Many people tend to think that the fund with low NAV (Net Asset Value) is much cheaper than the NAV of fund with higher NAV. There are plenty of reasons to have misconception that a fund with higher value will give fewer units, it has already appreciated as compared to a fund with lower NAV and fund with lower NAV has more potential to appreciate further. Though this is true to some extent, it is not the correct criteria to select a fund. Unfortunately, the NAV of the fund is grossly misunderstood. Here we attempt to clear the myth surrounding NAV.
NAV Simplified
Basically, NAV is the price at which investor buys or sells units of Mutual Fund. It is derived by dividing the total assets (sum of total value of all securities and cash) of the fund by the number of units issued to investors. The value of your investment is driven not only by NAV but, it is a product of NAV and number of units.
NAV equate with Equity Shares
This misconception stems from the fact that most people tend to equate NAV with the market price of the share. In case of the share of the company, its market price is decided by the stock exchange. While deciding the price of the share, the company fundamentals, view of the company's future performance and the demand-supply situation.
But in case of a mutual fund, the concept of market value is absent. So when you purchase mutual fund units, you are buying at NAV, which is simply the book value. So it implies you are paying the correct price of the assets. This price could be Rs 50 or Rs 500, but the concept of higher or lower price is non-existent. As a result, there have been instances when people have redeemed their investments in well-performing funds to invest in NFOs which are attractive as they are available at Rs 10.
Impact of NAV on its returns
While it is commonly believed that funds with lower NAVs will yield better returns, it is not true. For example, take two funds with NAVs of Rs 50 and Rs 100, respectively. You invest Rs 1,000 in both of them. So you get 20 and 10 units, respectively.
Assume both the funds give a return of 50 per cent after one year. The new NAVs of these funds, thus, become Rs 75 and Rs 150, respectively. Now the value of your investment in first fund becomes Rs 1,500 and that in the second fund also becomes Rs 1,500. Hence the returns in both the cases are same, irrespective of the NAV of the fund.
Conclusion
The article aims to highlight that the current NAV of a fund should not be a determining factor for purchasing any fund. Investments in a lower NAV fund as compared to a higher NAV fund does not imply better performance in future. Hence, investors should look at other indicators, such as mandate of the fund, the fund's past performance, how long the fund is in existence, size of the fund, the fund manager’s experience and history in managing the fund etc., before making final decision to buy a fund
NAV Simplified
Basically, NAV is the price at which investor buys or sells units of Mutual Fund. It is derived by dividing the total assets (sum of total value of all securities and cash) of the fund by the number of units issued to investors. The value of your investment is driven not only by NAV but, it is a product of NAV and number of units.
NAV equate with Equity Shares
This misconception stems from the fact that most people tend to equate NAV with the market price of the share. In case of the share of the company, its market price is decided by the stock exchange. While deciding the price of the share, the company fundamentals, view of the company's future performance and the demand-supply situation.
But in case of a mutual fund, the concept of market value is absent. So when you purchase mutual fund units, you are buying at NAV, which is simply the book value. So it implies you are paying the correct price of the assets. This price could be Rs 50 or Rs 500, but the concept of higher or lower price is non-existent. As a result, there have been instances when people have redeemed their investments in well-performing funds to invest in NFOs which are attractive as they are available at Rs 10.
Impact of NAV on its returns
While it is commonly believed that funds with lower NAVs will yield better returns, it is not true. For example, take two funds with NAVs of Rs 50 and Rs 100, respectively. You invest Rs 1,000 in both of them. So you get 20 and 10 units, respectively.
Assume both the funds give a return of 50 per cent after one year. The new NAVs of these funds, thus, become Rs 75 and Rs 150, respectively. Now the value of your investment in first fund becomes Rs 1,500 and that in the second fund also becomes Rs 1,500. Hence the returns in both the cases are same, irrespective of the NAV of the fund.
Conclusion
The article aims to highlight that the current NAV of a fund should not be a determining factor for purchasing any fund. Investments in a lower NAV fund as compared to a higher NAV fund does not imply better performance in future. Hence, investors should look at other indicators, such as mandate of the fund, the fund's past performance, how long the fund is in existence, size of the fund, the fund manager’s experience and history in managing the fund etc., before making final decision to buy a fund
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