Concept of a Mutual Fund — Pooling Money Together
A mutual fund pools money from many investors and invests it in securities according to each scheme's stated objective. This lesson explains pooling, units, NAV, who manages and holds the assets, and why returns are market-linked and not guaranteed.
Pooling money
A mutual fund collects money from many investors into one pool and invests it in securities such as shares, bonds, government securities and money-market instruments. What a particular scheme may buy is set out in its stated investment objective; some schemes also hold overseas securities or other permitted assets such as gold.
Each investor receives units in proportion to the amount invested. A unit is a share of the scheme's assets, so an investor with a small sum owns a small slice of everything the scheme holds. The scheme does not open deposits in investors' names, and it promises no rate of return.
Who manages and who holds
An asset management company (AMC) manages the schemes and employs the fund managers who take the buy and sell decisions. The AMC does not own the money. The scheme's assets are held in trust, separately from the AMC's own money, and a SEBI-registered custodian holds the securities.
Mutual funds are regulated by SEBI under the SEBI (Mutual Funds) Regulations, 2026, in force from 1 April 2026; they replaced the 1996 Regulations. This structure keeps scheme assets apart from the AMC's finances. It does not protect investors from market risk.
NAV: the value of one unit
Net Asset Value (NAV) is the value of one unit. It is calculated for every business day as (total assets − total liabilities) ÷ units outstanding. Assets are the scheme's holdings at market value; liabilities are amounts the scheme owes, such as accrued expenses.
Gains and losses on the portfolio reach investors through the NAV. When the prices of the holdings rise, the NAV rises; when they fall, it falls. Returns are therefore market-linked, and an investor can lose money.
Cost and the folio
Running a scheme costs money. The Total Expense Ratio (TER) is the yearly cost as a percentage of the scheme's net assets. It is accrued daily and already reflected in the NAV, so the investor receives no separate bill.
A folio is the account an investor holds with one AMC. It can contain several of that AMC's schemes.
Rules at a glance
A small slice of a large portfolio
Ten thousand people each put ₹10,000 into a scheme, making a pool of ₹10 crore. The fund manager spreads it across many securities, as the scheme's objective allows.
Geeta, 27, a bank clerk in Mysuru, is one of them. Through the scheme she owns one ten-thousandth of every holding. If the holdings as a whole fall in price, her units fall in value too.
From assets to NAV to units (illustrative)
- Made-up figures: a scheme has total assets of ₹1,210 crore, liabilities of ₹10 crore and 80 crore units outstanding.
- NAV = (1,210 − 10) ÷ 80 = 1,200 ÷ 80 = ₹15.00 per unit. Dividing assets alone by units (1,210 ÷ 80 = ₹15.125) would overstate it.
- An investor puts in ₹30,000. Stamp duty at 0.005% is ₹1.50, leaving ₹29,998.50.
- Units allotted = 29,998.50 ÷ 15.00 = 1,999.90 units.
- If the NAV later rises to ₹16.20, the units are worth 1,999.90 × 16.20 = ₹32,398.38. If it falls to ₹13.50, they are worth 1,999.90 × 13.50 = ₹26,998.65.
Result. The NAV is ₹15.00 and the investor holds 1,999.90 units. Their value moves with the NAV in both directions; the later NAVs are assumptions, not forecasts.
Key points
- A mutual fund pools money from many investors into one professionally managed portfolio, invested as per each scheme's objective.
- Each investor holds units in proportion to the amount invested; units represent a share of the scheme's assets.
- NAV = (total assets − total liabilities) ÷ units outstanding, calculated for every business day.
- The AMC manages the schemes; the assets are held in trust and the securities by a SEBI-registered custodian.
- The TER is accrued daily and is already reflected in the NAV.
- Returns are market-linked, not guaranteed; the value of units can fall.
Common misunderstandings
- A mutual fund is not a deposit: it pays no stated rate, and the value of units moves with the market.
- The trust and custodian arrangement does not prevent losses: it keeps scheme assets apart from the AMC, while market risk stays with investors.
- NAV is not total assets divided by units: liabilities are deducted first.
- The TER is not charged on top of the NAV: it is accrued daily within it.
Questions people ask
Who decides what a scheme buys and sells?
A fund manager employed by the AMC, within the scheme's stated investment objective.
Why does the NAV change from day to day?
Because the market value of the scheme's holdings changes, and expenses accrue daily. The NAV is worked out afresh for every business day.
Does an investor own the shares a scheme holds?
The investor owns units, which represent a proportionate share of the scheme's assets. The securities themselves belong to the scheme and are held by the custodian.
What this lesson relies on
- SEBI (Mutual Funds) Regulations, 2026 (in force from 1 April 2026)
- SEBI Master Circular for Mutual Funds (20 March 2026)
- Indian Stamp Act, 1899 (stamp duty on purchase of mutual fund units, from 1 July 2020)
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.