How Mutual Funds Work in India

What Is NAV and How Is It Calculated?

A mutual fund's Net Asset Value (NAV) is the per-unit price of a scheme, published once every business day. It equals total scheme assets minus liabilities, divided by the number of units outstanding. Under SEBI regulations, every AMC must compute and report this daily, and AMFI consolidates this figure for every scheme in the country each evening.

NAV is not a quality signal. A fund trading at Rs 500 NAV is not more expensive or better-performing than one at Rs 50 NAV. What matters for an investor is the percentage return over time, not the absolute NAV figure: two funds with identical underlying performance can show very different NAVs purely because of when they launched and what their starting NAV was.

How to Invest in a Mutual Fund

Investing in any AMFI-registered scheme follows the same five-step process, regardless of which fund or AMC.

1. Complete KYC. A one-time PAN and Aadhaar based e-KYC through any KYC Registration Agency (KRA) covers all mutual fund investing across every AMC, not just one.
2. Choose Direct or Regular. The Direct plan has a lower expense ratio since it carries no distributor commission, which compounds into a meaningfully larger corpus over a long holding period. See the comparison below.
3. Decide lumpsum or SIP. A lumpsum works when a large amount is available now; an SIP works for a fixed monthly commitment. Use the SIP Calculator or Lumpsum Calculator to compare both approaches for a specific target amount.
4. Choose Growth or IDCW. Growth compounds gains inside the fund. IDCW pays out periodically as taxable income. See the comparison below.
5. Submit the application. Apply through the AMC's own site, a registered mutual fund platform, or an RTA (CAMS or KFin Technologies), and track NAV and returns going forward.

Direct vs Regular Plans

A Direct Plan is bought straight from the AMC, with no distributor or advisor involved, so there is no commission built into the cost structure. A Regular Plan is bought through a distributor, bank, or advisor, whose trail commission is folded into a higher expense ratio, typically 0.5 to 1.5 percentage points higher than the same scheme's Direct Plan.

That gap looks small year to year but compounds meaningfully over a long holding period, since the difference in expense ratio directly reduces the NAV growth rate every single year, not just once. Every scheme on Fermor that is eligible for indexing is shown as its Direct Plan, Growth option variant specifically because that is the lowest-cost, most-compared version of each fund.

Growth vs IDCW Options

The Growth option reinvests every gain back into the fund, so NAV keeps compounding and the investor only realises a gain when units are actually redeemed. The IDCW (Income Distribution cum Capital Withdrawal) option pays out gains periodically, whenever the fund declares one, and each payout reduces the NAV by roughly the payout amount.

IDCW payouts are taxed as income in the investor's hands in the year received, regardless of how long the units have been held. For an investor not relying on the fund for periodic income, Growth is almost always the more tax-efficient and higher-compounding choice of the two.

How Mutual Fund Returns Are Calculated

For periods under 1 year, return is a simple point-to-point calculation: (current NAV minus starting NAV) divided by starting NAV, expressed as a percentage. For periods of 1 year or longer, return is annualised using CAGR: ((current NAV divided by starting NAV) raised to the power of (365 divided by days elapsed)) minus 1.

Annualising longer periods matters because it puts a 3-year return and a 5-year return on the same comparable footing (a percentage per year), rather than a raw cumulative number that makes longer-held funds look artificially better just for having more time to compound. Run the exact CAGR math for any two NAV points using the CAGR Calculator, or the XIRR Calculator for a series of SIP instalments made on different dates.

Frequently Asked Questions