How Mutual Funds Work — NAV, Units, Folio
Definition
The operational mechanics of a mutual fund describe the end-to-end journey of an investor's money — from the moment it leaves their bank account, through unit allotment at prevailing NAV, portfolio management by the fund manager, daily NAV computation, and finally redemption when the investor decides to withdraw. Understanding this flow is essential for every distributor because clients will ask exactly how their money is being handled.
In Simple Words
This is a common client question — here is exactly how the process works. When Anita invests ₹10,000 in a mutual fund, a precise chain of events is triggered. First, the money goes from her bank to the AMC's designated bank account (not the fund manager's pocket — this is crucial). The Registrar and Transfer Agent (RTA) — companies like CAMS or KFintech — processes the transaction, allots units at that day's NAV, and updates Anita's folio. The fund manager then deploys this money into the market per the scheme mandate. Every business day, the custodian marks all securities to market value, the fund accountant calculates the NAV, and AMFI publishes it by 11 PM. Anita can track her investment through the AMC website, the RTA portal (MyCams or KFintech), or her CAS (Consolidated Account Statement) which CAMS sends monthly via email. When Anita wants to redeem, she submits a redemption request, units are cancelled at that day's NAV, and money is credited to her bank within 1-3 business days depending on the fund type.
Real-Life Scenario
Let us trace ₹10,000 from Anita's bank account to her mutual fund folio — step by step: Step 1 — Anita logs into her MFD platform (or visits the AMC website) and places a purchase order for ₹10,000 in HDFC Flexi Cap Fund at 11:30 AM on a Monday. Step 2 — ₹10,000 is debited from her bank account via NACH mandate or UPI. Step 3 — Since she submitted before the 3 PM cut-off, she gets Monday's NAV. Let us say the NAV is ₹50.25. Step 4 — Units allotted = ₹10,000 / ₹50.25 = 199.00 units (rounded to 2 decimal places by most AMCs). Step 5 — The RTA (CAMS, in HDFC MF's case) updates Anita's folio. If she is a first-time investor, a new folio number is created. Step 6 — Anita receives an email confirmation and SMS with the allotment details. Step 7 — The fund manager now has this ₹10,000 as part of the larger pool (say ₹35,000 crore corpus) and deploys it according to the scheme mandate. Step 8 — Next day (Tuesday), the NAV is recalculated. If the portfolio gained 0.5%, the new NAV is ₹50.50 and Anita's 199 units are now worth ₹10,049.50. This entire process happens seamlessly for lakhs of investors every single day — that is the beauty of the mutual fund infrastructure in India.
Key Points to Remember
Frequently Asked Questions
Test Your Knowledge
3 questions to check your understanding
What is the NAV cut-off time for equity mutual fund purchases to get the same day NAV?
Summary Notes
The money flow is: Investor → AMC pool → Securities market → NAV reflects gains/losses → Investor can redeem at current NAV
Cut-off time is 3 PM for equity/debt funds and 1:30 PM for liquid/overnight funds — this determines which day's NAV applies
CAMS and KFintech are the two major RTAs in India — they are the backbone of mutual fund operations
CAS is the investor's single-window view of all mutual fund holdings across AMCs — generated monthly by RTAs
Always explain the exact timeline for redemption to clients: T+1 for liquid, T+2 for debt, T+3 for equity funds