Arvind Kulkarni (an illustrative profile) is 28, works at an IT company in Pune and has ₹1.5 lakh sitting in his savings account. A colleague tells him to buy a new fund "because its NAV is only ₹10, so you get more units". Another friend warns him that mutual funds are "like gambling" and that the fund house could disappear with his money.
Both pieces of advice are confused, and this chapter clears them up. Before you compare a single fund, you need to understand what you are actually buying, who is holding your money, and how the price of a unit is set.
In this chapter
- What a mutual fund is, and why pooling money helps small investors
- Who the AMC, trustee, custodian and registrar are, and how they protect you
- How NAV is calculated, with a worked example
- Why a "low NAV" is not a reason to buy, and how buying and redeeming work in practice
The pooling idea: one big basket instead of many small ones
Suppose you want to own a slice of fifty large Indian companies. With ₹10,000, you could not even buy one share of some of them, and tracking fifty separate holdings would be a headache. A mutual fund solves this by pooling money from thousands of investors into one large basket, which a professional fund manager invests according to a stated plan.
Think of it like a housing society hiring one security agency instead of each flat hiring its own guard. Everyone shares the cost, everyone gets a better service than they could afford alone, and the rules of the arrangement are written down in advance. In a mutual fund those rules are the scheme mandate, the written statement of what the fund may and may not invest in.
Each investor owns a share of the basket in proportion to what they put in. If you own 1% of the fund's units, you own 1% of everything in it, after costs.
Who is who, and why your money is protected from the fund house
Arvind's friend worried that the fund house could "run away" with the money. Indian mutual funds are deliberately structured so that this is very hard. A mutual fund is set up as a trust, and the money belongs to the unitholders, not to the company that manages it.
| Entity | What it does | Why it matters to you |
|---|---|---|
| Sponsor | Sets up the mutual fund, much like a promoter | Must meet SEBI's eligibility and net-worth conditions |
| Trustees | Oversee the AMC on behalf of investors | An independent check that rules are being followed |
| Asset Management Company (AMC) | The fund house that runs schemes and employs fund managers | Makes investment decisions within the mandate |
| Custodian | Holds the fund's shares and bonds in safekeeping | Assets are kept separate from the AMC's own balance sheet |
| Registrar (RTA) | Keeps records of who owns how many units | Sends your account statements and processes requests |
| SEBI | The securities market regulator | Sets rules for categories, pricing, costs and disclosure |
This structure protects you against misuse of money by the fund house. It does not protect you against market risk. If share prices fall 20%, an equity fund holding those shares will also fall. Keep these two ideas apart: "is my money safe from fraud?" and "can my investment lose value?" have very different answers.
Units and NAV: how the price of a fund is set
When you invest, you buy units of the fund. The NAV, or Net Asset Value, is the price of one unit. Unlike a share on the stock exchange, it does not move second by second with buyers and sellers. It is calculated once at the end of each business day from the market value of what the fund owns.
NAV formula: NAV = (market value of all investments + cash − liabilities and accrued expenses) ÷ number of units outstanding.
Worked example: calculating NAV and units. Assume an illustrative fund at the end of a trading day:
- Market value of shares held: ₹101 crore. Cash: ₹2 crore. Liabilities and expenses owed: ₹1 crore.
- Net assets = ₹101 crore + ₹2 crore − ₹1 crore = ₹102 crore.
- Units outstanding: 5 crore. NAV = ₹102 crore ÷ 5 crore = ₹20.40.
- Arvind invests ₹50,000. Stamp duty of 0.005% (₹2.50) is deducted, so ₹49,997.50 is invested.
- Units allotted = ₹49,997.50 ÷ ₹20.40 = about 2,450.86 units.
- If the portfolio later rises 15%, the NAV becomes ₹23.46, and Arvind's holding is worth 2,450.86 × ₹23.46 = about ₹57,497.
Notice that Arvind's money rose by exactly the same 15% as the portfolio. That is the whole point: a unit is simply a slice of the basket.
The "low NAV" myth
Now to the colleague's claim that a ₹10 NAV fund is a bargain. NAV mostly reflects how long a fund has existed and how its portfolio has performed since launch, because most funds start at ₹10. A high NAV usually means an older fund that has grown, not an expensive one.
| Fund A | Fund B | |
|---|---|---|
| NAV on the day you invest | ₹12 | ₹240 |
| Units for ₹1 lakh | 8,333.33 | 416.67 |
| Portfolio rises 12%; new NAV | ₹13.44 | ₹268.80 |
| Value of your investment | ₹1,12,000 | ₹1,12,000 |
Getting more units is like cutting a pizza into more slices; you do not get more pizza. Compare funds on their mandate, portfolio, risk, cost and consistency. A new fund offer (NFO) at ₹10 is not cheaper than an established fund in the same category, and it has no track record for you to examine.
How buying and redeeming actually work
Most retail investors use open-ended funds, which issue and buy back units on every business day at that day's NAV. Closed-ended funds accept money only during the initial offer and then trade on a stock exchange, where liquidity can be thin. Interval funds allow transactions only in specified windows.
For open-ended funds, the NAV you get depends on when your money reaches the fund. For most schemes the cut-off is 3 pm on a business day (1:30 pm for liquid and overnight funds), and for purchases the units are allotted at the NAV of the day the money is actually credited to the fund. When you redeem, SEBI requires the fund to pay you within three working days for most schemes, with a little longer for schemes investing mainly overseas.
The benefits are real: diversification with small amounts, professional management within a written mandate, daily liquidity and detailed disclosure of portfolios and costs. The limitations are equally real: returns are not guaranteed, you pay ongoing costs whether the fund does well or not, and you have no say in individual investment decisions.
Common mistakes to avoid
- Choosing a fund because its NAV is low. NAV level tells you nothing about future returns or value.
- Treating every NFO as an opportunity. A new fund has no track record, and a similar existing fund may already be available.
- Confusing structural safety with market safety. The trust structure protects against misuse, not against prices falling.
- Investing without reading the mandate. Two funds with similar names can own very different things.
- Ignoring cut-off times when timing matters. Money that reaches the fund after the cut-off gets the next business day's NAV.
Try this yourself: Pick any one fund you already own or are considering. On the AMC's website, open its latest factsheet and note four things: the NAV, the total assets (AUM), the top ten holdings and the Riskometer level. Then divide your current holding value by the NAV to confirm how many units you own. It takes ten minutes and makes the idea of 'a slice of the basket' concrete.
Frequently asked questions
Is my money safe in a mutual fund?
It is protected from misuse by the fund house through the trust structure, independent trustees, a custodian and SEBI regulation. It is not protected from market movements, so the value can fall, sometimes sharply in equity funds. Choosing the right category for your time horizon is how you manage that risk.
What happens if the fund house shuts down?
The fund's assets are held by the custodian on behalf of unitholders, not on the AMC's books. If an AMC exits, schemes are typically transferred to another fund house or wound up, with the assets distributed to unitholders at their market value, under SEBI's supervision.
Is NAV the same as a share price?
No. A share price is set continuously by buyers and sellers on the exchange. An open-ended fund's NAV is calculated once a day from the value of its holdings, and every investor transacting that day gets the same NAV.
How much do I need to start?
Minimums are set by each scheme and are usually small; many funds accept SIPs of a few hundred rupees a month. The more important question is not the minimum but whether the fund suits the goal you are investing for.
Next, see how SEBI groups funds into categories in Types of Mutual Funds, or read the broader mutual fund planning guide.