What are Units in Mutual Funds & How do Mutual Fund Units Work?

Mutual fund units represent an investor’s share in a mutual fund scheme. When you invest in a mutual fund your money is pooled with others and used to buy a portfolio of securities. In return you receive mutual fund units proportional to your investment. These units reflect your ownership and determine your share of profits, losses and dividends within the fund.

What are Units in Mutual Funds?

Units in mutual funds are the individual shares or portions allocated to investors when they invest in a mutual fund scheme. Each unit represents a proportional stake in the fund’s total assets and the value of these units is determined by the Net Asset Value (NAV). As the value of the fund’s investments changes so does the NAV impacting the worth of each unit held by the investor.

How do Mutual Fund Units Work?

Mutual fund units work by representing an investor’s share in the total pool of assets held by the fund. Here’s how they function:

• When you invest in a mutual fund, your money is used to buy units based on the fund’s Net Asset Value (NAV).
• NAV is calculated daily as: (Total Assets – Total Liabilities) / Total Number of Units Outstanding.
• As the fund’s underlying investments gain or lose value the NAV fluctuates, affecting the value of your units.
• You can buy more units by investing more or redeem units to withdraw funds, both based on the current NAV.
• Dividends or capital gains may be distributed to unit holders depending on the scheme.

In essence, mutual fund units allow small investors to collectively own a diversified portfolio.

Importance of Mutual Fund Units

Mutual fund units play an important role in making investment accessible and diversified for individuals. They allow investors to pool money and invest in a variety of financial instruments with professional management.

• Diversification: Each unit represents a share in a diversified portfolio, reducing individual asset risk.
• Affordability: Investors can start with small amounts and still gain exposure to large markets.
• Liquidity: Units can be redeemed at any time (subject to fund type), offering easy access to funds.
• Professional Management: Managed by experienced fund managers, reducing the burden of active decision-making.
• Transparency: Regular disclosures and NAV updates offer clear visibility into performance.
• Regulated Investment: Overseen by SEBI, ensuring investor protection and standardised practices.

How to Buy Mutual Fund Units?

The purchase of securities and units of mutual funds is a simple process. You can plan your investments better with the HDFC SIP Calculator. You can invest in these units directly via the fund house or through different online platforms. Here are the steps that you must follow:

1. You must select a mutual fund scheme that you think can meet your investment goals.
2. Decide on the amount you wish to invest.
3. Complete the necessary KYC formalities if you are a new investor.
4. You can make the payment through any of your preferred modes like net banking, UPI or cheque.
5. Once the payment is processed, units will be allotted based on the applicable NAV. To track your SIP growth, use the SIP Calculator.

Redeeming units is equally straightforward. You can sell all or a portion of your units back to the fund house. The redemption amount is calculated based on the number of units you’re selling and the current NAV.

How to sell Mutual Fund Units?

Here are the steps you must follow to sell (or redeem) your mutual fund units:

1. Decide how many units you want to sell.
2. Then, place a request to redeem the units with the fund house or through your investment platform.
3. Mention whether you want to redeem a specific number of units or a particular amount.
4. The fund house will then process your request.
5. After the transaction is completed, the money will be sent to your registered bank account.

Remember, the redemption value will be calculated based on the NAV applicable on the day of your request, subject to cut-off times.

How Mutual Fund Units are Calculated (with example)?

Understanding how to calculate units in mutual funds is crucial for every investor. Let’s understand the process with an example:

Suppose you invest ₹50,000 in a mutual fund with an NAV of ₹25.

• Number of units = Amount invested / NAV
• Number of units = 50,000 / 25 = 2,000 units

So, you would be allotted 2,000 units of the mutual fund.

Now let’s say after a year, the NAV has increased to ₹30. The value of your investment would be:

• Value = Number of units × Current NAV
• Value = 2,000 × 30 = ₹60,000

This calculation shows how the value of your investment can change with fluctuations in the NAV. You can easily evaluate your investment’s performance using a Mutual Funds Return Calculator.

Things to Know About Mutual Fund Units

Mutual fund units represent your share in the total assets of the fund. Understanding how they work helps you make informed investment decisions.

• NAV Determines Unit Price: Units are priced based on the Net Asset Value, calculated daily.
• Fractional Ownership: Each unit gives you fractional ownership in the mutual fund’s portfolio.
• Purchase and Redemption: Units can be bought or redeemed based on NAV, with applicable charges.
• Income Distribution: Units may generate returns through dividends or capital gains.
• Units Are Dynamic: The number of units you hold may change based on reinvestments or redemptions.
• Tax Implications: Gains from unit transactions may be subject to capital gains tax.
• Not Tradable Like Stocks: Unlike shares, mutual fund units are not traded on stock exchanges.

Difference between Equity Shares and Mutual Fund Units

Equity shares and mutual fund units are both investment options but they differ in terms of ownership, risk and management approach.

Conclusion

Before investing your money, you must understand what are units in mutual funds. You also need to learn about concepts like NAV and balance units in mutual funds to maximise your profits. These units offer you an easy way to invest in a portfolio managed by expert fund managers. These units also help you diversify your investments and provide you with the potential for higher returns.