A mutual fund collects money from many investors, pools it, and a professional fund manager invests that pool according to a stated objective. You own units of the fund in proportion to what you contributed.
You do not own the underlying shares directly. You own a slice of the whole pool.
A fund collects ₹100 crore from 50,000 investors and buys shares in 45 companies.
You contributed ₹50,000, which is 0.05% of the pool. You therefore own 0.05% of every one of those 45 holdings, indirectly.
You cannot sell one of those companies on your own. You can only redeem your units, and the fund manager decides what to sell.
NAV: the price of one unit
Net Asset Value is the per-unit value of the fund.
NAV = (value of everything the fund owns − what it owes) ÷ number of units outstanding
It is calculated once per business day, after markets close. Unlike a share, a mutual fund has no live price through the day and no bid-ask spread. Everyone transacting for a given day gets the same NAV, subject to the cut-off rules covered later in this module.
Who actually runs it
Indian mutual funds are structured as trusts, deliberately, so that your money is separated from the company managing it.
| Party | Role |
|---|---|
| Sponsor | The promoter that establishes the fund |
| Trustee | Holds the assets in trust for unit holders and supervises the AMC |
| AMC (Asset Management Company) | Employs the fund managers and runs the investing |
| Custodian | Physically holds the securities |
| RTA | Maintains your folio, processes purchases and redemptions |
| SEBI | Regulates all of it |
AMFI (Association of Mutual Funds in India) is the industry body. It publishes the market-cap classification lists that decide which companies count as large, mid and small cap, and runs the distributor registration system.
Open-ended vs closed-ended
Open-ended — the overwhelming majority. You can buy or redeem any business day at that day's NAV. The fund's size grows and shrinks with flows.
Closed-ended — a fixed corpus raised once, with a fixed maturity. Units are listed on an exchange, and often trade below their NAV because liquidity is poor. Far less common now.
Growth vs IDCW
Every scheme offers two options, and the difference is frequently misunderstood.
Growth — gains stay in the fund and compound. NAV rises. You realise gains only when you redeem.
IDCW — Income Distribution cum Capital Withdrawal, formerly called the "dividend" option. The fund periodically pays out an amount, and the NAV falls by exactly that amount.
For most investors, growth is the sensible default.
What a mutual fund gives you
Diversification for a small amount. ₹500 buys you exposure to 45 companies. Buying those 45 directly would need lakhs and a great deal of work.
Professional management. A team researches, decides and executes.
Regulation and disclosure. Portfolios published monthly, valuation rules prescribed, daily NAV.
Convenience. SIPs, automatic debits, no demat account needed for most schemes.
What it does not give you
Protection from falling markets. An equity fund holding 45 stocks falls when the market falls. Diversification reduces the risk of one company destroying you; it does not reduce the risk of the market declining.
Guaranteed returns. Nothing is promised. Past performance is genuinely not an indicator of future results, however often that phrase is read past.
Control. You cannot ask the manager to avoid a particular company or sell at a particular moment.
Freedom from cost. You pay an expense ratio every year, whether the fund performs or not.
Key takeaways
- A mutual fund pools money from many investors and invests it to a stated objective; you own units, not the underlying shares.
- NAV is the per-unit value, calculated once each business day — its level says nothing about whether a fund is attractive.
- The trust structure separates your money from the AMC that manages it.
- IDCW pays you your own money and reduces NAV by the same amount; growth is the usual default.
- Diversification reduces single-company risk, not market risk.
Check your understanding
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