What is NAV?
Net Asset Value of a mutual fund scheme is the market price or the value of its assets minus the liabilities per unit. In simple terms, NAV is the price of the fund you are invested in. For example, if you bought a fund at a NAV of Rs. 10 and the price of the fund touches Rs. 15, then it is a return of 50% over that period. However, it must be noted that your net returns will be lower due to any applicable exit loads and the Securities Transaction Tax (STT) on equity fund redemptions.
NAV is different from a stock price because stock price represents the present and future prospects of the company while in case of mutual funds, there is no question of factoring in the future. The NAV is the book value of the fund scheme that you are holding. It must also be understood that in no way is the NAV associated with the potential of the scheme.
Which Mutual Fund is better- low or high NAV?
Ideally, most people would say that mutual fund with lower NAV would work better because the lower the NAV, the larger the number of units one gets. However, does this hold true? Not really!
With a standard assumption that both the schemes belong to the same category and have identical portfolios, it would hardly make a difference whether the NAV is lower or higher. It is correct that a lower NAV will fetch you more units and a higher NAV would give you a lesser number of units in your hand, but the overall value of your investment in both the cases would be the same.
It is wrong to assume that a scheme with a NAV of Rs. 10 is cheaper than a scheme available at Rs. 50 per unit. In fact, higher NAVs suggest that the schemes have prospered well in the past or have been around for a long time. This is because the net assets of the fund would have increased due to good performance.
Financial advisors believe that a higher or lower NAV is irrelevant to investors. Whether a scheme has a higher NAV or lower NAV, both would get the same returns as the appreciation or depreciation of investments of the scheme would be the same as they have identical portfolios. Hence, NAVs should majorly be ignored if the mutual fund schemes have identical portfolios because the cost of purchasing has little to do with returns. In other words, avoiding a scheme with higher NAV is silly because you are penalizing it for performing better than other schemes.
While, it surely makes sense to select the cheapest possible option, the bottom line is that your NAV level does not make much difference. Instead, what matters is the composition of the fund portfolio and how it is managed with its risks and returns. Hence, instead of the NAVs, one must compare schemes based on their past performance and portfolio composition; judge the customer service provided by the MF and the fund manager. You can also take assistance of a professional advisor if you are new to mutual funds.
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