Mutual Fund NAVs are often confused by new as well as old investors.
Mutual Fund Agent to Client: “The New Fund Offer (NFO) is priced at Rs. 10/-. It is Cheap! Buy! Buy! Buy!”
Mutual Fund Investor:
“Is it advisable to buy mutual funds with a high NAV?”
“Mutual Fund ABC has a high NAV of around Rs 423. Is it a better option? How much more can this go up?”
“What is the maximum value to which a NAV can go to?”
Common questions? Unfortunately yes.
The NAV of a Mutual Fund is not the same as the price of a share or commodity. It is the net value of the assets of the fund minus its liabilities like AMC fees etc divided by the number of units of the fund sold to its investors.
NAV = (Assets of the Fund – Liabilities) / Number of Units
So what does that mean? It means that you can safely ignore the NAV of a Mutual Fund when trying to decide whether it is good investment.
Lets see why:
Lets say we have two funds, ABC & XYZ. Also, lets say you have invested Rs. 10,000/- in each and that both funds go up 5%.
Okay, now for the numbers…
The fund with the “Expensive NAV”…
| Mutual Fund: | ABC |
| NAV: | Rs. 200/- |
| Investment: | Rs. 10,000/- |
| No. of Units you Own: | 10,000 / 200 = 50 Units |
| Increase (5%): | Rs. 10/- (5% of 200) |
| New NAV: | Rs. 210/- |
| New Value of Investment: | 50 Units * 210 = Rs. 10,500/- |
Now for the fund with the “Cheaper NAV”…
| Mutual Fund: | XYZ |
| NAV: | Rs. 20/- |
| Investment: | Rs. 10,000/- |
| No. of Units you Own : | 10,000 / 20 = 500 Units |
| Increase (5%): | Re. 1/- (5% of 20) |
| New NAV: | Rs. 21/- |
| New Value of Investment: | 500 Units * 21 = Rs. 10,500/- |
What does this show us?
That we gained 5% in both funds. Our investment of Rs. 10,000/- grew to Rs. 10,500/- in both cases!
So you can safely ignore the NAV of a Mutual Fund. It has no meaning in terms of “Expense”.
To determine whether a particular fund is a good buy you must look elsewhere:
- What are your investment objectives? What is the fund’s investment objectives? Is there a match?
- What is the fund’s investment style? What is the Risk versus Return? Does it match your risk profile?
- What is the fund’s track record? Has it down well in all kinds of markets?
Ultimately you must decide what you are looking for and compare that with what the fund offers.
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