How Mutual Funds Work?
The portion of holding of the fund is provided as ‘Units’ to each investor in proportion to the amount invested by them. The income generated from the scheme is distributed among all the investors in proportion to their investment, by calculating Net Asset Value or NAV. NAV can be defined as the market value of all the securities (equities, bonds, money market instruments, and other securities) held by the scheme.
For example, if a person invests ₹5,000 in a mutual fund with a NAV of ₹20, he will get 250 Units ([Tex]\frac{5000}{20}[/Tex]) of the mutual fund.
Now, NAV of a scheme fluctuates on day to day basis, i.e., if the market value of any security that a mutual fund invests in goes up, the same will reflect in the NAV of the mutual fund. So if the NAV of the mutual fund goes up to ₹30, then the value of 250 Units that amounted to ₹5,000 will now amount to ₹7,500. If the investor chooses to redeem their mutual funds on this date, they shall receive ₹7,500 against the originally invested amount, i.e., ₹5,000.
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