What are Mutual Fund Units?

If you plan to invest in a mutual fund, it is imperative for you to know what mutual fund units are. Units represent an investor’s ownership stake in a mutual fund and serve as the vehicle through which individuals can participate in the fund's performance.

This article aims to explore the mutual fund unit definition, how their prices work, and how they are calculated.

Things to know about Mutual Fund Units
How does a mutual fund unit price work?
How mutual fund units are calculated
How can mutual funds units be purchased?
How to redeem mutual fund units

Things to know about Mutual Fund Units

Mutual fund units indicate your ownership in a mutual fund scheme’s portfolio. When you invest in a mutual fund, units are allocated to you based on the Net Asset Value (NAV) per unit at the time of your investment.

The NAV is calculated by subtracting the fund’s liabilities from the market value of its assets and dividing the result by the total number of outstanding units. NAV changes daily, reflecting the value of the underlying investments. Knowing how units work helps in understanding how your investment may grow over time.

Key points about mutual fund units:

Purchase and redemption: Units are bought when you invest and returned to the fund when you redeem your investment.
Impact of NAV: The number of units allotted for a specific investment amount depends on the NAV at that time. For a fixed amount (eg: Rs. 500), a lower NAV would fetch more units and a higher NAV would fetch fewer.
Investment value:The value of your investment is calculated by multiplying the total units held with the current NAV.
IDCW payout: If the scheme releases payouts under the Income Distribution cum Capital Withdrawal option, these are distributed on a per-unit basis.

How does a mutual fund unit price work?

Mutual fund units are issued by companies according to the amount of money invested by investors. The price of a mutual fund unit, often referred to as the Net Asset Value (NAV) per unit, is crucial to determining the fund's value and potential investor returns.

The NAV represents the per-unit market value of the mutual fund's assets minus its liabilities and expenses divided by the number of outstanding units. It is calculated at the end of each trading day based on the closing prices of the fund's underlying securities.

The NAV may fluctuate daily based on changes in the market value of the fund's underlying assets. Factors such as the performance of the stock or bond markets, changes in interest rates, and portfolio management decisions can all impact the NAV of a mutual fund.

How mutual fund units are calculated

The calculation of mutual fund units involves two primary components – the NAV per unit and the amount invested by the investor. When an investor purchases mutual fund units, the number of units allocated to them is determined by dividing the investment amount by the NAV.

For example, if an investor wishes to invest Rs 5,000 in a mutual fund with an NAV of Rs. 10, they would be allocated 500 units (Rs. 5,000 divided by Rs. 10). Similarly, if an investor wants to redeem from their mutual fund, the number of units redeemed is determined by dividing the redemption amount by the NAV per unit.

How can mutual funds units be purchased?

Mutual fund units can be purchased in two ways – through a lump-sum investment or through systematic investment plans (SIPs). In an SIP, investors contribute a fixed amount at regular intervals, allowing them to benefit from rupee-cost averaging and potentially reduce the impact of market volatility on their investments.

Furthermore, trading and holding mutual fund units may be subject to certain fees and expenses, such as management fees, administrative costs, etc. These expenses are deducted from the fund's assets and may impact the NAV per unit over time.

How to redeem mutual fund units

Redeeming mutual fund units means selling them back to the fund house in exchange for your investment amount and any potential gains. This process is usually simple and can be carried out through multiple channels in India.

Ways to redeem mutual fund units:

If you have invested through a distributor, you can ask them to initiate the redemption on your behalf. They may do this either online or offline. If you have invested directly with the mutual fund house, you can redeem units in the following ways:

Online redemption:

Through AMC website or app:Log in to the Asset Management Company’s (AMC) platform and go to the ‘Redeem’ or ‘Sell’ section.

Via investment platforms:If you used an online investment platform, log in there to initiate the redemption.

Choose the scheme and indicate whether you want to redeem specific units or a fixed amount. Confirm the request, usually through OTP or other verification.

Offline redemption:

Through AMC or RTA offices: Visit the mutual fund house or a Registrar and Transfer Agent (RTA) like CAMS or KFin Technologies.

Fill in and submit a redemption request form with details such as folio number, scheme, and the units or amount to redeem.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.

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