Units

What is Units in Mutual Funds?

In the context of mutual funds, a unit represents an investor's share of ownership in the mutual fund. When investors contribute money to a mutual fund, their investment is converted into units based on the fund's Net Asset Value (NAV) at the time of purchase. Each unit reflects a proportional ownership stake in the fund's total assets, which include a diverse range of securities such as stocks, bonds, and other financial instruments.

How Mutual Fund Units Work?

Investment Calculation: When an investor invests in a mutual fund, the number of units they receive is determined by dividing the investment amount by the NAV. For example, if an investor puts in ₹1,000 into a mutual fund with an NAV of ₹50, they will receive 20 units (calculated as ₹1,000 / ₹50).

Valuation and NAV Calculation

NAV = (Total Assets − Total Liabilities)/Total Outstanding Units

This calculation is typically done at the end of each trading day to reflect current market conditions:

Buying and Selling Units of Mutual Funds

Investors can buy additional units at the current NAV or sell their existing units back to the fund at that same NAV. This process allows for flexibility in managing investments based on market conditions.

Types of Mutual Fund Units

1. Open-Ended Funds: These funds continuously issue new units and allow investors to buy or redeem units at any time based on the prevailing NAV. There is no limit to the number of units that can be created.
2. Closed-Ended Funds: In contrast, closed-ended funds have a fixed number of units available for subscription during an initial offering period. Once all units are sold, no new units are issued until a new offering is made. These units are typically traded on stock exchanges.

Benefits of Investing in Mutual Fund Units

• Diversification: By investing in mutual fund units, investors gain exposure to a diversified portfolio without needing to purchase individual securities directly.
• Professional Management: Mutual funds are managed by professional fund managers who make investment decisions based on research and market analysis.
• Accessibility: Investors can start with relatively small amounts (often as low as ₹500) to purchase mutual fund units, making it accessible for various investor profiles.