Subscription: How Money Turns Into Units of a Scheme

A subscription hands rupees to a scheme and receives units back. In an open-ended scheme nobody sells those units; they are brought into existence against the money, so both net assets and units outstanding rise together and the value per unit is left where it was. The holder chooses the amount. The unit count is what the division returns.

One thing trips people. Anybody who has bought a share already carries a picture of what buying works like: somebody wanted out, somebody wanted in, a price was agreed, and the thing changed hands. Almost none of that picture survives the trip into a scheme. A subscriptionThe instruction that puts money into a scheme and takes units back in return. into an ordinary open-ended schemeA scheme that keeps making units against money coming in and cancelling them against money going out, with no closing date on either side. has no counterparty, no bid, no ask and no seller. The units on the other side of it are manufactured out of the transaction itself. Once that is seen, most of the questions readers ask about subscriptions answer themselves.

One scheme runs through this guide from the first division to the last. Girnar Asset Management Limited, an invented asset manager, operates the Girnar Large Cap Equity Fund, an open-ended equity scheme carrying net assetsWhat a scheme holds less what it owes, measured at a stated moment. of Rs 4,200 crore against 120.00 crore units in issue. Divide those net assets by those units and the value per unitOne figure per dealing day, reached by sharing what a scheme is worth across every unit alive. is Rs 35.00 exactly, and that division is performed here rather than the answer being quoted. The scheme is held across 3,80,000 foliosThe account number a holder's unit balance and details are recorded against.. Kalyani Bhagat manages the portfolio and Sohail Merchant heads operations.

Three matters are covered separately and taken as given here: what a scheme is and who stands behind it; the nature of a unit as a legal interest; and how one figure a day gets struck out of a set of books. Only the instruction itself is walked below, from the moment a holder gives it to the moment a balance exists.

What is a subscription, and who exactly sold the units?

Put at its shortest: money goes to the scheme, units come back. Eight words hold the entire definition, and everything worth knowing sits in the second half of them. In an ordinary open-ended scheme the units handed back were not sitting anywhere waiting. The units did not exist a moment earlier. The scheme writes them into existence because money arrived, and the count it writes is decided by arithmetic rather than by negotiation.

Think about a village chit where eleven households put in equal amounts every month and share what the pot holds. When a twelfth household joins and puts in its share, nobody sells them a place. A place is made, and it is made exactly the size of what they put in. Nobody in the first eleven is worse off, and nobody had to agree a price with the newcomer. A scheme works on the same principle at industrial scale: the pool takes the money, makes room in proportion, and the room it makes is the units.

The vocabulary of trading fits a subscription badly for exactly that reason. There are not two parties with views, so there is no bid and no ask. Nothing exists to match against, so there is no order book. Nothing was ever unfilled, so there is no fill. In their place stand a receipt of money, a division, and an allotmentWriting a count of units onto a holder account, once a figure has attached to the transaction. written into a record. Girnar Asset Management runs that chain for the Girnar Large Cap Equity Fund the same way for a Rs 5,000/- instruction and a Rs 5 crore one.

Inside an open-ended fund, what changes the moment money arrives?

An open-ended scheme is one that goes on creating units against money arriving and cancelling them against money leaving, without a shutter coming down on either side. The Girnar Large Cap Equity Fund is one, and so is the Girnar Broad Market Index Fund that Girnar Asset Management Limited also operates. The form itself is covered separately. The question at this point is what a subscription meets when it walks into one.

A subscription meets a scheme that will accommodate it by growing. Two quantities move at the same instant. Rupees came in and the scheme now holds more than it did, so the net assets rise. The units outstandingHow many units are alive across every account at one moment, added together. rise as well. Units were written into existence to stand against those rupees. The scheme grows by exactly the amount that was handed over and not by a single rupee more. A subscription is therefore an addition to the pool rather than a transfer inside it.

Say the pool at Girnar Asset Management holds Rs 4,200 crore across 120.00 crore units and a holder subscribes Rs 1,00,000/-. Net assets become Rs 42,00,01,00,000/-, or Rs 4,200.01 crore. Units outstanding become 1,20,00,02,857.143. Neither figure moved for any reason except the transaction, and no other holder's balance changed by anything at all. Nobody had to sell, nobody had to be found, and nothing had to be matched.

Why can no fresh unit appear in a close-ended fund once its offer has shut?

A close-ended schemeA scheme whose units stop being created against fresh money once its offer period has closed. takes money during an offer period, issues its units against that money, and then stops issuing. After the offer closes the scheme is finished growing by that route. Creating units is precisely what that form no longer does, so no fresh rupee brings one into existence.

So what happens to somebody who decides afterwards that they want in? Anybody arriving later buys units from a holder who already has some. The transaction is a genuine purchase in the ordinary sense: there is a seller, there is a buyer, and a price is arrived at between the two of them rather than struck out of a book of accounts. And one part of this matters for everything that follows. The scheme itself is not a party to that transaction: it receives nothing, it issues nothing, and its total unit count sits precisely where it sat before, so one word covers two entirely separate events, and only in the first of them does any figure belonging to the scheme itself move.

An everyday version. A residents' association sells fifty parking slots when a building is new, and after that it sells no more. There are fifty slots and there will be fifty slots. Somebody who wants one in year three buys it from a resident who has one. Money changes hands between two people. Nothing was created and nothing was cancelled, so the association's books do not change. Compare that with the chit from earlier, where a new member joins and a new place is simply made. Same word for joining, two completely different mechanics.

Why is nobody already in the pool made worse off by this?

Because money and units walk in together, in step, at exactly the same proportion. The claim is easy to nod at and hard to believe, and the arithmetic that settles it runs as follows.

DilutionWhat happens when fresh claims arrive without their weight of money behind them, so each older claim stands for less. happens when the count of claims on a pool grows faster than the pool does. Add twenty per cent more claims against five per cent more money and every old claim is worth less. Dilution is a real thing, it happens in companies, and the intuition a reader brings to it is not superstition. A scheme differs in one respect. The count of new claims is not chosen by anybody. The count is computed, by dividing the money that arrived by the value per unit that attached to it, and that division forces the two growth rates to be identical.

Work it on the Girnar Large Cap Equity Fund. Rs 1,00,000/- against net assets of Rs 4,200 crore is a share of one part in 4,20,000, exactly one 4,200th of one per cent, or about 0.00024 per cent. Now the units. The count allotted is Rs 1,00,000/- divided by Rs 35.00, and that count against 120.00 crore units in issue is also one part in 4,20,000, exactly one 4,200th of one per cent. The two shares are not close to each other and they are not approximately equal; before any rounding they are the same number, and that identity, rather than anybody's restraint or good behaviour, is the entire reason the value per unit is left where it was.

The algebra runs to one line, in words. Units created are the amount divided by the value. So the new units as a fraction of the old units are the amount divided by the value divided by the old units. And the old units are the old net assets divided by the value. The value cancels out of the top and the bottom, and what is left is the amount divided by the old net assets. The leftover is the money share. The cancellation is the proof, and it works for any amount at all. The control further down confirms it.

What does Rs 1,00,000/- actually do to this scheme, step by step?

Start where the scheme starts. Girnar Asset Management Limited reports net assets of Rs 4,200 crore for the Girnar Large Cap Equity Fund against 120.00 crore units in issue. Written out in full rupees that is Rs 42,00,00,00,000/- and 1,20,00,00,000 units. Divide: Rs 35.00 per unit, exactly, with no remainder to argue about.

Now the subscription. Take Rs 1,00,000/- against the Rs 35.00 just divided out. One lakh over thirty five runs to 2,857.142857 units and does not stop there. No amount of patience makes 35 divide 1,00,000 cleanly, so the division does not terminate. The scheme in this illustration records unit balances to a thousandth, so the count written down is 2,857.143 units. Notice which way that landed: the fourth decimal was an eight, so the third rounded up, and the folio was credited with a hair more than the exact division would have given it.

How much more, in money? The recorded 2,857.143 units at Rs 35.00 come to Rs 1,00,000.005/-, against Rs 1,00,000/- actually handed over. The residue is half a paisa, and it sits on the holder's side of the line rather than the scheme's. Half a paisa falls exactly halfway between two whole paise, so it cannot be stated to the paisa at all without silently choosing a rounding rule and pretending the choice was arithmetic. The residue is therefore named as Rs 0.005/-, with the direction it fell, and left there.

Then the two aggregates. Net assets go from Rs 42,00,00,00,000/- to Rs 42,00,01,00,000/-, or Rs 4,200.01 crore. Units outstanding go from 1,20,00,00,000 to 1,20,00,02,857.143. Now divide the second into the first and see where the value per unit lands.

Here is the whole run in rows, so nothing has to be taken on trust.

The last row deserves a word. The obvious check is a different one. The tempting move here is to take Rs 35.00, apply it to the fresh unit total, and see whether the answer lands on the fresh net assets. The answer does land there, but the exercise is not a check at all: multiplying is division run backwards, so it is the same identity turned around and it cannot fail even if the arithmetic before it was wrong. A check is only worth running if it can come out wrong, so a different route serves: the half paisa of residue, divided by the new unit count, must equal the amount by which the value per unit falls short of Rs 35.00, and those two quantities were reached along different paths. The two agree exactly, at about four ten-billionths of a paisa per unit, and that agreement makes the tie a finding rather than a restatement.

Last, the scale of one transaction inside this pool. The arithmetic is easier to hold once the size of the pool is clear. Across the Girnar Large Cap Equity Fund there are 3,80,000 accounts sharing Rs 4,200 crore. Rs 42,00,00,00,000/- divided by 3,80,000 makes the typical one about Rs 1,10,526/-. The subscription walked through above is a little under one of those. The subscription is an entirely ordinary transaction, and the arithmetic that leaves the value per unit alone would be identical for one a thousand times larger.

Which of the two quantities is actually the holder's to choose?

The rupees. The amount is the only quantity in the transaction the holder controls, and it stays exactly what they said it was from the moment they said it. Rs 1,00,000/- is Rs 1,00,000/- whatever happens next.

The unit count is a different kind of number. The count is not chosen, it is returned. The count comes out of a division whose divisor is the value per unit that attaches to the transaction, and that divisor is struck out of the scheme's own books by Girnar Asset Management Limited rather than set by anyone on the holder's side. Anyone who pictures this transaction in units first has cause and effect the wrong way round: rupees go in, a count comes out, and no wording a holder can put on an instruction flips that around.

Fixing the money is a property of the subscription specifically, not of every instruction. An instruction to go out of a scheme in units makes the units the fixed quantity and the rupees the output of a multiplication. The direction of the arithmetic follows the instruction, so the direction has to be clear before any statement is read.

An everyday version. A hundred rupee note handed to a shopkeeper with a request for as much rice as it buys fixes the money. The weight that comes back is decided by a price the buyer did not set and could not see when the note was handed over. A request for exactly two kilos fixes the weight instead, and the money becomes the thing outside the buyer's control. Same two quantities, and which one is the input is decided entirely by how the request was phrased.

Why does the balance run out to a thousandth of a unit?

Because that division hardly ever comes out even, and a scheme discarding what was left over would be quietly keeping money belonging to somebody else each time it happened. Rounding down to whole units instead would work out as follows in the Girnar Large Cap Equity Fund. Rs 1,00,000/- at Rs 35.00 would give 2,857 units, and those valued at Rs 35.00 come to Rs 99,995/-. The holder handed over Rs 1,00,000/-, so Rs 5/- has gone somewhere and it has not gone to them.

Five rupees sounds like nothing. Multiply it by the transaction count running through a scheme held across 3,80,000 folios and it stops sounding like nothing, and more importantly it stops being defensible. No principle turns a holder's money into somebody else's when seven does not divide neatly into a lakh. The decimals are not decoration and they are not precision theatre. A unit that can be split has no remainder to strand, and that is the mechanism by which a pooled vehicle keeps every holder's share exact.

The three decimal conventionRecording a unit balance down to a thousandth of a unit, so that a division that does not come out even leaves nothing stranded. belongs to the Girnar Large Cap Equity Fund alone. The convention is not a requirement, not an industry standard, and not something a reader will find stated the same way everywhere. Where a convention of that kind is set down at all, it is set down in a scheme's own documents.

And carrying three decimals does not make the arithmetic exact, it makes it very nearly exact and moves the argument to a much smaller place. The residue in the worked instance was exactly that: a rounding at the third decimal, worth half a paisa, falling on the holder's side on this occasion. Which side it falls on is decided by the rounding rule a scheme writes into its own conventions, and different rules put it in different places.

Which struck figure ends up attached, and who settles that?

Everything above assumed a value per unit had already attached to the transaction. Where that comes from follows, in outline.

Two separate things have to reach the scheme, and they are not one thing arriving twice. The first is the application: the instruction itself, complete and valid, landing where the scheme's records are kept. The second is the money: the rupees themselves actually reaching the scheme rather than merely having been sent. A holder can easily produce one without the other, and most people who have ever wondered why a transaction seemed to stall have run into exactly that. There is a rule joining the outcome to both arrivals together rather than to either by itself, SEBI writes that rule and publishes it at sebi.gov.in, and how the two conditions are combined is settled there. The two conditions themselves are separate things.

Conditions of that kind are revised, and they have been. An hour, an interval, a period or a floor on the amount does not go gently out of date the day the rule changes. A stated hour or interval becomes wrong, and it stays wrong, looking exactly as confident as it did when it was right. Naming the rule and routing to the place it lives is what survives a review interval, at a cost of one click on the day a reader actually needs the answer.

What does the holder actually end up holding?

A number. Specifically, a unit balance recorded against a folio, carried to a thousandth. The balance is the whole of it. The things a reader half expects to also be there are worth naming. Expecting them and not finding them sends people looking for documents that were never going to exist.

There is no certificate. There is no named security sitting somewhere with the holder's name attached to it. There is no line of the scheme's portfolio marked off and set aside, no particular parcel of anything reserved against this folio and no claim on any individual holding Kalyani Bhagat may have bought. A holder has a call on the pool taken whole, never on any item sitting in it, a point covered separately and taken as given here.

The unit balance may sit as a statement balance kept in the scheme's records, or in a depository account held with National Securities Depository Limited (NSDL) at nsdl.co.in or Central Depository Services (India) Limited (CDSL) at cdslindia.com. Either route leaves the substance identical: a count of units against an identifier, and a value per unit struck separately, whose product is what the holding is worth on a given day.

An allotment line is the artefact that records the transaction, and it is worth knowing what has to be on it. Four things, and every one of them has to be there for the line to be checkable later by anybody, including the holder.

What does a subscription not do?

Readers assume several of these and then go looking for evidence of them, so each is worth stating plainly.

A subscription does not buy any particular holding. Nothing inside the Girnar Large Cap Equity Fund is bought on the holder's behalf as a consequence of their instruction, and no holding is tagged to their folio. A subscription does not change what Kalyani Bhagat may hold or what she may do next; the money she is running grows, and the mandate she runs it under does not. A unit is a unit and there is one class of claim, not a preferential one for whoever arrived most recently, so a subscription gives a new holder nothing the existing ones lack. And a subscription does not move the value per unit for anybody. The stability is not a courtesy the scheme extends but an arithmetic consequence of the way the units were counted out.

One more thing it does not do, and this one matters for what follows. A subscription does not settle instantly. There is a run of processing between the instruction and a balance appearing, and that run is where an application is checked, money is matched to it and a record is written. The inside of that run, including how long it takes and what may go wrong, is covered separately.

Girnar Asset Management Limited, the Girnar Large Cap Equity Fund, the Girnar Broad Market Index Fund, Kalyani Bhagat and Sohail Merchant are invented.
Educational material. Not advice on any investment, tax, budget or market position.