Busting myths about Mutual Fund NAV: Anytime is good for investing in a good fund

Updated: April 19, 2019 3:13:47 PM

Anytime is good for investing in a good fund when the investment is for a long term, subject to your age, risk appetite and asset allocation.

Busting myths about mutual fund NAV (Illustration: Shyam Kumar Prasad)Busting myths about mutual fund NAV (Illustration: Shyam Kumar Prasad)

Many investors have misconceptions about the current net asset value (NAV) of all mutual funds. They wonder how the NAV is linked to a fund’s performance and its returns. In fact, NAV in simple terms is the current worth of each unit of the mutual fund. It is calculated as assets minus liabilities of a scheme divided by number of units corpus. Every fund house declares NAVs for each scheme daily.

Let us attempt to bust two popular NAV related myths.

Myth 1: Funds with higher NAV are better than those with lower NAV

Sometimes, investors tend to link the current NAV of mutual funds to absolute returns of funds. Therefore higher NAV is taken to be synonymous with higher return. This is not necessarily true. NAV is a tool to measure performance but NAV is not a performance indicator in itself. It is the change in NAV on two dates that reflects the performance of the fund in the period between those two dates. However, it is true that with time NAV increases; that’s why older funds tend to have higher NAVs.

For instance, suppose you invest in a fund with NAV of Rs 10 which grows to NAV of Rs 60 in 10 years. At the same time your neighbour invests in another fund with NAV of Rs 150 which grows to Rs 250 in the same period. Although NAV of the latter was much higher, its annual return is only 5% compared to 20% of your fund.

What is important is that you select a good fund (as known from its past performance over various market cycles), backed by strong fundamentals, irrespective of whether its current NAV is in double digits or triple digits.

Myth 2: New fund offers are cheaper since NAV is Rs 10

Most new fund offers (NFOs) have NAV of Rs 10. The myth, much believed in the past when NFO launches were rampant, is that since NAV is lower you had better buy during the NFO period than later when it shoots to Rs 30 or Rs 40.

However, that NFOs are cheaper, is not true. Unlike in shares or bonds there is nothing like cheap NAV or expensive NAV in mutual funds. Understanding the relationship between NAV and the amount you invest would help. If you have Rs 10,000 to invest and the fund you have chosen has NAV of Rs 10 you get 1,000 units of the fund.

If the fund performs well and the NAV grows by six times to reach Rs 60, in 10 years your investment value rises to Rs 60,000. This would be exactly the same as investing in the fund when its NAV stood at Rs 30 and if it also grew by six times and reached Rs 180 in 10 years.

Anytime is good for investing in a good fund when the investment is for a long term (not less than five years) subject to your age, risk appetite, asset allocation, etc. With an existing fund you have past performance to look up against, which is missing in a new fund where you may invest based on trust you have on the fund house launching it. Ultimately what counts, again, is whether the fund consistently performs well over the course of time.

(By Harshad Chetanwala. The writer is Head, Customer Delight, Quantum Mutual Fund)

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