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 been appreciated as compared to a fund with lower NAV and fund with lower NAV has more room for appreciation further. This conception may hold true in case of only stocks, even there, investors should also look for other performance variables and realize that price of stock is not the only criterion to select the cheapest one. So, mutual funds with lower NAVs (Net Asset Value) often appeal more to gullible investors and they get trap in such ‘mis-pricing’.
Ergo, let’s firstly simplify and understand the definition of NAV which is grossly misunderstood.
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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. So when you intend to invest in a mutual fund, you do invest in it at its existing NAV, i.e. you buy the units at a price (i.e. NAV), the calculation of which is based on the current market price of all the assets that the mutual fund owns. In other words, the NAV represents the fund’s intrinsic worth.
NAV equate with Equity Shares
Another corollary for the above misconception is that gullible people start comparing mutual funds’ NAV as the way they usually compare shares. 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 totally 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. Even many mutual fund distributors tend to mislead people by telling them that funds with low NAV are cheaper than those with high NAVs, thus enticing them to invest in the funds that they are selling.
Impact of NAV on its returns
Ironically, it is commonly believed that funds with lower NAVs will yield better returns; it is not true in some extent. Let’s take an illustration which will help us to better understand the same and establish the irrelevance of NAV while making an investment decision.
|Fund Name||Current NAV*||3-Year Return*|
|Birla Sunlife Equity Fund-Growth||420.47||17.85%|
|ICICI Prudential Top 200 Fund-Growth||219.39||17.13%|
|ICICI Prudential Dynamic Fund-Growth||171.09||16.16%|
|Tata Pure Equity Fund-Growth||142.89||13.47%|
|UTI Dividend Yield Fund-Growth||43.84||10.10%|
|IDFC Imperial Equity Fund-Growth||21.56||8.65%|
|HSBC Dynamic Fund-Growth||12.81||7.47%|
*NAV and Return as on 23 July, 2014. (Source: Value Research Online)
As the above table clearly exhibits that Birla Sunlife Equity Fund with an NAV of 420.47 has topped on the 3-Yr return front, by clocking a return of 17.85% CAGR. On the other hand, HSBC Dynamic fund which has the least NAV i.e. 12.81 has clocked a return of mere 7.47% CAGR.
So, please recognize that NAV’s are an irrelevant when selecting good performing mutual funds for your growth portfolio. A lot of qualitative and quantitative factors have to be thoroughly analyzed before zeroing down on any mutual fund scheme. As an investor, you should need to consider factors such as your own risk profile, the fund house’s management style and the mutual fund’s performance.
Hence, 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. So don’t fall trap in the low NAV or Rs10 NAV arguments.
This article got published in Hindi Version by Dainik Bhaskar on 17-02-2015. Read in Hindi, please click here
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