8.3How do mutual funds work?
1What is it?
You buy units at the day’s NAV. The fund invests your money. As the investments rise or fall, NAV moves. You redeem (sell back) units at the NAV on the redemption day.
2Why does it exist?
Units make it simple to track ownership: your value = units × NAV.
3Stock market example
Unlike shares, funds are bought and sold with the fund house at the end-of-day NAV, not on the exchange at live prices (except ETFs).
4Calculation
Units = Amount ÷ NAV; Value = Units × Current NAV
- Invest ₹10,000 at NAV ₹50 → 200 units.
- NAV rises to ₹60 → value = 200 × ₹60 = ₹12,000.
Gain = ₹2,000 (20%).
5Quick revision
- Buy units at NAV.
- Value = units × NAV.
- Transact at end-of-day NAV.
6Knowledge check
Q1. ₹5,000 at NAV ₹25. Units?Show answer
200.
Q2. Does fund NAV change every second like a share price?Show answer
No, it is calculated once a day.
Q3. Which funds trade on the exchange?Show answer
ETFs.
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