Mutual funds and SIPs in India: NAV, expense ratio, direct vs regular and other terms explained
What a mutual fund is, how NAV and units work, what a SIP is, what the expense ratio and plan types mean, and how to read a factsheet. Terms and mechanics only, with illustrative numbers.
A mutual fund pools money from many people and invests it in a set of securities, such as shares or bonds, according to a stated objective. A professional fund manager at an asset management company (AMC) makes the choices. This guide explains the terms you will meet. It does not compare or recommend any fund, and it says nothing about future returns, which are not guaranteed.
At a glance
| Term | Meaning |
|---|---|
| Unit | Your share of the fund. You buy units, not the underlying securities. |
| NAV | Net asset value: the value of one unit, worked out each day. |
| SIP | Systematic investment plan: a fixed amount invested at regular intervals. |
| Expense ratio | The yearly cost of running the fund, as a percentage of its assets. |
| Direct / regular plan | Two versions of the same fund that differ in cost and how it is bought. |
| Exit load | A fee charged if you redeem within a stated period. |
| Riskometer | A labelled scale showing the fund’s level of risk. |
NAV and units
The NAV is the fund’s total assets minus its liabilities, divided by the number of units. If a fund’s assets are ₹1,000 crore, liabilities ₹10 crore and there are 99 crore units, the NAV is ₹10. When you invest ₹10,000 at that NAV you receive 1,000 units. The NAV changes daily as the value of the underlying holdings changes. A low NAV does not mean a fund is cheap and a high NAV does not mean it is expensive; it is just the per-unit value. See what NAV means.
Types of fund, by what they hold
- Equity funds hold mainly shares.
- Debt funds hold bonds and other lending instruments.
- Hybrid funds hold a mix.
- Index funds and ETFs aim to mirror an index rather than have a manager pick holdings. ETFs trade on an exchange like a share.
SEBI defines fund categories so that funds with the same label follow similar rules.
SIP and lump sum
A SIP invests a fixed amount at set intervals, for example ₹5,000 on the 5th of each month. A lump sum invests the whole amount at once. A SIP is a way of paying, not a different product: the same fund can be bought either way. Because each instalment buys at that day’s NAV, you receive more units when the NAV is lower and fewer when it is higher. To see the arithmetic for an assumed rate, use the SIP calculator. The rate is your assumption, not a forecast.
Costs
The expense ratio is deducted from the fund’s assets every day, which is reflected in the NAV, so you do not see a separate bill. A cost of 1% a year sounds small but compounds: see the cost you do not see.
Direct plans are bought straight from the AMC and have a lower expense ratio. Regular plans are bought through an intermediary, and the higher expense ratio includes a commission to them. The portfolio is the same; the cost is different.
An exit load applies only if you redeem before a stated period. It is stated in the fund’s documents.
Reading a factsheet
A fund’s monthly factsheet lists its objective, the riskometer, the top holdings, the sector split, the expense ratio, the exit load and the fund manager. Read the objective and the riskometer first: they tell you what the fund says it does and how much risk the AMC labels it with.
Before anything else: KYC
To invest you complete KYC once. It works across fund houses.
Common questions
Are mutual fund returns guaranteed? No. The value of units can fall as well as rise.
Is a SIP safer than a lump sum? It is a different way of investing, with different arithmetic. It does not remove risk.
Where is the official information? In each fund’s scheme documents and factsheet, on the AMC’s site, and in AMFI and SEBI’s investor education pages.
We do not recommend any fund. See our disclaimer.