What is a mutual fund?
A mutual fund is a trust that pools money from many investors and invests it in securities (shares, bonds, money-market papers). It is run by an asset management company (AMC). A fund manager decides what to buy and sell. A custodian keeps the securities safe, and a trustee checks that investors' interests are protected. Every fund is registered with the country's securities regulator (for example SEBI in India, SEC in the USA).
Each investor gets units in proportion to the money they put in.
NAV: the price of one unit
NAV (net asset value) per unit = (market value of assets − liabilities) ÷ number of units
Assets = market value of all shares and bonds + cash + income due. Liabilities = fees and expenses owed.
NAV is worked out at the end of every trading day. When you invest, units bought = amount ÷ NAV. When you sell (redeem), you get units × NAV (minus any exit load).
Example: assets ₹10,00,000, liabilities ₹20,000, units 98,000 → NAV = 9,80,000 ÷ 98,000 = ₹10.
Types of mutual funds
By what they buy:
- Equity funds: mostly shares. Higher risk, higher long-term growth. Includes large-cap, mid-cap, small-cap, sector and index funds.
- Debt funds: bonds and loans; steadier, lower return.
- Hybrid (balanced) funds: a mix of shares and bonds.
- Money-market / liquid funds: very short loans; very low risk.
By structure:
- Open-ended: buy or sell units any working day at NAV; no fixed end date.
- Closed-ended: units sold only at launch (NFO); fixed end date; traded on the stock exchange in between.
- Interval funds: open for buying/selling only at set intervals.
By goal: growth (gains stay invested) vs income/dividend (pays out regularly); tax-saving funds with a lock-in.
Features, benefits and costs
- Diversification: money spread over many assets, so one failure hurts less.
- Professional management: experts research and choose.
- Small amounts: start with a few hundred rupees; a SIP (systematic investment plan) invests a fixed sum every month.
- Liquidity: open-ended units can be sold any working day.
- Transparency and regulation: NAV daily, holdings published regularly.
Costs: expense ratio (yearly fee as a % of your money) and sometimes an exit load (fee if you sell too early).
Risks: returns are not guaranteed; NAV can fall when markets fall.
Key formulas and definitions
- NAV per unit = (Assets − Liabilities) ÷ Number of units
- Units bought = Amount invested ÷ NAV
- Value of holding = Units × current NAV
- Return (%) = (New NAV − Old NAV) ÷ Old NAV × 100
- Yearly cost = Investment × expense ratio
- Amount received on redemption = Units × NAV × (1 − exit load)
Worked examples
1. A fund has assets of ₹50,00,000 and liabilities of ₹1,00,000. It has 4,90,000 units. Find the NAV.
NAV = (50,00,000 − 1,00,000) ÷ 4,90,000 = 49,00,000 ÷ 4,90,000 = ₹10.
2. You invest ₹6,000 when NAV is ₹20. How many units do you get? If NAV later becomes ₹23, what is your holding worth and what is the return %?
Units = 6,000 ÷ 20 = 300. Value = 300 × 23 = ₹6,900. Return = (23 − 20) ÷ 20 × 100 = 15%.
3. A SIP of ₹1,000 a month buys at NAV ₹10, ₹8 and ₹12 in three months. Find total units and average cost per unit.
Units = 100 + 125 + 83.33 = 308.33. Money = ₹3,000. Average cost = 3,000 ÷ 308.33 ≈ ₹9.73 — lower than the simple average NAV of ₹10, because more units are bought when NAV is low.
4. You hold ₹1,00,000 in a fund with an expense ratio of 1.5%. What is the yearly cost?
Cost = 1,00,000 × 0.015 = ₹1,500 a year (taken out of the fund, so NAV is slightly lower).
5. You redeem 500 units at NAV ₹40 with a 1% exit load. How much do you receive?
500 × 40 = ₹20,000. Exit load = 1% = ₹200. You receive ₹19,800.
6. A fund's assets rise from ₹1 crore to ₹1.1 crore in a day with no new money and no change in units (10,00,000 units, liabilities nil). Find old and new NAV.
Old NAV = 1,00,00,000 ÷ 10,00,000 = ₹10. New NAV = 1,10,00,000 ÷ 10,00,000 = ₹11 (a 10% rise).
Common mistakes
- Thinking a low NAV fund is "cheaper" or better. NAV only tells unit price; what matters is how much the NAV grows.
- Believing mutual fund returns are guaranteed. Equity fund NAVs can fall.
- Forgetting liabilities when working out NAV.
- Mixing up open-ended (buy/sell any day from the fund) and closed-ended (fixed units, traded on the exchange).