Understanding Mutual Fund NAV: Why Low NAV Isn't Better Than High

What is NAV?

Net Asset Value (NAV) is the per-unit price of a mutual fund scheme. It is calculated by dividing the total fund assets by the number of outstanding units. While NAV is a crucial figure in mutual fund investing, it often leads to misconceptions about the performance and quality of a mutual fund. Some investors believe that low NAV mutual funds offer better returns, but this is not always the case.

Does NAV Determine a Mutual Fund's Quality?

In simple terms, the NAV of a mutual fund is like the price of a share in a company; it changes daily based on the financial health and performance of the fund. The key takeaway here is that NAV does not define the quality or performance of a mutual fund. A mutual fund with a lower NAV is not inherently better than one with a higher NAV.

XYZ Fund NAV - 10 Rs. Units - 5. Total Value - 50 Rs. vs. ABC Fund NAV - 5 Rs. Units - 10. Total Value - 50 Rs.

Let's take two hypothetical funds: XYZ and ABC.

XYZ Fund with an NAV of 10 Rs and 5 units, so the total value is 50 Rs. Units of this fund are worth 10 Rs each.

ABC Fund with an NAV of 5 Rs and 10 units, so the total value is also 50 Rs. Units of this fund are worth 5 Rs each.

Both funds hold a total of 50 Rs in assets, but XYZ's NAV is double that of ABC. Despite this difference, both funds offer the same intrinsic value per unit to the investor, assuming units are purchased at the same price.

Is Investing in Low NAV Mutual Funds Better Than High NAV Funds?

Investing in low NAV mutual funds is not necessarily better than investing in high NAV funds. Here's why:

Example Scenario - Scheme A and B

Let's consider two diversified equity-oriented schemes, A and B, with different NAVs.

Scheme A has an NAV of 15, and Scheme B has an NAV of 90. An investor invests 9000 Rs in each scheme, which gives 600 units in Scheme A (9000/15) and 100 units in Scheme B (9000/90).

Assuming the market rises by 10%, the new NAVs would be 16.5 for Scheme A and 99 for Scheme B. In both cases, the market value is the same (9900 Rs), and the investor gets a 10% return in each scheme.

Therefore, when considering investments, focusing on NAV should not be the deciding factor. Instead, consider other important factors such as the fund manager, the fund's investment philosophy, expense ratio, and past performance.

Conclusion

Mutual fund NAV is just one of many factors to consider when selecting a fund. While low NAV might attract some investors, it does not guarantee better performance or returns. The key to successful mutual fund investing lies in thorough research, understanding the fund's strategy, and selecting a fund that aligns withyour investment goals and risk tolerance.

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