Does Lower NAV Mean Better Fund?

By | May 26, 2015


If myths were true then lightning never strikes a place twice, Einstein failed in math exam, bulls hate red and lower NAV (net asset value) means cheaper mutual funds.

But that’s not the case. Lightning can strike a place twice; Einstein did excel in his math exam; bulls are proven to be color blind. And yes, lower NAV definitely doesn’t mean cheaper funds.

The next time a fund manager screams at the top of his lungs with the USP that a fund with a lower NAV is cheaper, scream louder (in your mind, that is): Is that really true?

Let’s clear the air on that.

Oh, before that, let’s look at what NAV is.

In simple terms, NAV is the market value of the assets of the scheme less its liabilities. It shows the intrinsic value of the fund; not a paisa more, not a paisa less.

With the basics in place, a trip down the NAV lane would throw light on whether there is a cost-advantage for the funds.

Performance matters, not NAV

To drive home the point, let’s look at the following scenario.

Two funds, with similar portfolios, ‘X’ and ‘Y’ have NAVs of Rs 100 and Rs 200 per unit respectively. Which one is cheaper? Obviously ‘X’, isn’t it?

Hang on. Not so fast.

Rakesh decides to invest Rs 10,000 each in both the funds. Then he will be getting 100 units of ‘X’ and 50 units of ‘Y’. After a year, both the funds would grow at the same rate – say 10% – as they have similar portfolios.

Thus, ‘X’ would fetch him Rs 110 per unit and ‘Y’ Rs 220 per unit, totaling Rs 11,000 for each mutual fund. So the contention that a fund with lower NAV will give better return doesn’t hold water. It also means that Rs 10,000 invested in both funds has brought similar rewards.

One point to be noted is that lower NAV means more units (Rakesh got 100 units at the rate of Rs 100) and higher NAV means lesser number of fund units (50 units at Rs 200 each).

The cost of a mutual fund has nothing to do with the returns of a particular scheme. It is performance that matters and not the net asset value of a mutual fund. The stock the fund manager has invested is crucial in determining the returns and not the net asset value.

Don’t confuse NAV with the price of a stock. The net asset value reflects the current value of the portfolio but the market price of a share may be higher or lower than the precise value of the stock.

Did anyone tell you that investing in mutual fund would provide a low rate of return or for that matter money gets tied up in these funds?

It’s completely wrong and you can say that in his face. Equity mutual funds provide a decent return if the economy is doing well and the debt equity funds may be seen as replica of fixed deposits, which give a regular source of income without any risk.

The NAV of a fund should not be the decisive factor while taking a decision to invest in mutual fund. One should take into consideration other factors too such as the size of the fund, expertise of the fund manager, how long the fund was active in the market and rating of the fund advisorsbefore finally deciding to park money in a particular fund.

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