Learn · Mutual Fund Basics
How mutual funds actually work: NAV, units, the AMC, and the ecosystem of trustees, custodians and registrars that protects your money.
Fifty families in a colony pool ₹10,000 each to hire a chef who buys the best vegetables in bulk. Each family owns a share of the meal proportional to what they put in. A mutual fund works the same way — thousands of investors pool money, a professional fund manager invests it, and profits (or losses) are shared proportionally.
Key takeaway: A mutual fund is organised collective investing — you own a share of a large, professionally managed portfolio.
Think of the AMC as the restaurant kitchen. HDFC Mutual Fund, SBI Mutual Fund, Nippon India — each is an AMC. They hire skilled fund managers (the chefs), research analysts (tasters), and compliance officers (health inspectors). Your money goes into their kitchen and comes back as a cooked portfolio.
Key takeaway: The AMC is the company that manages your mutual fund — it hires fund managers and is regulated by SEBI.
The AMC is the kitchen, but who watches the kitchen? The Trustee board — usually a Trust company separate from the AMC — acts like the building watchman. They ensure the fund manager follows SEBI rules, doesn't misuse investor money, and that the fund's documents are correct and updated.
Key takeaway: Trustees are the legal guardian of investor interest — they approve fund rules and monitor the AMC.
Before the restaurant opened, someone had to put up the initial capital, apply for licences, and hire the first chef. That's the Sponsor — for HDFC Mutual Fund it is HDFC Ltd and Standard Life. The Sponsor creates the mutual fund Trust, appoints Trustees, and puts up the initial net worth required by SEBI.
Key takeaway: The Sponsor is the promoter who sets up the mutual fund and is responsible for its track record and credibility.
The fund manager buys shares of 60 companies. Those share certificates need a safe home. The Custodian (usually a large bank like HDFC Bank or Deutsche Bank) is the locker that holds all the securities. The AMC cannot touch the actual shares directly — they only give buy/sell orders; the Custodian executes settlement.
Key takeaway: The Custodian safekeeps all the securities (shares and bonds) bought by the fund — the AMC never physically holds them.
When 5 lakh investors buy and sell units every day, someone has to maintain the register of who owns how many units. CAMS and KFintech are India's two major RTAs. They are like the municipal records office for mutual funds — maintaining unit balances, sending statements, processing name changes, and handling nominations.
Key takeaway: The RTA is the record-keeper — they track every investor's unit balance and send account statements.
A 10 kg bag of basmati rice is divided into 100 small packets of 100 g each. Each packet is a "unit." When you invest ₹5,000 and the NAV is ₹50, you receive 100 units. If the fund grows and NAV becomes ₹70, your 100 units are now worth ₹7,000. You haven't added money — the value of each unit rose.
Key takeaway: A unit is your proportional share of the mutual fund's total pool — like one slice of a very large pie.
Every evening after markets close, the fund house calculates the total value of all stocks and bonds in the fund, subtracts expenses, and divides by the number of units. The result is the NAV — the price tag for one unit. If you invest ₹10,000 when NAV is ₹100, you get 100 units. Next day if NAV is ₹105, your investment is worth ₹10,500.
Key takeaway: NAV is the per-unit price of the fund, calculated daily — it rises and falls with the underlying assets.
A new restaurant opens in Bandra with a "grand opening" price — thalis at ₹99 instead of the usual ₹250. NFO is similar: a new mutual fund scheme launches at ₹10/unit. Investors rush in, thinking ₹10 is "cheap." But ₹10 is just the starting price — a ₹10 NAV fund has zero track record to evaluate.
Key takeaway: NFO is a fund's launch period at ₹10/unit — low price does not mean good value without a performance history.
An open-ended fund is like a municipal water tap — you can draw water (invest) or stop drawing (redeem) any working day. A close-ended fund is like a fixed-capacity bucket — you fill it once at launch (NFO), it is locked for a fixed period (say 3 years), then opened for redemption. Most funds in India are open-ended.
Key takeaway: Open-ended funds allow entry/exit any day; close-ended funds have a fixed maturity like an FD.
Kiran has two mango trees. One she lets grow — fruit reinvested as seeds for more trees. The other she picks clean every season. After 15 years, the first tree has an orchard; the second is still one tree. The Growth option reinvests all profits back into the fund — no payouts, but NAV compounds dramatically over time.
Key takeaway: Growth option = all profits stay invested; ideal for long-term wealth creation with the power of compounding.
Ravi is retired and needs regular cash. He chose the IDCW option in a hybrid fund. Occasionally the fund distributes ₹2 per unit — like rental income from a property. But the NAV drops by exactly ₹2 after distribution — it's not "extra money"; it comes from your own corpus. IDCW is your own money paid back to you.
Key takeaway: IDCW is not free income — the NAV falls by the exact dividend amount. Growth option builds wealth faster.
Shreya buys onions directly from the farmer at ₹30/kg. Her sister buys the same onions from the sabzi-wala at ₹45/kg — ₹15 extra is the middleman's margin. In mutual funds, the "Regular Plan" includes a distributor commission (0.5–1% per year extra). Direct Plan has no middleman — the same fund, but 0.5–1% lower annual cost.
Key takeaway: Direct Plan = lower expense ratio = higher NAV over time. On a 20-year SIP, this difference can be ₹10–15 lakh.
The same fund, but bought through a distributor or bank, includes a "trail commission" — 0.3–1% per year of your investment, paid to the distributor for as long as you stay invested. On ₹10 lakh invested for 10 years, this adds up to ₹60,000–₹1 lakh in extra fees. You don't see it — it's quietly deducted from NAV.
Key takeaway: Regular Plan is fine if you need advisory services; if you are self-sufficient, Direct Plan saves significant money.
Ready to apply these ideas to your own goals? Mahadware can help you invest with a goal-based, risk-aligned plan.
Educational illustrations only; figures and tax rates are examples and may change. Not investment advice. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.