Every product has a price, and as a buyer, you will naturally look for the best deal. Say you are at the mall looking for a new laptop, and you find two models with the same specifications and features. One is priced at Rs 40,000 and the other costs Rs 50,000 - which one would you choose? Most people would opt for the Rs 40,000 option to save money. You may also apply this theory to investing and be drawn to mutual funds with a lower Net Asset Value (NAV), thinking they are a bargain. But is a low NAV mutual fund really a better deal when it comes to mutual funds? Let's find out.
The NAV refers to the per unit price of a mutual fund scheme. It is calculated by subtracting the fund's total liabilities from its total assets and dividing that figure by the total number of units issued. The formula for NAV is as follows:
NAV = (Total Assets - Total Liabilities) / Total Number of Units Issued
The NAV is calculated at the end of each trading day and gives you the per unit value of the fund for the day. This means that the NAV simply represents the fund's current per unit price.
While it might seem that a mutual fund's NAV impacts its performance, that is not necessarily the case always. Let's compare two funds with different NAVs to understand this better:
Imagine you invest in two funds - Fund A has an NAV of Rs 10, and Fund B has an NAV of Rs 5. You purchase ten units of each fund.
Now, let's assume both funds A and B grow by 20% over time.
As you can see, the percentage growth is the same at 20%. This shows that the low NAV mutual fund itself does not always reflect high performance. What truly matters is how much the fund grows and how much money you invest, and not necessarily the value of each unit.
Here are some things that can affect the performance of your mutual fund investments:
Conclusion
The NAV in MFs (mutual funds) helps you understand the fund's current growth but is not indicative of its future performance. Therefore, you must not base your decisions on it solely. Other aspects, such as the portfolio strategy and diversification, management experience, the fund's objective, etc., can make a far larger impact on the performance of the mutual fund. So, make sure to pay attention to these facets instead.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME-RELATED
DOCUMENTS CAREFULLY
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.