Mutual Fund Units
What are mutual fund units?
Mutual fund schemes are pools of investment collected from volunteering investors who are keen on partaking in the growing financial market of a country which may have the potential to provide superlative returns. These instruments are the easiest way to get exposure to stocks and bonds and also provide benefits like diversification, asset allocation, and professional management, among others.
Compared to direct stock or bond investing, mutual fund investing carries a lot of advantages. You need at least some advanced research or advice to buy a stock, and once you do that, your fortunes are tied to it. An increase or decrease in your invested capital will be completely determined by it. On the other hand, for the same amount that you would invest in one or a few stocks, a mutual fund scheme will allow your money to be invested in a portfolio of several stocks. This would help you lower the risk of your investment as there is a chance that the decline in one or more stocks is countered by a rise in others.
Also, while you need to determine the investment strategy and keep rebalancing the stocks portfolio so that it remains in line with your investment objective, in funds, a professional fund manager and his team take care of these and other technical aspects of investing for a small fee.
You can avail of these and a plethora of other benefits that mutual fund schemes have to offer by investing in them, and this is where the topic at hand comes in. When you buy a mutual fund, you are issued your ownership in the form of ‘units.’
Units represent your holding in a mutual fund scheme and are the smallest portion of its ownership. Sometimes, they are also referred to as shares. Mutual fund units are issued by fund companies according to the amount of money invested by investors. As an investor in a mutual fund scheme, you are known as a unitholder. It is these units which help you determine the value of your investment and form the base of all transactions in schemes. Whether you are buying, selling, or using facilities like Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), or Systematic Transfer Plan (STP), units form the foundation of executing these trades.
How mutual fund units are calculated?
In order to know how many mutual fund units will be allotted to you, you need to divide the net invested amount by the Net Asset Value (NAV) of the mutual fund scheme. Thus, if the NAV of a fund is Rs 20 and your net invested amount is Rs 15,000, then you will be allotted 750 mutual fund units. As can be seen from this example, the NAV of a fund is the value of a single unit of that fund. You can understand it better this way: If you wish to invest the same amount of money in two funds, then their respective NAVs will determine the number of units you are allotted. Thus, if you wish to invest Rs 10,000 each in two funds A and B, and their NAVs are Rs 20 and Rs 25 respectively, then you will receive 500 units of fund A and 400 units of fund B.
To know the precise number of mutual fund units you will receive, you need to be certain of the amount that is being actually invested, which is referred to as the net invested amount here. The gross amount you invest may be subject to fees charged by an advisory service that you may hire to help you invest in funds. This fee will be reduced from the gross amount and the resultant amount will be the one invested in your selected funds.
Things to know about mutual fund units
Unlike buying stocks from the primary or secondary market, you can buy mutual fund units in fractions as well. While your stock ownership may be in fractions due to corporate actions like stock splits, the purchase in financial markets is in complete units, not in parts. For example, you can either buy 10 shares or 11 shares of stock, but not 10.58 shares. On the other hand, mutual fund units, whether purchased directly from an Asset Management Company (AMC) or via a distributor, can be in fractions. For example, at the NAV of Rs 25.70, an investment of Rs 25,000 will fetch you 972.76 units.
The same goes for selling mutual fund units as well. For example, you may wish to withdraw Rs 10,000 out of the total investment that you have made in a scheme. Assuming that the day’s NAV is Rs 15.60, you would need to sell 641.03 units in order to receive the required amount (net of any exit load). Since NAV of a fund changes every day, the number of units you will receive in the same fund on different days will change according to that day’s NAV.
If you’re trading in a liquid fund, you will get the same day’s NAV if you buy or sell before 2 PM or the next day’s NAV if you place your order after 2 PM. For other funds, the cut-off for same day NAV is 3 PM. In this way, the units that you’ll get can be impacted by the time of placing the order.
There is a difference between accumulating units in a close ended mutual fund vis-à-vis an open-ended fund. Though the calculation is exactly as shown above, you can acquire units in a close-ended fund only during its NFO (New Fund Offering) whereas, in an open-ended fund, you can purchase units on an ongoing basis and continue increasing or decreasing your holding. Meanwhile, not only can you not add to your holdings in a close-ended fund after the NFO period, you can’t sell your holdings before the fund either matures or becomes open-ended after a pre-determined period. Close-ended funds are listed on stock exchanges to enhance liquidity, but the volume of trade in them is quite thin, so the chances of you adding units or selling them in the secondary market are slim.
As an individual investor, you can, and should, appoint a nominee for the units you own in mutual fund either as a single or joint holder. However, the nomination facility is not available for non-individual investors like a society, trust, body corporate, partnership firm, Karta of Hindu Undivided Family, holder of Power of Attorney, etc.
As has been explained in this article, mutual fund units are a small but integral concept to understand in investing. Deeper knowledge of this holding can help you make smarter investment decisions for your portfolio.