cumulative market value of the fund’s investments, receivables, cash, cash equivalents, and other accrued income.

When calculating net asset value for mutual funds, the liabilities portion includes outstanding payments, money owed to lenders, and other charges owed to associated companies.

How to purchase mutual fund units?

Investors can buy mutual fund units through a variety of methods, including online mutual fund platforms, brokers or Registered Distributors. They can make investments in lump sums or systematic investment plans (SIPs).