What Is a Mutual Fund? Net Asset Value (NAV) Mechanics, Types & SEBI Regulations
A mutual fund is a professionally managed collective investment scheme that pools capital from numerous retail and institutional investors to construct a diversified portfolio of securities, including corporate equities, government bonds, money market instruments, and gold. In India, mutual funds are structured as trusts under the Indian Trusts Act of 1882 and operate under the strict regulatory oversight of the Securities and Exchange Board of India (SEBI), pursuant to the SEBI (Mutual Funds) Regulations of 1996. By pooling savings, mutual funds democratize capital markets, allowing small investors to access professional fund management, operational risk diversification, and institutional trading liquidity that would be difficult to attain through individual stock purchases.
The foundational operational metric of any mutual fund scheme is its Net Asset Value, universally known as NAV. The NAV represents the intrinsic per-unit market value of the fund's underlying assets. It is computed at the close of every business day using a standardized mathematical formula: total market value of all securities held in the portfolio, plus accrued dividends and cash balances, minus all accrued liabilities and management expenses, divided by the total number of outstanding units issued to investors. Unlike corporate equity shares whose trading prices fluctuate continuously during exchange market hours based on buyer-seller order matching, mutual fund units are transacted strictly at the single end-of-day NAV determined post-market closure.
Mutual funds are categorized primarily into open-ended and close-ended structures. Open-ended funds offer continuous redemption and issuance of units at prevailing NAV without a fixed maturity period, whereas close-ended funds issue a fixed unit quantity through a New Fund Offer and trade on stock exchanges until a stipulated liquidation date. Investors participate either through lumpsum investments or via Systematic Investment Plans (SIPs), which enable automated, periodic capital contributions. A portion of assets is deducted annually as the Total Expense Ratio (TER), capped by SEBI to regulate asset management fees, marketing outlays, and custodial costs.