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A Mutual Fund with High NAV or Low NAV - Which one should you choose?

Introduction

In India, Mutual Funds continue to remain one of the most popular investment choices amongst investors. When you consider investing in a Mutual Fund, many assume it is imperative to know the Net Asset Value (NAV) of the fund, as it could impact your returns. However, even though NAV is an informative factor while investing, it does not signify how the investment might turn out to be.

The NAV of the fund is the value at which you buy or sell the units of a Mutual Fund. It is essentially the price per unit of the Mutual Fund. So should the NAV be high or low for you to make a good investment decision? What should be your pick? As an investor, you will be able to make a more informed decision about your investment once you understand the finer aspects of NAV.

What is Net Asset Value and how is it calculated?

Technically, the NAV of a Mutual Fund is the Total Assets minus the Total Liabilities of a Fund divided by total number of issued units. To understand how NAV is calculated, you should understand the investment portfolio of a Mutual Fund and the expenses that a fund incurs for its management.

Total Assets - The accumulated fund corpus of a Mutual Fund is invested in a group of assets, basis the Fund’s objectives, for churning out profits. These assets, including Equities, Gold, Bonds, Debt Instruments, and more, are known as the Total Assets. Total assets also include the profit generated by these assets in the form of dividend, interest, capital gain, etc.

Total Liabilities – The costs which an Asset Management Company (AMC) incurs to manage the fund are termed as Total Liabilities. Total Liabilities primarily include the Management Fees, Marketing Expenses, Distribution Expenses, etc.

Total Units – The sum of all the units held by all the Mutual Fund investors of a scheme are the Total Units of the Fund.

Thus, NAV = (Total Assets – Total Liabilities) / Number of Units

It is important to note here that the NAV of a fund is not constant. It may change every day. This is because the total underlying assets in which the fund invests are traded daily, and its value may fluctuate based on the exchanges during market hours. Hence, as a principle, the NAV of a fund is calculated after market hours. A rise in the NAV signifies a profit whereas a dip signifies a loss of the fund on a particular day.

Is NAV linked to the performance of a Mutual Fund?

NAV of a fund merely states the price of a unit of a Mutual Fund. It does not signify the performance of a fund. For instance, let’s assume the NAV of ‘x’ Mutual Fund scheme is Rs. 30. This means if you want to buy one unit of ‘x’ Mutual Fund scheme, you will have to pay Rs. 30.

NAV of a fund is basically like a share price of a company. It merely functions as an indicator of price of a unit on a given day. It does not indicate the company’s or the fund’s performance.

Busting NAV Myths

There are many who believe a high NAV will fetch better returns. However, a high NAV does not mean a better performing Mutual Fund. It may mean that the fund has been around for a longer tenure or fund has shown good performance in the past. But it has no relevance to how the fund will fare in the future.

Similarly, some investors believe that a fund with a lower NAV is the right choice for investment. The general perception is that since the NAV is lower, it has more scope of growth in the future. This is also incorrect. The fund may have a low NAV if it is not too old. The other reason could be the poor performance of the market in the past. But it has no relevance to how the fund will perform in the future.

Here is an example to help you bust the myth of High and Low NAV

Assume a Total Investment of Rs 10,000 each, in two Equity based schemes.

Scheme A – Low NAV

Scheme B – High NAV

NAV is Rs. 50

NAV is Rs. 100

Number of Units purchased : 10000/50 = 200

Number of Units purchased : 10000/100 = 100

Assume that both the schemes perform equally well as the stock market surges by 10%. Thus both the Scheme NAVs also reflect a change of 10% rise

New NAV is Rs 55

New NAV is Rs 110

Increased Investment Value

= NAV x Number of Units

= 55 x 200

= 11,000

Increased Investment Value

= NAV x Number of Units

= 110 x 100

= 11,000


It is clear from the above example that high or low NAV have no effect on the total investment growth. Irrespective of the value of NAV, the total investment value increased only due to the performance of the fund.

Conclusion

You should not make the mistake of judging an investment in a Mutual Fund based on how high or low its NAV is. A comparative analysis based on NAV between two Mutual Funds to understand which one will be better for your money is baseless. It is actually just a common myth that most investors believe to be true. A High or Low NAV says nothing about the future of your investment. Instead, you should click here to know tips and tricks to select the best Mutual Fund for your investment.

Additional Read: Investing in mutual funds? Here's all you need to know

Disclaimer : ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein mentioned are solely for informational and educational purpose.

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