Concept of Fund and NAV

7.1 The Family Pot – A Different Take

When people first hear the word fund in the context of mutual funds, they often imagine something abstract or complicated. But at its core, a fund is simply a pool of money collected from different people, managed together for a common investment purpose. To make this idea more relatable, let’s build a new story.

Imagine you are the “finance go-to person” in your extended family. Instead of stock market fame, let’s say you’ve built a reputation for being disciplined with money. You’ve chosen the right insurance policies, invested in fixed deposits at the right time, and even guided a cousin to buy gold just before prices shot up. Word spreads quickly, and soon your relatives begin to trust your judgment.

One day, your family members approach you with a request:

“Why don’t you manage our savings? You seem to know how to make money grow.”

Now, legally speaking, you can’t just start pooling and managing other people’s money. In India, a mutual fund must be registered with SEBI under the SEBI (Mutual Funds) Regulations, 2026, which replaced the earlier 1996 Regulations with effect from 1 April 2026. It is set up as a trust by a sponsor, overseen by trustees, and its money is managed by a SEBI-approved Asset Management Company (AMC). Anyone who sells or distributes mutual fund units must also hold the required NISM certification (NISM Series V-A) and be registered with AMFI. So, let’s assume you go through this entire process, set up a SEBI-registered mutual fund, and become its fund manager.

Pooling the Money

Your relatives hand over different amounts: your uncle gives ₹1,00,000, your cousin contributes ₹25,000, and your aunt adds ₹1,50,000. Altogether, you collect ₹2,75,000. Instead of keeping each person’s money in separate accounts, you decide to pool it into one common account. This pooled money is what you will use to buy stocks, bonds, or other investments.

Think of it like a community kitchen. Everyone contributes ingredients — rice, vegetables, spices — in varying quantities. Once pooled together, the cook prepares a single dish that everyone shares. The taste of the dish is the same for all, regardless of how much each person contributed. Similarly, in a mutual fund, the returns generated from the pooled investments are shared proportionately among all investors.

Fairness in Returns, Flexibility in Service

Here’s an important principle: while the level of personal attention investors receive may vary, you cannot treat them differently in terms of returns. Every investor in the same scheme, plan and option must earn the same percentage return for the same holding period.

For example, your aunt who invested the largest amount might get special attention — perhaps you invite her for coffee when she visits. Your younger cousin who invested a smaller amount may not get the same hospitality. That’s acceptable. But when it comes to investment performance, both must receive the same percentage return.

To illustrate, imagine two passengers on the same train. One is traveling in first class, enjoying cushioned seats and air-conditioning. The other is in second class, with simpler seating. The service differs, but the train itself moves at the same speed. Both passengers reach the destination at the same time. In mutual funds, the “destination” is the return generated by the portfolio, and it must be identical in percentage terms for all investors.

Think of two people watching the same movie in a cinema. One buys a premium recliner seat with free popcorn, while the other sits in a regular seat. The comfort differs, but the movie on the screen is identical for both. In mutual funds, investors may get different levels of service depending on how much they invest, but the percentage return — the “movie experience” — is the same for all.

One important nuance: since 1 January 2013, SEBI has required every mutual fund scheme to offer two plans — a Direct Plan  and a Regular Plan. The Regular Plan includes distributor commission in its expense ratio, so it has a slightly higher Total Expense Ratio  and therefore a different, usually lower, NAV than the Direct Plan. Similarly, the Growth and IDCW options within a plan have different NAVs because one reinvests income and the other pays it out. The equal-return principle applies to all investors within the same plan and option; it is the plan’s cost structure, not the size of an individual’s investment, that causes the difference.

Why It’s Called “Mutual”

The pooling of money is the essence of why these are called mutual funds. The account doesn’t belong to one person alone; it belongs to everyone who contributed. Each investor owns “units” of the fund, which represent their share in the collective pool.

Think of a housing society. Every resident pays maintenance fees, and the society uses that pooled money to maintain the building, pay for security, and keep the lights on. No single resident can claim ownership of the society’s funds — it’s mutual, meant for the benefit of all. Mutual funds work in much the same way, except the pooled money is invested in financial markets.

7.2 The Fund in Action

Example:  five friends decide to start a small investment club called “Growth Circle.” Each contributes different amounts to build a common pool of money that will be invested in the stock market.

Each ₹10 unit represents a slice of the total fund. The total corpus is ₹2,75,000, divided into 27,500 units. (In a mutual fund, investors hold units, not shares.)

The Manager’s Role

As the fund manager, you’re responsible for investing this ₹2,75,000 wisely. You decide to spread it evenly across ten different companies — a strategy known as an equally weighted portfolio.

Day 2 – Market Movement

The next day, the market fluctuates. Some stocks rise, others fall. After recalculating (and ignoring expenses for simplicity), the total value of the portfolio becomes ₹2,77,844 — a gain of ₹2,844.

The fund’s return is:

Return  = 2,844/2,75,000 *100 =1.0342%

This means the fund grew by 1.0342% in a single day.

Adjusting the Notional Value

To ensure every investor experiences the same percentage gain, the notional value per unit must increase by the same rate. This updated per-unit value is the fund’s Net Asset Value (NAV).

New Notional Value =10 * (1+0.010342)=10.10342

Now, each investor’s holdings are recalculated using this new value.

(The individual values add up to ₹2,77,843.50 before rounding, which matches the portfolio value of ₹2,77,844.) Notice how everyone’s investment grew by the same percentage, even though their absolute gains differ. This is the beauty of uniform wealth creation — fairness through proportional returns.

Day 3 – A New Investor Joins

Suppose your father-in-law wants to invest ₹75,000 on Day 3.

Should you issue units at ₹10 or ₹10.1034?

He certainly cannot get units at ₹10, because the fund’s value has already appreciated but strictly speaking he will not get ₹10.1034 either. Mutual funds use forward pricing: new investors buy units at the applicable NAV  the closing NAV of the day on which the application is received before the cut-off time and the money is available to the scheme. Since Day 3’s NAV is calculated only after the market closes, he will not know his exact purchase price in advance. This ensures fairness  no one gets an undue advantage by entering at outdated, already-known prices.

Under current SEBI rules, for equity and debt schemes the cut-off time for purchases is 3:00 p.m.; units are allotted at the NAV of the day the funds are realised in the scheme’s bank account before the cut-off, regardless of the investment amount. For liquid and overnight funds, the cut-off is 1:30 p.m. and the NAV of the day before the funds are realised applies. There is no entry load , but a stamp duty of 0.005% applies on purchases since 1 July 2020.

For example, if Day 3’s NAV also turned out to be ₹10.1034, the stamp duty on ₹75,000 would be ₹3.75, and your father-in-law would be allotted ₹74,996.25 ÷ 10.1034 ≈ 7,422.872 units.

Key Takeaways

In essence, a mutual fund is a collective journey — different people, one goal: wealth creation through disciplined investing. The NAV acts as the compass, ensuring everyone moves forward at the same pace, no matter how much they contribute.