Mutual Fund Units, Explained Simply

A mutual fund pools money from many investors. To keep track of who owns what share, the pool is divided into units. Each unit represents an equal share of the fund.

The value of one unit is the NAV. Our page on what NAV is explains how it is calculated every day.

When you invest, the fund divides your amount (after any stamp duty) by the applicable NAV. If you invest Rs 5,000 and the NAV is Rs 50, you get about 100 units. If the NAV is Rs 47.31, you get a number with decimals. These figures are only an illustration.

Units are usually allotted up to three decimal places, so the numbers look unusual but are precise.

The NAV used depends on when your money reaches the fund and whether it arrives before the cut-off time. Money that arrives after the cut-off gets the next working day NAV.

Our page on the cut-off time explains the rules.

With a SIP, you invest the same amount each month, but the NAV changes. When the NAV is low, you get more units. When it is high, you get fewer. Over time, your total units build up from all these purchases.

Our page on rupee cost averaging explains why this helps.

A common myth is that a fund with a low NAV is cheaper, because you get more units. But your value is units multiplied by NAV. Rs 10,000 in a fund with a low NAV and Rs 10,000 in a fund with a high NAV are both worth Rs 10,000 on day one.

What matters is how the NAV grows from there, not how many units you start with. Our page on mutual fund myths explains this in more detail.

Units go down when you redeem or switch out. If you redeem a rupee amount, the fund calculates how many units equal that amount at the current NAV and removes them from your folio.

Our page on the redemption process explains how this works.

When you redeem part of your holding, units are generally treated as sold on a first-in, first-out basis: the oldest units go first. This matters for exit loads and tax, which depend on how long each unit was held.

Our pages on exit load and mutual fund taxation explain why holding period matters.

In the growth option, your units stay the same unless you buy or sell. Any income the fund earns stays inside and raises the NAV. So your value grows through a rising NAV, not more units.

In the IDCW option, the fund may pay out some money to you. When it does, the NAV falls by roughly the amount paid. Your units stay the same, but each is worth a little less after the payout.

If you chose IDCW reinvestment, the payout buys more units instead. Our page on growth versus IDCW explains the difference.

In an ELSS, each batch of units has its own three-year lock-in from its purchase date. Your statement may show some units as free and others as locked.

Our page on lock-in periods explains how this works.

When you switch from one fund to another, the units in the first fund are redeemed, and the proceeds buy units in the second fund at its NAV. So your number of units will change, even though the value is similar.

Our page on switching mutual funds explains the costs to check.

Your account statement and consolidated account statement show the number of units in each folio, the NAV and the current value. Fund house and registrar apps show them too.

Our pages on the consolidated account statement and CAMS and KFintech explain where to look.

If two schemes are merged, your units in the old scheme are converted into units of the new one at a ratio based on their NAVs. The value stays the same; only the unit count changes.

Our post on what happens when a fund is merged or renamed explains this.

Exchange traded funds also have units, but you buy them on the stock exchange in whole numbers at market price, through a demat account. Our page on mutual funds versus ETFs explains the differences.

Suppose you invest the same amount every month for a year. In months when the NAV is lower, you get more units; when it is higher, fewer. At the end of the year, you might hold units bought at twelve different prices. Your total value is all those units multiplied by today NAV. These are illustrative ideas, not real figures.

Your statement also shows your average cost per unit. Comparing it with the current NAV gives a rough sense of gain or loss, though XIRR is the better measure for SIPs. Our page on XIRR explains why.

A small stamp duty is deducted from purchase amounts before units are allotted, so you may get very slightly fewer units than a simple division suggests. It is a tiny amount and applies to all funds.

• Units are your share of the fund.
• Units = amount divided by NAV.
• Value = units multiplied by NAV.
• Do not choose a fund for a low NAV or more units.

We are distributors rather than investment advisers and we recommend no schemes. If you want help reading your statement, get in touch.