NAV, Units and What Happens When You Buy or Sell

What you own

Neha has money in a mutual fund and is not entirely sure what she owns. She owns units, which are equal shares of the fund's total holdings.

The fund holds investments. Add up what they are worth, subtract what the fund owes, and divide by the number of units in existence. That figure is the net asset value — the NAV — and it is the value of one unit.

Two consequences follow. Your holding is worth your units multiplied by the NAV. And when new money arrives, new units are created for it, so the existing holders' units are unaffected — you are not diluted by other people investing.

Why a low NAV is not cheap

This is the misunderstanding worth killing, because it is used to sell things.

A fund with a NAV of ten and one with a NAV of a thousand may hold exactly the same portfolio. The difference is arithmetic: how many units the fund happened to issue. Invest the same amount in each and you get many units of one and few units of the other, and the same rupee exposure to the same holdings. A ten per cent rise gives you the same gain either way.

A fund's NAV tells you nothing about whether it is expensive or cheap, well or badly run. It tells you where it started and how it has done since. A new fund at a round starting NAV is not a bargain — it is a new fund, which is the pitch made about new fund offers.

The same logic applies to a share price, where the confusion is even more common: a share price is not a valuation until you know what it is a price of.

Which day's NAV you get

This is where the mechanics start to matter.

A fund does not trade during the day. NAV is struck once, after markets close, and everyone transacting that day gets that price. There is no way to buy at the low point of the afternoon, because there is no afternoon price.

Which day's price applies depends on when your money actually reaches the fund — not when you pressed the button. A payment initiated late, on a weekend, or through an intermediary that batches transactions may land the following business day and get that day's NAV.

For a monthly investment this is almost never worth worrying about: your instalments will land on a spread of prices and the timing washes out. It matters when you are moving a large sum, or when you are switching between funds, because a switch is a sale and a purchase that may not settle on the same day — leaving your money briefly out of the market, or briefly in both.

Redemptions: what you are actually asking for

When you sell, you are not selling your units to another investor. You are asking the fund to cancel them and pay you, which means the fund needs cash.

Most of the time it has enough, from other people's incoming money and from its own holdings. When it does not, it must sell investments to raise it — and that is the whole of why redemptions are riskier than they look.

Two things follow.

The fund sells at the worst possible time. Redemptions cluster when markets are falling, which is when selling holdings is least attractive and, for anything thinly traded, hardest. The remaining holders bear the cost of that selling, so a wave of exits damages the people who stayed.

Some funds can restrict it. Where holdings cannot be sold quickly, a fund may be permitted to limit or suspend redemptions. This matters most for debt funds holding instruments that do not trade freely, and it is the risk most people do not think about at all — laid out in can a mutual fund fail.

Equity funds holding large listed companies are the least exposed to this, because their holdings can be sold. The risk rises as what the fund holds becomes harder to sell, which is a reason to know what a fund holds and not only what it returned.

Two more mechanics worth knowing

Money takes time to arrive. Redemption proceeds are credited some days after you sell, and the gap varies by fund type. If you need money on a particular date, work backwards from it. This is why an emergency fund does not belong in something with a settlement delay.

Selling may cost you. Some funds charge an exit load if you leave within a defined period, and selling realises a tax event on any gain. Neither shows up in the NAV, and both should be checked before you sell rather than after. We quote no figure for either: loads are set per scheme, and the tax depends on how long you held and what you hold.

What to take away

Units are shares of a pool; NAV is what one is worth; a low NAV is not a discount and a high one is not expensive. That one correction is worth more than everything else on this page, because it is actively used to sell products.

Then remember what a redemption is. You are asking the fund to raise cash, and how easily it can do that depends entirely on what it holds — which is a question worth asking before you invest rather than on the day you want to leave.