The concept of NAV of mutual funds is probably one of the most misunderstood concepts in the investment universe. Investors often face the difficulty of misunderstanding how their mutual fund investments work.
What is Net Asset Value in a mutual fund?
A mutual fund consists of several units, also known as unit shares. The Net Asset Value of each such unit is simply its market value. In other words, it is the price at which you buy or sell the units of a mutual fund. When you invest in a mutual fund, you’ll find that many assets are managed under that fund.
Offered a choice, if you are to choose between the same category of different types of mutual funds schemes, which would you choose? Mistakenly, investors would prefer the ones which are associated with LOW NAV (Net Asset Value). Why? They are in the perception that the lower the NAV, the more units they get. However, does that help in deciding which mutual funds to invest in? Surprisingly, the answer is No. Let’s understand this in detail.
Assume that both the schemes invest in mutual funds with an identical portfolio. Then, it wouldn’t really matter whether you invest during a low NAV or a higher one. Are you wondering why? Here’s why:
Sure, lower NAV would indeed give you more units and a higher NAV would mean lesser units of the mutual fund scheme. In both cases, if the identical funds appreciate in equal percentage even if the NAV difference is Rs. 500 or even Rs 10000 on the day of investment, your total returns would remain the same in both the cases. So, the question now arises — how should you decide between the two NAV values, if comparing NAV is irrelevant? You should look at just the performance of the fund over a specific period of time.
When you invest in mutual funds online, you should look at the growth of your money over time. The NAV of a scheme at a given point has no relevance. What’s important is how that NAV has grown over time because the performance of a fund can be determined based on that growth.
When you invest in a mutual fund with a low NAV value, you would be allocated more units as compared to the units allocated when you invest in a mutual fund with a higher NAV value. This is the reason why several investors think that it would be better to invest in mutual funds that has a lower NAV. However, what matters is the difference between the values of the NAV when they are bought and redeemed. An investor shouldn’t be swayed by holding more units in a fund with lower NAVs. Happy investing!