The Unit: How a Scheme Is Divided Between Holders

A unit is one equal, undivided share of a scheme's net assets, and it is the divisor that lets many people hold one pool at once. Girnar Asset Management divides the Girnar Large Cap Equity Fund's net assets of Rs 4,200 crore into 120.00 crore units, so one unit stands for Rs 35.00 of those net assets, and more units means a larger proportion of the same pool.

The definition is one sentence long and the arithmetic behind it is a single division. Being that short is why the subject is usually taught in a line and then misread for years afterwards. So the division is worth slowing down. A unitThe standard piece a pooled scheme is divided into, so that each holder can be given a stated proportion of one shared pool. is a mechanism rather than a word, and once the problem it was built to solve is clear, three of the commonest misreadings stop being available.

One scheme carries the whole of this guide. Girnar Asset Management Limited runs the Girnar Large Cap Equity Fund, an open ended equity scheme with net assets of Rs 4,200 crore and 120.00 crore units in issue. The first divided by the second gives Rs 35.00 exactly for one unit. The scheme is held across 3,80,000 foliosThe account a scheme keeps for one holder, recording the units standing to their name., an average of about Rs 1,10,526/- each. The average is computed here rather than quoted, and it describes nobody in particular. Kalyani Bhagat manages the portfolio and Sohail Merchant heads operations.

Three things are settled elsewhere and are taken as given here. A unit's standing as a legal interest was established with the vehicle itself. The existence of one applicable value struck once a day, and which day's value applies to what, are covered under net asset value. And the two sides of the scheme's books are covered separately, for one reason that matters here: the Rs 4,200 crore on top of the division is already a net figure, after everything the scheme owes, so a unit is a share of what is left rather than a share of what the scheme holds.

What is a unit in a scheme, exactly?

A unit is one equal, undivided share of the scheme's net assets. Both adjectives are load bearing, and readers who skip them make predictable mistakes later, so take them one at a time.

Undivided is the word doing the real work: a unit is a proportion of the whole pool and not a claim on any particular thing inside it. The pool is never carved up and handed out in pieces. Nobody's rupees are attached to one holding and somebody else's to another. An undivided shareA share of a whole pool taken together, rather than a claim on any identified item inside it. means the whole of the scheme stands behind every unit and every unit stands for the same slice of the whole of it. For a holder of units in the Girnar Large Cap Equity Fund who asks which of the scheme's holdings are theirs, the honest answer is none of them, and a proportion of all of them.

Equal is the second word. Every unit of the same kind is identical to every other. There is no early unit worth more than a late one and no large holder whose units carry a better claim than a small holder's. Equality sounds obvious until what it buys becomes clear: because all units are the same, the scheme never has to work out who is entitled to what. The scheme only has to count. A folio holding 2,857.143 units and a folio holding 2,85,714.300 units are treated by exactly the same arithmetic, a hundred times over.

Consider a shared water tank in a building where four households have paid for it in different proportions. One arrangement writes down, every time, who paid what, and reopens the argument whenever somebody moves out. The other issues everybody a number of equal shares in the tank at the moment they pay, and the argument never comes back. The second is a unit. A unit converts a running dispute about proportions into a stored number.

Why does a pooled scheme need a divisor at all?

Because people arrive and leave at different moments, and something has to keep score without anybody being disturbed. Imagine four cousins putting money into one pot to buy in bulk at a wholesale market. On day one it is easy: four equal shares. On day forty a fifth cousin wants in, and the pot has grown. On day ninety the second cousin wants out. Without a standing measure of proportion, every one of those events becomes a negotiation, and every negotiation moves somebody else's share.

The unit exists so that a person can join or leave a pool without taking a rupee from anybody already in it, and that is the whole engineering purpose of the thing. When somebody joins, the scheme does not sell them a slice of what already exists. The scheme works out what one unit is currently worth, takes their money, and issues them new units at that figure. Their money goes into the pool and their units go into the count, both at the same instant and both at the same rate. Nothing is taken from anywhere.

Watch the arithmetic do it. A holder with 2,857.143 units of the Girnar Large Cap Equity Fund holds Rs 1,00,000.005 worth on a day the figure per unit is Rs 35.00. Somebody applies Rs 3.50 crore. The scheme creates 0.10 crore new units, net assets go to Rs 4,203.50 crore, and units outstandingThe total number of units the scheme has in issue on a given day, which is the denominator in the division. go to 120.10 crore. The holder's 2,857.143 units are still worth Rs 1,00,000.005, to the last decimal. Their proportion of the pool falls very slightly, from about 0.00023810 per cent to about 0.00023790 per cent, but only because the pool itself is bigger. A smaller slice of a larger cake, cut so that the portion in the hand stays exactly the same size.

How is a unit different from a share in a company?

Most of the trouble starts here. A reader arriving at a scheme has usually met company shares first, and the two words feel like near neighbours. Shares and units are not neighbours. A share in a company is a direct interest in that one company. A unit is an interest in a pool that itself holds interests in things. A reader carrying company share intuitions into a scheme will expect three things that simply do not exist here, and expecting them is the commonest imported error on this subject.

The first is a claim on something named. A share of a company is a share of that company and nothing else. A unit of the Girnar Large Cap Equity Fund is a proportion of a pool, and no line in any record attaches a holder's rupees to any one thing in it. The second is a vote at the companies the scheme holds. The votes exist, but they sit with the scheme, and how they are exercised is the manager's and the trustee company's business rather than the holder's. The third is a say in what the scheme buys and sells. Kalyani Bhagat decides that inside the scheme's stated mandate. Holding more units does not buy a louder voice on it; it buys a larger proportion of the same result. The rights that holding units does carry are covered separately.

Where do units come from, and where do they go?

In an open ended scheme they are made and unmade against the scheme itself. The mechanism is creation and cancellationMaking new units when money is applied to a scheme, and extinguishing units when money leaves it, rather than transferring them between holders., and it is the structural fact that separates this vehicle from almost everything else a reader has met. When money comes in, units are created. When money goes out, units are cancelled. The count of units in issue rises and falls accordingly, day after day, and nobody negotiates any of it.

Because units are made and unmade against the scheme, there is no counterparty at either end: no queue, nobody who has to want the units being handed back, and no price to be agreed with anybody. The claim is stronger than it sounds. In almost every other transaction in a person's financial life, leaving requires somebody else to arrive. Selling a flat needs a buyer. Selling shares needs a bid. Here the scheme is the other side of every transaction by construction, and the units handed back simply stop existing.

One line closes it off. A reader will have seen the other route and should not be confused by the omission. Units of some schemes change hands on an exchange instead, between one holder and another, at a price the exchange produces rather than one the scheme strikes. Exchange traded units are a different mechanism with different consequences, and they are covered separately.

Why does a holder end up with a fractional number of units?

Because the rupees are fixed and the units fall out of the division, the exact reverse of how buying company shares works. Rs 1,00,000/- applied to the Girnar Large Cap Equity Fund on a day the figure per unit is Rs 35.00 makes the division Rs 1,00,000 over Rs 35.00. The answer is 2,857.142857142857 and it continues without ever stopping. So the record has to stop somewhere, and a fractional unitA part of a unit, held to a stated number of decimal places, which exists because a fixed amount of money rarely divides into a whole number of units. is what remains after it stops.

Fixing the money and letting the unit count fall where it falls is the opposite of buying company shares, where the buyer chooses a whole number of shares and the rupees are whatever they are. Somebody buying shares asks for one hundred of those and finds out afterwards what it cost. Somebody applying money to a scheme hands over one lakh of rupees and finds out afterwards how many units that came to. Neither is better; they are simply different ends of the same division being held still. But the habit brought from one produces nonsense in the other, and this is the first place it shows.

Where does the record stop? On this worked record it stops at three decimals, so 2,857.142857142857 is recorded as 2,857.143. Stopping at three decimals is a rounding conventionThe stated rule a record follows for where a number is cut off, including how many decimal places are kept., and it belongs to the scheme, stated in the scheme's own documents. The three decimals used here are the invented record's own convention. The three decimals are not a rule that applies anywhere else. The Securities and Exchange Board of India (SEBI) sets what a scheme must record and to what precision, and that requirement moves. The current position is published by SEBI at sebi.gov.in.

The cost of stopping is small and exact. The recorded 2,857.143 units multiplied by Rs 35.00 come to Rs 1,00,000.005, half a paisa more than the Rs 1,00,000/- that went in. Rounded to the nearest paisa it reads Rs 1,00,000.00 or Rs 1,00,000.01 depending on which rounding rule is applied, and neither of those is more money than the holder paid. The half paisa is an artefact of recording units to three decimals rather than a gain, and noticing it is the right instinct rather than pedantry. The half paisa is also the clearest evidence for something structural: the scheme records units, not rupees. A holder's rupees are recomputed every day from the units. The units are what stand still.

How Mutual Fund Units and NAV Work Together, and What Moves the Figure Per Unit?

Two numbers sit either side of one division, and they move for completely different reasons. On top are the scheme's net assets. Underneath are the units in issue. The quotient is the figure per unit. Once it is clear which of the two a given event touches, the quotient can be predicted every time without any arithmetic at all, and predicting it that way is the single most useful habit on the subject.

Predict the answer before the arithmetic appears. An instinct is worth much more once it has been tested against a number.

Here is why. When money comes in, units are created at the struck figure. The numerator and denominatorThe number on top of a division and the number underneath it. Here, net assets on top and units in issue underneath. rise together and in exact proportion. Rs 3.50 crore of new money at Rs 35.00 creates 3.50 over 35.00, or 0.10 crore units. Net assets become 4,200 plus 3.50, or Rs 4,203.50 crore. Units in issue become 120.00 plus 0.10, or 120.10 crore. The division is then Rs 4,203.50 crore over 120.10 crore units, and multiplied back as a check, 120.10 times 35 is 4,203.50. The quotient is Rs 35.00 per unit, exactly, with nothing left over.

When prices move instead, only the numerator changes. Nobody applied any money, so no units were created, and the denominator sits exactly where it was. The same rupees now spread across an unchanged count, so the quotient has to move. The figure per unit responds to what the scheme holds and not to who joined or left, and everything else about units follows from that one fact.

What does one folio look like inside the whole pool?

The whole thing runs end to end, with a division at every step. Net assets of Rs 4,200 crore over 120.00 crore units is Rs 35.00 per unit. A holder applies Rs 1,00,000/- and the division gives 2,857.142857142857 units, recorded as 2,857.143. The holding of 2,857.143 units against 1,20,00,00,000 units in issue is about 0.000238 per cent of the scheme, a proportion too small for any drawing to show at true scale, and their rupees are 2,857.143 times Rs 35.00, or Rs 1,00,000.005 as recorded.

One more division sizes the pool in human terms. Rs 4,200 crore held across 3,80,000 folios is an average of about Rs 1,10,526/- a folio, computed here rather than quoted. The average is taken across an invented scheme and it describes nobody: half the folios could sit far below it and a handful far above, and this record carries nothing that would say which. The figure is useful only for scale. With it, 120.00 crore units stops being an abstraction and becomes several lakh households, each holding a few thousand units.

Does the same Rs 3.50 crore do the same thing if it comes from a gain?

The same Rs 3.50 crore does not, and showing why needs no new figures. Net assets are the same Rs 4,203.50 crore. But nobody applied any money, so no units were created, and units in issue are the unchanged 120.00 crore. Divide: Rs 4,203.50 crore over 120.00 crore units is Rs 35.029167 per unit, about 2.92 paise more than before. The holder with 2,857.143 units now holds about Rs 1,00,083.34, a gain of about Rs 83.33/-, without having done anything at all.

The same Rs 3.50 crore left the figure per unit untouched when it arrived as new money and lifted it when it came from what the scheme already held, and the source of the money is the only thing that differs between the two cases. The source of the money is the finding worth carrying away. Money coming in brings its own units with it, in exact proportion, so it cannot move the quotient. A gain brings no units with it, so it must.

Does a lower figure per unit mean a scheme is cheaper?

No, and this is not a subtle point that a careful reader might reasonably miss. A lower figure per unit is a complete misreading of price, and the misreading survives because everything else a person prices in life works the other way round. Rice at Rs 60/- a kilo is cheaper than rice at Rs 90/- a kilo. Petrol at one pump is cheaper than at another. A share at Rs 200/- is cheaper per share than one at Rs 900/-. Every one of those comparisons is sound, and being sound everywhere else is precisely why the instinct arrives here fully formed and confident.

Here is what breaks it. Because a pool of any size can be cut into any number of units without changing the pool in any way at all, the number of units a scheme is divided into is arbitrary. Take the Girnar Large Cap Equity Fund's own Rs 4,200 crore and cut it into 120.00 crore units and the figure per unit is Rs 35.00. Cut the identical Rs 4,200 crore into 12.00 crore units instead and the figure per unit is Rs 350.00. Same holdings, same net assets, same everything, and a figure per unit that is ten times larger for no reason that has anything to do with the scheme.

Follow the money through both cuts. The arithmetic settles it. Rs 1,00,000/- at Rs 35.00 buys 2,857.143 units. The same Rs 1,00,000/- at Rs 350.00 buys 285.714 units. In the first cut that holding is about 0.000238 per cent of the pool. In the second cut it is also about 0.000238 per cent of the pool. The proportion bought by a given amount of money is exactly the same in both cuts, so two cuts of an identical pool can carry completely different figures per unit and neither is cheap nor dear because of it. All that changed was the size of the counting unit, the way weighing rice in grams rather than kilograms changes the number on the scale and not the amount of rice.

What does a unit count actually tell a holder?

Exactly one thing: a share of that one pool. Nothing more, and nothing that travels. The unit count multiplied by the figure per unit gives the rupees. The same count divided by the units in issue gives the proportion. The two operations exhaust what a unit count contains.

A unit count on its own, compared across two schemes, carries no information at all, and the habit that protects a reader is to multiply before reacting to it. Somebody who says they hold ten times as many units as another holder has said nothing at all until the scheme and the worth of each unit on the day are known. The holder may have ten times the money, a tenth of it, or the same. The number by itself is a measurement in a unit of somebody else's choosing. So the first thing to do with any unit count is convert it into rupees and only then think about it.

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