One of the major debates around mutual funds revolves around the topic of NAV. It is a common belief amongst investors that a fund that comes with a net asset value of ₹22 is better than a mutual fund scheme that comes with a NAV of ₹85. Just like is the case with stocks, mutual fund investors are known for believing that the best course of action will be selecting mutual fund schemes that come with lower NAVs. But, this is an erroneous strategy and can also force you to take sub-optimal decisions.
If you were to check up on the history of mutual fund performance, you will learn that the best-performing funds are not necessarily the schemes that come with lower NAVs. You generally allocate funds to mutual fund schemes for things like the quality of the portfolio offered and the quality of fund management. Also, it is important to note that if you were to choose equity as an asset class, it will be favourable for you in the long run. Additionally, you will find yourself in a favourable position if you are considering structuring your investment in the form of a systematic investment plan, i.e., SIP. But the question remains, what are NAVs? Well, here is the answer:
What are NAVs?
The simple definition of net asset value or NAV is that they are the market value of all securities that a mutual fund scheme is currently holding on to. A lot of investors are known for associating the performance of a mutual fund scheme with its net asset value. The NAV per unit of your mutual fund scheme can be ascertained by dividing the number of units of the mutual fund scheme on a specific date by the market value of the securities of the mutual fund scheme. The net asset value or NAV can even be defined as the price you need to pay for the units of the particular mutual fund scheme. Generally, mutual fund units are known for beginning with a unit cost of ₹10 and, it may even rise when the fund’s assets under the management of the fund manager start growing.
Does the NAV play any role in the performance of a mutual fund scheme?
Many investors believe that the net asset value is just like the price of the stock. This belief results in a common misconception that a mutual fund scheme coming with a lower net asset value is cheaper and even a better investment choice. But, that couldn’t be further that the truth. The NAV is not an indicator of the performance of a mutual fund scheme and therefore a lower net asset value alone does not make a mutual fund scheme a sound investment choice. Hence, while signing up for a mutual fund scheme, please make sure that the NAV alone is not the sole determining factor.
How is NAV relevant for investors?
While signing up for a mutual fund scheme, it is recommended to avoid focusing just on the NAV of the mutual fund. Meaning, that one should not select a mutual fund scheme just because it has a lower net asset value. The NAV can be described as the price at which you may either purchase or even redeem units of your mutual fund scheme and it does not reflect the future performance of the mutual fund scheme. While investing, you must base your investment choices on factors such as your time horizons, risk appetite, and investment objectives than the NAV of the mutual fund.
Which mutual fund scheme is better? Low NAV or high NAV?
The type of NAV is of little relevance to the actual value of the mutual fund scheme. It is the CAGR returns over a period that matters. The CAGR, i.e., the compound annual growth rate can be defined as a tool that measures the average annual growth of your investments over a given period. This tool is known for showing you the average rate of return on your investments over a year. CAGR is a tool that precisely measures both, the growth of your investment and even the decline over time. The performance of a mutual fund scheme may be attributed to factors such as fund management. Simply put, it is the fund management and the composition of the mutual fund portfolio that matters more than the type of NAV. Happy Investing!