Mutual Fund Units - Calculations & How does it Work?

When you put money in a mutual fund, you do not buy the company’s shares directly. You buy units of the fund. A mutual fund is like a box that holds many things—stocks, bonds, cash, and other assets. Many investors put money into the same box. The fund manager uses this money to buy and manage the investments. Your part of the box is shown as units. The price of one unit is called NAV (Net Asset Value). NAV changes every trading day because the value of the items inside the box changes every day.

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This system makes investing easy for everyone. You do not need to pick many shares or bonds yourself. You buy units of a fund that already has a ready mix. If the fund’s total value goes up, your unit value also goes up. If it goes down, your unit value also goes down. In this guide, we will explain units and NAV in very simple words. We will also show how buying and selling work, how SIPworks, and how to do small calculations. In the end, you will know the basics to start calmly and safely.

What Is a Mutual Fund Unit?

A mutual fund unit is your slice of the fund’s total pie. The fund holds many investments. The total pie is the total value of all those investments after subtracting the fund’s small costs. This total value is divided into equal parts called units. When you invest, you get some of these units. Your total holding equals number of units × NAV.

Units help the fund keep fair records for thousands or even millions of investors. If you buy more, your unit count goes up. If you sell some, your unit count goes down. The fund itself may issue new units when people put money in, and it may “cancel” units when people take money out. This keeps the system flexible.

One more point: units do not give you direct voting rights in the companies the fund owns. The fund house and the fund manager handle those things. Your job is to choose the right fund, invest for your goal, and track your value by looking at your units and the NAV. Units make it simple to see how much of the fund you own at any time.

What Is NAV and How Is It Found (in simple words)?

NAV (Net Asset Value) is the price of one unit of a mutual fund. It is like the MRP for a product, but it changes every trading day. In simple words, imagine the fund lists all its assets—shares, bonds, cash—and subtracts what it owes—small fees or payables. The result is the net value. Then the fund divides this net value by the total number of units that exist. The answer is the NAV per unit.

You do not need to do this math yourself. The fund house publishes NAV daily. When markets go up, the value of the fund’s holdings can rise, so NAV may go up. When markets fall, NAV may fall. For debt funds (which hold bonds), NAV moves mainly with interest rates and bond prices. For equity funds (which hold shares), NAV moves with stock prices.

Remember, a low NAV does not mean “cheap” and a high NAV does not mean “expensive.” NAV is only the per-unit price. What matters more is the quality of the fund, its long-term record, costs (expense ratio), and whether the fund matches your goal and risk level. Think of NAV as the meter reading; the road quality and the driver skill still matter a lot.

How Buying Units Works (Lump Sum and SIP)

When you buy units, the number of units you get is based on the amount you invest and the applicable NAV for that day (after cut-off time rules, which the fund house follows). The simple rule is:

Units Allotted = Amount Invested ÷ NAV
(If there are any small charges or stamp duty, the final units may be a little less.)

Lump Sum: You invest a single amount at one time. If the NAV is ₹20 and you invest ₹10,000, you get 10,000 ÷ 20 = 500 units. Your value on that day is 500 × 20 = ₹10,000. If NAV rises to ₹22 later, your value becomes 500 × 22 = ₹11,000.

SIP (Systematic Investment Plan): You invest a fixed amount every month (or week). Each time, the NAV can be different, so the units you get each time are different. When NAV is lower, you get more units; when NAV is higher, you get fewer units. Over time, this helps average your cost and keeps you disciplined. SIP is popular for salary earners and new investors because it is simple and steady.

You can also set auto-debit for SIP from your bank. This makes it easy to keep investing regularly without stress. Just choose a comfortable amount, a date, and a good fund, and let it run for your long-term goals.

How Selling (Redemption), STP and SWP Work

When you sell your units, the money you get equals number of units sold × NAV on the applicable day, minus any exit load if it applies. Some funds have an exit load for selling too soon (for example, before one year). This is to encourage longer holding. Always read the fund factsheet to know the rules.

If your fund has a lock-in (like some tax-saving funds), you cannot sell before the lock-in period ends. After that, you can sell anytime. For many open-ended funds, there is no lock-in, but do check the exit load period.

There are also two helpful tools:

• STP (Systematic Transfer Plan): You move money from one scheme to another inside the same fund house in a planned way. For example, from a liquid fund to an equity fund every month. This can help you spread entry over time.
• SWP (Systematic Withdrawal Plan): You withdraw a fixed amount regularly, like monthly income. The fund redeems enough units to give you that amount. SWPis useful for retirees or anyone who wants steady cash flow from their investment.

For taxes, selling can lead to capital gains tax based on fund type and how long you held. Check the latest rules or ask a tax advisor before big redemptions.

Simple Calculations You Should Know

A) Lump Sum Units:

• Invested: ₹12,000
• NAV on allotment: ₹24
• Units = 12,000 ÷ 24 = 500 units
  If NAV later becomes ₹27 → value = 500 × 27 = ₹13,500. Your gain before taxes and loads is ₹1,500.

B) SIP Units Over Three Months:

• Month 1: Invest ₹1,000 at NAV ₹20 → 50 units
• Month 2: Invest ₹1,000 at NAV ₹25 → 40 units
• Month 3: Invest ₹1,000 at NAV ₹20 → 50 units
• Total units = 140; total amount = ₹3,000
  If current NAV = ₹22 → value = 140 × 22 = ₹3,080. Your simple gain is ₹80 before any exit load or tax.

C) Partial Redemption:

You hold 600 units. You need ₹5,000 now. Current NAV is ₹25.
Units to sell = Amount ÷ NAV = 5,000 ÷ 25 = 200 units.
After selling 200 units, you still hold 400 units.

D) Understanding Expense Ratio (in simple words):

The fund charges a small yearly fee (expense ratio) for managing the scheme. This is already adjusted inside the NAV. You do not pay it separately. A lower expense ratio, with other things equal, helps your long-term returns. Do not chase only the lowest fee; also see performance history, risk level, and the fund manager’s style.

Tips and Common Beginner Mistakes to Avoid

Start with goals: Do you want long-term growth, steady income, or a mix? Choose funds that match your goal and risk level. Equity funds can grow more but move up and down more. Debt funds are steadier but may grow slower.

Do not judge by NAV alone: A low NAV does not mean the fund is “cheap”; a high NAV does not mean it is “costly.” NAV is just the per-unit number. Focus on fund quality, track record, expense ratio, and whether it suits your time horizon.

Be regular and patient: SIP helps build a habit. Markets will go up and down. If your goal is far away, stay calm and let compounding work. Try not to stop SIPs due to short-term fear.

Read exit load and tax rules: Selling too early may cost an exit load. Also, taxes apply on gains when you sell. Knowing the rules saves money and stress.

Don’t over-diversify: Holding too many funds can become messy. A simple, clean set (for example, 1–3 core funds for most beginners) is easy to track.

Review once in a while: Check once or twice a year. If a fund keeps underperforming for long, consider switching to a better option. If your goal or risk level changes, adjust your plan. Keeping things simple and steady is the best way for most new investors.