How Mutual Funds Work — NAV, Units, Folio
This lesson follows an investor's money through a mutual fund: how a purchase becomes units, which day's NAV applies, how a redemption is priced and paid, and who keeps the records.
The path of a purchase
A purchase is paid from the investor's bank account into the scheme's own bank account. Units are then allotted at the applicable NAV, and the fund manager invests the money. The securities bought are held by a custodian.
The money goes to the scheme itself. Distributors and platforms may not pool investors' money or units in their own accounts.
Which day's NAV applies
For schemes other than liquid and overnight funds, units are allotted at the NAV of the day the money reaches the scheme and is available for use by 3:00 pm. This holds whatever the amount; older material quotes a ₹2 lakh threshold that no longer exists.
The test is when the scheme can use the money, not when the order was placed. Liquid and overnight funds have an earlier purchase cut-off of 1:30 pm, and a purchase with money available before that cut-off is allotted at the previous day's closing NAV.
Redeeming units
A redemption request received by 3:00 pm gets that day's NAV; a later request gets the next business day's NAV. For overnight funds, online redemptions have been accepted up to 7:00 pm since 1 June 2025.
If an exit load applies, the repurchase price is NAV × (1 − exit load); the load cannot exceed 3% of NAV and is credited back to the scheme. A switch is a redemption from one scheme and a purchase in another.
Redemption proceeds must be paid within 3 working days of the request, or 5 working days for schemes with 80% or more invested overseas. There is no separate one-day rule for liquid funds; faster payment by some fund houses is practice. If payment is late, the AMC bears interest at 15% a year.
Records and statements
A registrar and transfer agent (RTA) processes transactions and keeps investor records and folios on behalf of the AMC. It takes no investment decisions. A folio is the investor's account with one AMC and can hold several of that AMC's schemes.
A Consolidated Account Statement (CAS) is sent by the 15th of the next month for a month with a transaction; otherwise it is sent half-yearly. The half-yearly statement also shows the commission paid to the distributor in rupees.
Rules at a glance
Ordered before the cut-off, money after it
Arjun, 35, a designer in Jaipur, places a purchase order in an equity scheme at 2:40 pm on Monday. His bank transfer reaches the scheme's account and becomes available for use only at 3:20 pm.
Because the money was not available by 3:00 pm on Monday, his units are allotted at the NAV of the next business day, Tuesday, which may be higher or lower than Monday's.
Pricing a redemption with an exit load (illustrative)
- Made-up figures: an investor's request to redeem 1,000 units of a debt scheme is received at 2:15 pm on Tuesday. Tuesday's NAV is ₹42.00 and the scheme's exit load of 1% applies.
- The request came before 3:00 pm, so Tuesday's NAV applies.
- Repurchase price = NAV × (1 − exit load) = 42.00 × (1 − 0.01) = 42.00 × 0.99 = ₹41.58.
- Proceeds = 1,000 × 41.58 = ₹41,580. The exit load is 1,000 × 0.42 = ₹420.
- Payment is due within 3 working days: by Friday, if Wednesday, Thursday and Friday are working days.
Result. The investor receives ₹41,580 before any tax on a gain. A request received after 3:00 pm would have been priced at the next business day's NAV.
Key points
- Money flows from the investor's bank to the scheme's own bank account; the custodian holds the securities bought.
- For schemes other than liquid and overnight funds, the purchase NAV is that of the day the money is available for use by 3:00 pm; liquid and overnight funds have a 1:30 pm purchase cut-off.
- A redemption request received by 3:00 pm gets that day's NAV; proceeds are due within 3 working days (5 for schemes with 80% or more overseas).
- The RTA keeps investor records and processes transactions; it makes no investment decisions.
Common misunderstandings
- The time an order is placed does not fix the purchase NAV: the money must be available to the scheme by the cut-off.
- Liquid funds have no one-day payout rule: the limit is 3 working days for every scheme, and faster payment is practice.
- The RTA does not manage money: it keeps records and processes transactions; the fund manager decides investments.
Questions people ask
Why are there cut-off times at all?
A day's NAV is worked out from that day's prices and disclosed by 11 pm for most schemes. The cut-off decides, by a fixed rule, which day's NAV a transaction gets.
What happens in a switch between two schemes?
It is a redemption from one scheme and a purchase in the other, so the redemption leg follows the redemption rules, including any exit load.
Who keeps the record of how many units an investor holds?
The registrar and transfer agent, on behalf of the AMC. The custodian holds the scheme's securities.
What this lesson relies on
- SEBI Master Circular for Mutual Funds (20 March 2026) — applicable NAV and cut-off timings, NAV disclosure, redemption payout (para 15.3), Consolidated Account Statement (para 15.7.4)
- SEBI (Mutual Funds) Regulations, 2026 (cap on exit load)
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.