For some time now, I had stopped receiving mails about mutual funds being chosen on the basis of their net asset values (NAVs). Over the last couple of weeks, this trend has restarted. One of the biggest myths with regard to mutual fund investing is that the lower the NAV, the better the fund. An alarmingly large number of investors tend to believe that a fund with a lower NAV is better because it comes cheaper. This is as ludicrous as saying that onions are better than potatoes because they are cheaper. You simply can?t compare the two ? both have their own different set of qualities. Comparing two mutual funds on the basis of their NAVs is just as absurd.
A fund?s NAV is the reflection of how much it has gained since its inception. This is a very basic thing, and the fund?s NAV has no other bearing. If the markets have gained 20 per cent in one year, then a one-year old fund?s NAV will be Rs 12 and the NAV of a two-year old fund with a similar portfolio will be Rs 14.40. Simple as that! This wouldn?t mean that the first fund is better because the lower NAV would make it cheaper. The NAV also is no indication of the fund?s future performance. The only way NAV can be used is by comparing to that same fund?s past NAV. The fund can be said to be doing well if the NAV has risen in accordance to or higher than the general markets. Comparing NAVs of two funds is fruitless.
Now, why I have decided to raise this issue is because of late, I have learned about a lot of people buying funds this way. This is also because fund salesmen have started using lower NAV as a sales point. The reasons behind this are the many changes that have been incorporated in the way mutual funds are sold.
Over the past year or so, a lot of good has happened for mutual fund investors. SEBI has made a number of regulatory changes that have turned out to be beneficial to investors. The biggest change was the abolishment of the entry load. No entry load means that fund companies have to finance new funds from their pockets. Earlier, they could dip into the money invested for their marketing expenses. But not anymore. Sebi has now even become stringent when it comes to passing new fund applications. Fund companies have to prove that the new fund is really something new and not similar to any existing fund. All this has led to fund companies marketing their existing funds more than new funds. This is why we are seeing a spate of fund ads revolving around past numbers, rather than future aspirations and fancy gimmicks.
As far as I?m concerned, this is a very welcome change. A mutual fund should be bought on the basis of its track record. But we don?t tend to do that, most of us don?t tend to buy things for the right reasons. And that is where a fund salesman pushing low NAV comes in. A fund that seems cheaper is going to find many takers. But that is last thing that should be a deciding factor for you to buy a fund. In fact, make that a deciding factor as to which salesman to associate yourself with. Anyone selling a fund on the basis of lower NAV would surely not be good for your financial health.
(The author is the CEO of Value Research)