Mutual funds: structure, NAV, plans and costs

₹10 lakh invested for 20 years at an assumed 10 % a year before costs grows to ₹61,41,612 if the fund costs 0.5 % a year, and to ₹51,12,046 if it costs 1.5 %. The portfolio can be identical; the ₹10,29,566 between them is the cost, and it is printed in the scheme’s documents for anyone to compare.

This lesson takes a mutual fund apart: who runs it and who guards it, how its net asset value is worked out and what your units are worth, why the direct and regular plans of one scheme have different NAVs, how a riskometer level is calculated, and what the category, the documents, index funds and ETFs tell you. It is education only: every scheme and number in it is invented or assumed, it names no fund, and it recommends none.

A mutual fund is a trust that pools money into units

When you put ₹50,000 into a scheme, you do not buy shares or bonds yourself. Your money joins everyone else’s in one pool, and you receive units, each an undivided share in what the pool owns. The SEBI (Mutual Funds) Regulations, 2026, which replaced the regulations of 1996, set out who does what. A mutual fundmutual fund: A trust registered with SEBI that pools investors' money in schemes and invests it in securities and other permitted assets. Investors hold units, each an undivided share of a scheme's assets. is always a trust, and the jobs are split so that no single party both invests your money and holds it:

The asset management companyasset management company (AMC): The company, approved by SEBI, that launches a mutual fund's schemes and invests their money according to each scheme's objective, under the oversight of the fund's trustees., the fund house, runs the schemes; the trustees oversee it on the unitholders’ behalf; a custodian independent of the fund house keeps the securities. A scheme is open-ended when it sells and buys back units on any business day with no fixed end, and close-ended when its maturity is fixed. SEBI’s investor site lists what this structure gives you: professional management, a diversified portfolio, a NAV published every day, portfolios disclosed at set intervals, and expenses capped by regulation.

NAV is net assets divided by units, worked out every day

The net asset valuenet asset value (NAV): What one unit of a scheme is worth: the scheme's net assets, valued under SEBI's rules, divided by the units outstanding, worked out every business day. is what one unit is worth. Regulation 43 defines it exactly: every business day, the fund house divides the scheme’s net assets, valued under SEBI’s valuation rules, by the number of units outstanding. Step through an invented scheme’s day:

SEBI’s consolidated circular for mutual funds sets the prices on either side of a NAV. You buy at the applicable NAV, since there is no entry load on any scheme, and you sell back at the NAV less any exit loadexit load: A charge on units sold back within a period a scheme sets, taken as a share of the NAV and kept in the scheme for the investors who stay. For an open-ended scheme it may not exceed 3 %., which is charged as a percentage of the NAV, capped at 3 % for an open-ended scheme by the regulations and credited to the scheme itself, net of any GST on it. NAVs are rounded to two decimals, or four for index funds and debt schemes. The program buys and redeems units of the invented scheme, leaving stamp duty and tax aside:

"""An invented scheme's NAV, a purchase of its units and a redemption with an exit load.

The NAV follows regulation 43 of the SEBI (Mutual Funds) Regulations, 2026: net assets divided by the units
outstanding, worked out every day. Sale and repurchase follow SEBI's consolidated circular for mutual funds: units are
bought at the applicable NAV and sold back at NAV × (1 − exit load), and the exit load, net of any GST on it, is
credited to the scheme. The scheme, its figures and its 1 % exit load on units redeemed within 12 months are invented.
This example keeps units to three decimal places, rounded down, and leaves out stamp duty and taxes. Decimal
arithmetic throughout.
"""

from decimal import ROUND_DOWN, ROUND_HALF_UP, Decimal

CRORE = Decimal(10_000_000)


def rupees(amount, places="0.01"):
    value = Decimal(amount).quantize(Decimal(places), rounding=ROUND_HALF_UP)
    whole, _, paise = f"{value:.2f}".partition(".")
    head, tail = whole[:-3], whole[-3:]
    groups = []
    while len(head) > 2:
        groups.insert(0, head[-2:])
        head = head[:-2]
    if head:
        groups.insert(0, head)
    return "₹" + ",".join(groups + [tail]) + "." + paise


def crore(amount):
    return f"₹{(Decimal(amount) / CRORE).quantize(Decimal('0.01'))} crore"


print("1. The NAV at the end of a day")
securities = Decimal("412.60") * CRORE  # what the holdings would fetch at the day's prices
cash = Decimal("6.80") * CRORE
receivable = Decimal("1.10") * CRORE  # interest and dividends earned, not yet received
payable = Decimal("2.40") * CRORE  # money the scheme owes, such as for securities bought
expenses = Decimal("0.10") * CRORE  # the day's expenses, accrued
net_assets = securities + cash + receivable - payable - expenses
units_out = Decimal("12.50") * CRORE
nav = (net_assets / units_out).quantize(Decimal("0.01"), rounding=ROUND_HALF_UP)
print(f"   securities {crore(securities)} + cash {crore(cash)} + receivable {crore(receivable)}")
print(f"   − payable {crore(payable)} − accrued expenses {crore(expenses)} = net assets {crore(net_assets)}")
print(f"   net assets ÷ {units_out / CRORE} crore units = NAV {rupees(nav)}")

print()
print("2. A purchase of ₹50,000 at that NAV")
invest = Decimal(50_000)
units = (invest / nav).quantize(Decimal("0.001"), rounding=ROUND_DOWN)
print(f"   {rupees(invest)} ÷ {rupees(nav)} = {units} units")

print()
print("3. Redeeming all of them eight months later, at a NAV of ₹36.10")
nav_later = Decimal("36.10")
load = Decimal("0.01")
price = nav_later * (1 - load)
gross = units * nav_later
paid = units * price
print(f"   repurchase price = ₹36.10 × (1 − 1 %) = ₹{price:.3f}")
print(f"   paid out: {units} × ₹{price:.3f} = {rupees(paid)}")
print(f"   at the NAV itself the units are worth {rupees(gross)}; the exit load of {rupees(gross - paid)} goes to the scheme")
print(f"   gain before tax: {rupees(paid - invest)} on {rupees(invest)}")

1. The NAV at the end of a day
   securities ₹412.60 crore + cash ₹6.80 crore + receivable ₹1.10 crore
   − payable ₹2.40 crore − accrued expenses ₹0.10 crore = net assets ₹418.00 crore
   net assets ÷ 12.50 crore units = NAV ₹33.44

2. A purchase of ₹50,000 at that NAV
   ₹50,000.00 ÷ ₹33.44 = 1495.215 units

3. Redeeming all of them eight months later, at a NAV of ₹36.10
   repurchase price = ₹36.10 × (1 − 1 %) = ₹35.739
   paid out: 1495.215 × ₹35.739 = ₹53,437.49
   at the NAV itself the units are worth ₹53,977.26; the exit load of ₹539.77 goes to the scheme
   gain before tax: ₹3,437.49 on ₹50,000.00

₹50,000 at a NAV of ₹33.44 bought 1,495.215 units. Eight months later the NAV was ₹36.10, but the units were redeemed within the 12 months of the invented exit load, so each was bought back at ₹35.739: ₹53,437.49 paid out, and the ₹539.77 of exit load, less any GST on it, went to the scheme for the investors who stay.

Direct and regular plans hold the same portfolio at different costs

Every scheme comes in two plans with the same portfolio and the same fund manager. SEBI’s consolidated circular requires a direct plandirect plan: The plan of a mutual fund scheme for investments not routed through a distributor. It holds the same portfolio as the regular plan but pays no distribution commission, so it costs less and its own NAV grows faster. for investments not routed through a distributor; because no distribution commission is paid from it, it has a lower expense ratio and a NAV of its own. The regular planregular plan: The plan of a mutual fund scheme bought through a distributor. Its expenses include the distributor's commission, so its expense ratio is higher than the direct plan's and its NAV grows more slowly. is the one bought through a distributor, and its expenses include the distributor’s commission.

What a plan costs is its total expense ratiototal expense ratio (TER): A scheme's yearly costs as a share of its assets: the base expense ratio, brokerage, transaction costs and statutory levies. It is charged on the daily net assets, so every NAV is already after it., the TER: a base expense ratio, the brokerage for its trades, the exchanges’ transaction costs and the statutory levies, as a share of the scheme’s assets. Regulation 66 caps the base part, as a per cent of the daily net assets:

The caps fall as a scheme grows, and the direct plan’s base ratio must exclude distribution expenses and commissions. Brokerage on top of the base ratio is capped too, at 0.06 % of the trade value in the cash market. The TER is charged a little every day, so it is already inside every NAV you see; nothing is billed to you separately.

A one-point cost gap compounds into lakhs

A yearly cost works like a negative interest rate: it is taken off every year’s return, and the money it removes stops compounding. The model below is the compound-interest one, set to the opening’s numbers: ₹10 lakh for 20 years at 9.5 %, the assumed 10 % less a cost of 0.5 %. Change the rate to 8.5 % for a cost of 1.5 % and read the balance again:

At 9.5 % the balance reaches ₹61,41,612; at 8.5 %, ₹51,12,046. The program works out the three costs, checks the result when the cost is charged daily, as a TER is, and follows the NAVs of two plans of one scheme from ₹10:

"""What a yearly cost does over 20 years: ₹10 lakh at an assumed 10 % gross return a year, at three levels of cost.

The 10 % is an assumption for the arithmetic, not a forecast, and the three costs stand for any yearly expense ratio,
such as a regular plan's against a direct plan's of the same scheme. Part 1 takes the cost straight off the yearly
return (10 % − 0.5 % = 9.5 %), the simple convention. Part 2 charges it a little every day, as a total expense ratio is
charged on the daily net assets, which leaves slightly less. Part 3 follows two plans' NAVs from ₹10 at launch.
Nothing here describes a real scheme.
"""

from decimal import ROUND_HALF_UP, Decimal, getcontext

getcontext().prec = 40
START = Decimal(1_000_000)
GROSS = Decimal("0.10")
YEARS = 20
COSTS = (Decimal("0.005"), Decimal("0.010"), Decimal("0.015"))


def inr(amount):
    value = int(Decimal(amount).quantize(Decimal("1"), rounding=ROUND_HALF_UP))
    digits = str(value)
    head, tail = digits[:-3], digits[-3:]
    groups = []
    while len(head) > 2:
        groups.insert(0, head[-2:])
        head = head[:-2]
    if head:
        groups.insert(0, head)
    return "₹" + ",".join(groups + [tail])


def pct(x):
    return f"{(x * 100).quantize(Decimal('0.1'))} %"


print(f"1. {inr(START)} for {YEARS} years at {pct(GROSS)} a year before costs, the cost taken off each year's return")
simple = {}
for c in COSTS:
    simple[c] = START * (1 + GROSS - c) ** YEARS
    print(f"   cost {pct(c)}: {inr(simple[c])}")
print(f"   the gap between {pct(COSTS[0])} and {pct(COSTS[-1])}: {inr(simple[COSTS[0]] - simple[COSTS[-1]])}")
print(f"   the gap between {pct(COSTS[0])} and {pct(COSTS[1])}: {inr(simple[COSTS[0]] - simple[COSTS[1]])}")

print()
print("2. The same, with the cost charged on every one of 365 days instead")
daily = {}
for c in COSTS:
    daily[c] = START * ((1 + GROSS) * (1 - c / 365) ** 365) ** YEARS
    print(f"   cost {pct(c)}: {inr(daily[c])}")
print(f"   the gap between {pct(COSTS[0])} and {pct(COSTS[-1])}: {inr(daily[COSTS[0]] - daily[COSTS[-1]])}")

print()
print("3. Two plans of one scheme from a NAV of ₹10.00, the cost taken off each year's return")
direct, regular = Decimal("0.005"), Decimal("0.015")
print(f"{'Year':>7}{'Direct NAV':>13}{'Regular NAV':>14}")
for year in (1, 5, 10, 20):
    d = (10 * (1 + GROSS - direct) ** year).quantize(Decimal("0.01"), rounding=ROUND_HALF_UP)
    r = (10 * (1 + GROSS - regular) ** year).quantize(Decimal("0.01"), rounding=ROUND_HALF_UP)
    print(f"{year:>7}{'₹' + str(d):>13}{'₹' + str(r):>14}")

1. ₹10,00,000 for 20 years at 10.0 % a year before costs, the cost taken off each year's return
   cost 0.5 %: ₹61,41,612
   cost 1.0 %: ₹56,04,411
   cost 1.5 %: ₹51,12,046
   the gap between 0.5 % and 1.5 %: ₹10,29,566
   the gap between 0.5 % and 1.0 %: ₹5,37,201

2. The same, with the cost charged on every one of 365 days instead
   cost 0.5 %: ₹60,87,290
   cost 1.0 %: ₹55,07,996
   cost 1.5 %: ₹49,83,824
   the gap between 0.5 % and 1.5 %: ₹11,03,466

3. Two plans of one scheme from a NAV of ₹10.00, the cost taken off each year's return
   Year   Direct NAV   Regular NAV
      1       ₹10.95        ₹10.85
      5       ₹15.74        ₹15.04
     10       ₹24.78        ₹22.61
     20       ₹61.42        ₹51.12

A gap of one percentage point, 0.5 % against 1.5 %, cost ₹10,29,566 over 20 years, about a sixth of the cheaper result, and half a point cost ₹5,37,201. Charged daily instead, the gap grows slightly, to ₹11,03,466. The two plans’ NAVs show the same thing from the inside: ₹10.95 against ₹10.85 after a year, ₹61.42 against ₹51.12 after twenty.

The riskometer is worked out from what the fund holds

Every scheme carries a product label, which SEBI’s consolidated circular prescribes: the nature of the scheme, such as wealth creation or regular income over an indicative horizon; its objective in one line; and a riskometerriskometer: The six-level gauge of risk, from Low to Very High, on every mutual fund scheme's label, worked out each month from the portfolio by a method SEBI prescribes. with six levels, from Low through Low to Moderate, Moderate, Moderately High and High to Very High. The level comes from a method SEBI prescribes, not from a fund house’s view: Annexure 10 of the circular turns the portfolio into a number. Each equity holding scores for its company’s size, its daily volatility and its impact cost, a measure of how easily it trades; each debt holding scores for its credit rating, the portfolio’s interest-rate sensitivity and its liquidity. The program applies the method to three invented portfolios:

"""The riskometer level of three invented portfolios, by the method of SEBI's consolidated circular for mutual funds.

Annexure 10 of that circular gives each holding values for a few risks, averages them over the portfolio by
weight, and maps the result to a level (its Table 11). Equity: market capitalisation (large 5, mid 7, small 9), daily
volatility over two years (up to 1 %: 5, above: 6) and impact cost (up to 1 %: 5, up to 2 %: 7, above: 9), then the
simple average of the three. Debt: credit risk by rating, interest-rate risk by the portfolio's Macaulay duration and
liquidity risk by listing, rating and structure, then the simple average, or the liquidity value if that is higher.
The portfolios are invented; no real scheme is described.
"""

from decimal import ROUND_HALF_UP, Decimal

LEVELS = ((1, "Low"), (2, "Low to Moderate"), (3, "Moderate"), (4, "Moderately High"), (5, "High"))


def level(value):
    for top, name in LEVELS:
        if value <= top:
            return name
    return "Very High"


def weighted(parts):
    """Σ weight × value over (weight in per cent, value) pairs."""
    return sum(Decimal(w) / 100 * v for w, v in parts)


def show(x):
    return x.quantize(Decimal("0.01"), rounding=ROUND_HALF_UP)


def equity(name, cap, vol, impact):
    caps = weighted(cap)
    vols = weighted(vol)
    impacts = weighted(impact)
    value = (caps + vols + impacts) / 3
    print(f"{name}")
    print(f"   market capitalisation {show(caps)}, volatility {show(vols)}, impact cost {show(impacts)}")
    print(f"   average {show(value)}: {level(value)}")


def debt(name, credit, duration_value, liquidity):
    credits = weighted(credit)
    liquid = weighted(liquidity)
    average = (credits + duration_value + liquid) / 3
    value = max(average, liquid)
    print(f"{name}")
    print(f"   credit risk {show(credits)}, interest-rate risk {duration_value}, liquidity risk {show(liquid)}")
    rule = "liquidity is higher, so it counts" if liquid > average else "the average counts"
    print(f"   average {show(average)}, {rule}: {show(value)}, {level(value)}")


equity(
    "A: only large companies, each steady and easy to trade",
    cap=[(100, 5)],
    vol=[(100, 5)],
    impact=[(100, 5)],
)
equity(
    "B: 60 % large, 30 % mid-sized and 10 % small companies",
    cap=[(60, 5), (30, 7), (10, 9)],
    vol=[(50, 5), (50, 6)],
    impact=[(70, 5), (20, 7), (10, 9)],
)
debt(
    "C: short-term debt, Macaulay duration 2.4 years",
    credit=[(50, 1), (30, 2), (20, 3)],  # government securities and AAA, AA+, AA
    duration_value=4,  # more than 2 and up to 3 years
    liquidity=[(50, 1), (30, 3), (20, 4)],  # government securities, listed AA+, listed AA
)
print()
print("Every equity value is 5 or more, so a portfolio of equity alone can never score below High.")

A: only large companies, each steady and easy to trade
   market capitalisation 5.00, volatility 5.00, impact cost 5.00
   average 5.00: High
B: 60 % large, 30 % mid-sized and 10 % small companies
   market capitalisation 6.00, volatility 5.50, impact cost 5.80
   average 5.77: Very High
C: short-term debt, Macaulay duration 2.4 years
   credit risk 1.70, interest-rate risk 4, liquidity risk 2.20
   average 2.63, the average counts: 2.63, Moderate

Every equity value is 5 or more, so a portfolio of equity alone can never score below High.

A portfolio of only large, steady, easily traded companies scores exactly 5.00, High; adding mid-sized and small companies takes it to 5.77, Very High; the short-term debt portfolio scores 2.63, Moderate. Every equity value in the method is 5 or more, so a scheme of equity alone can never show less than High. The level is evaluated every month, disclosed with the portfolio within 10 days of the month’s end, and any change is sent to unitholders by e-mail or SMS.

The category and the documents say what you are buying

SEBI sorts every scheme into a category with fixed characteristics, so that two funds with the same category name hold the same kind of portfolio. Its categorisation circular groups them as equity, debt, hybrid, Life Cycle Funds and other schemes, which include index funds, ETFs and funds of funds. A few of the rules:

The scheme’s documents say the rest. The offer document has two parts: the scheme information document, the SID, with everything about one scheme, and the statement of additional information about the fund house and its rules. A key information memorandum, the KIM, a short summary, comes with every application form, and the riskometer is printed on the front page of the SID, the KIM and the application form. The SID shows the effect of the expense ratio on the returns of both plans, and every one of these documents is on the fund house’s website.

Index funds and ETFs track an index instead of picking

An index fundindex fund: A mutual fund scheme that invests in the securities of an index in the index's proportions, aiming to match the index rather than beat it. It is bought and sold at the day's NAV. invests in the securities of an index in the same proportions as the index, so its aim is to match the index, not to beat it. An exchange traded fundexchange traded fund (ETF): A scheme that, like an index fund, holds an index's securities in its proportions, but whose units are listed and traded on a stock exchange at market prices, through a broker and a demat account. does the same, but its units are listed and traded on a stock exchange, which the regulations make mandatory. Both are structures: what they hold is set by the index they follow, and the regulations cap their base expense ratio at 0.90 %.

An actively managed scheme differs from both in what it holds: whatever its fund manager chooses within its category, with base expenses capped higher, at up to 2.10 % on the first ₹500 crore of an equity-oriented scheme.

SEBI’s investor site adds the practical differences: an ETF trades at market prices through the day, cannot be bought in fractions of a unit, and carries a broker’s charges, while an index fund is bought and sold at the NAV like any other scheme. Neither matches its index exactly, because of expenses and the costs of following it; the slight difference between a fund’s return and the index’s is its tracking errortracking error: The slight difference between an index fund's or ETF's return and the return of the index it follows, caused mainly by its expenses and the costs of following the index..

Practise: units, plans, costs and labels

Six of these ask for a number and the rest for a choice, from a NAV to an ETF. Your weakest idea comes up first, and every number can be worked out from this page:

Interview questions

Warm-up (fresher): Why does the direct plan of a scheme have a higher NAV than its regular plan?

Both plans hold the same portfolio, but they carry different costs. SEBI requires every scheme to offer a direct plan for investments not routed through a distributor; no distribution commission is paid from it, so its expense ratio is lower, and it has its own NAV. The total expense ratio is charged every day on the plan’s assets, so the plan that pays more grows a little more slowly every day. From a NAV of ₹10 at launch, at an assumed 10 % a year before costs, a plan costing 0.5 % reaches ₹15.74 in five years and one costing 1.5 % reaches ₹15.04; after 20 years, ₹61.42 against ₹51.12. The gap is the cost of distribution.

Warm-up (fresher): What is NAV, and how is it calculated?

NAV, net asset value, is what one unit of a scheme is worth. Every business day the fund house values the scheme’s holdings at the day’s prices under SEBI’s valuation rules, adds cash and income receivable, subtracts what the scheme owes and its accrued expenses, and divides the net assets by the units outstanding. For an invented scheme with ₹418 crore of net assets and 12.5 crore units, the NAV is ₹33.44. Investors buy at the NAV, since there is no entry load, and sell back at the NAV less any exit load. Most schemes must publish the day’s NAV by 11 p.m. that day.

Key takeaways

• A mutual fund is a trust: the fund house invests, the trustees oversee it for the unitholders, and an independent custodian keeps the securities, while you hold units, each an undivided share of the pool.
• The NAV is net assets divided by units, worked out every business day; you buy at the NAV and sell at the NAV less any exit load, which is credited to the scheme.
• The direct and regular plans of a scheme hold the same portfolio; the direct plan pays no distribution commission, so its expense ratio is lower and its NAV higher.
• A cost gap compounds: 0.5 % against 1.5 % a year turned ₹10 lakh into ₹61,41,612 or ₹51,12,046 in 20 years.
• The riskometer is calculated from the holdings, and equity alone always scores High or above; the category, the SID and the KIM say what the scheme must hold, and index funds and ETFs simply follow an index.