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.

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.

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