Are you judging mutual funds by their NAVs?

Are you judging mutual funds by their NAVs?
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Think again There’s a myth prevalent among the inexperienced investors that a lower NAV (Net Asset Value) automatically means a cheaper mutual fund. That’s far from being true. However, let’s first understand what’s meant by NAV before delving into the why of it. NAV is the exact market value of a mutual fund scheme’s assets, minus the liabilities. It reveals the market value of the fund.

It’s the performance that matters, not the NAV

Let’s take help of a simple example to understand this better. Let there be two different mutual funds ‘A’ and ‘B’ having similar portfolios and NAVs of Rs. 50 and Rs. 100 per unit respectively. Quite obviously, ‘A’ seems cheaper than ‘B’.

Now, Dinesh, our friendly investment guinea pig, invests Rs. 5000 each into both these mutual funds. He receives 100 units of ‘A’ and 50 units of ‘B’. Both the funds grow at the same pace; let’s say 10%, in a year’s time as their portfolios are the same.

Hence, the fund ‘A’ would fetch Dinesh Rs. 55 per unit and fund ‘B’ Rs. 110 per unit, at the end of the year, totaling to Rs. 5500 returns per mutual fund. Hence, the argument that fund ‘A’ with a lower NAV being better and delivering better returns doesn’t hold any ground. The Rs. 5000 invested into both of them provide similar returns.

The mutual fund NAV doesn’t have anything to do with the possible returns of the particular scheme. Instead, it’s the performance which matters. It’s the stocks that the fund manager invests into determines the returns of the mutual fund, and not the NAV. Therefore, you must never confuse the NAV of a fund with the stock price.

The NAV of a mutual fund should never be the deciding factor when considering investing into mutual funds. You must also consider other important factors like the pedigree of the fund house, historical performance and market value before deciding to invest money into a particular fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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