What you actually buy
A mutual fund collects money from many investors, pools it, and invests it towards a stated objective. What you get back is not shares. It is units — a stated number of equal claims on the pool.
That difference is easy to skim past and it decides everything else in this lesson. Your ten Bharat Foods shares sit in your own , in your name, and 01.01.06 established what they entitle you to. A fund's shares are not held that way. They are held for all unit holders together, and your claim is a proportion of the whole pot, not a set of named shares you could point to.
So nobody hands you a slice of Bharat Foods. If the fund owns it, you own a share of a pot that owns it — and the fund, not you, votes it and collects its dividends.
Nobody quotes the price. It is worked out.
A share has a price because somebody is willing to pay it — that is the whole of 01.04.01. A fund unit has no such price, because there is no queue of buyers bidding for units. Its value is calculated.
Take everything the scheme holds, value it at the day's closing prices, subtract what the scheme owes, and divide by the number of units in existence. That figure is the Net Asset Value, the NAV, and it is worked out once each business day after the market closes.
Which means you do not choose your price. You get the NAV of the day your money actually reaches the fund — not the NAV you read yesterday, and not a price you set. A mutual fund is not something you can trade during the day, and that single limitation is what the next lesson exists to remove.
- Value of all shares held
- ₹800 crore
- Less: fees and expenses owed
- ₹2 crore
- Net assets
- ₹798 crore
- Units in existence
- 40 crore
Four parties, and only one of them manages money
Tap each. An Indian mutual fund is built as a trust, and the split is the protection.
The whole arrangement is designed so that the people who choose the shares are not the people who hold them. It is the same instinct as 01.04.05, where the clearing corporation stands between two strangers so neither has to trust the other.
Two ways to run the pot
Once the money is pooled, somebody has to decide what it buys. There are two honest answers, and they are not two grades of the same thing — they are different jobs.
An active fund employs a manager to form a view: which companies to hold, how much of each, when to change. You are paying for judgement, and judgement has to be paid for whether or not it turns out well.
A passive fund holds what a published index says to hold, in the proportions the index rule gives, and changes only when the index changes. You met that rule in 01.05.03 and watched it re-run on a calendar in 01.05.04. Nobody at a passive fund is forming a view — there is nothing to form a view with.
A passive fund buys a company the week it joins an index. What does that purchase tell you about the company?
The fee you are never sent a bill for
Running a fund costs money: the manager, the custodian, the registrar, the audit, the paperwork. All of it is charged to the scheme as the total expense ratio — an annual percentage of the scheme's assets.
Here is the part that surprises people. You are never invoiced. The expense is accrued every day and taken out before the NAV is published, so the NAV you read is already net of it. The fee does not appear as a deduction in your statement because it was removed from the price itself.
The difference this makes is not small. On ₹1,00,000 held for a year, an active fund charging 1.80% takes ₹1,800 and an index fund charging 0.20% takes ₹200 — and that gap is charged again every year you hold.
SEBI caps the total expense ratio, on a sliding scale that falls as the scheme grows larger — a big fund may not charge the percentage a small one may. The exact slabs are set by regulation and are revised, so read the scheme's own current disclosure rather than a number you remember.
This is 01.01.04 again, wearing a different coat. There, a ₹4,000 share was not a bigger company than a ₹500 one. Here, ₹10,000 buys 501.25 units at a NAV of ₹19.95, or 40 units at a NAV of ₹250 — and in both cases you own ₹10,000 of holdings. The unit count is arithmetic. A low NAV means the scheme divided itself into more pieces, and nothing else.
Two equity funds hold very similar portfolios. One has a NAV of ₹12, the other ₹340. Which is the better buy?
One price a day, worked out after the close, and no way to act in between. For a great many people that is not a flaw — it is the whole appeal. But it does raise an obvious question: what if the units themselves were listed, and you could buy them from another investor at eleven in the morning?