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.
What is the Net Asset Value of a mutual fund?
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.
How does the NAV matter?
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.
- In the first scenario, you buy ten units at Rs 10 each, making your total investment Rs 100
- In the second scenario, you buy 20 units of Fund B at an NAV of Rs 5 each, so your total investment is Rs 100
Now, let's assume both funds A and B grow by 20% over time.
- In the first fund, the NAV increases from Rs 10 to Rs 12, which takes your investment to Rs 120
- In the second fund, the NAV rises from Rs 5 to Rs 6, and your investment is now valued at Rs 120
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.
What really affects the performance of mutual funds?
Here are some things that can affect the performance of your mutual fund investments:
- Portfolio: The fund's portfolio can greatly impact its performance. It is advised to go through the portfolio's holdings and ensure they are well-diversified. This lowers risk and allows you to participate in the growth of multiple companies, industries, and sectors.
- Management: The fund manager has a considerable contribution to the scheme’s overall performance. How the manager performs directly influences the returns you receive. This makes it essential to choose funds managed by reputable and experienced professionals.
- Objective: Lastly, the fund's objectives should align with your own financial goals. This ensures that it fits your personal investment strategy.
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
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
