Decoding Myths About Mutual Fund NAV

Posted On Thursday, Apr 11, 2019

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Many investors have misconceptions about the current NAV of all mutual funds, about how the NAV is linked to a fund’s performance and their returns.

Net Asset Value (NAV) in simple terms is the current worth of each unit of the mutual fund. NAV, which is calculated as assets minus liabilities of a scheme divided by number of units corpus , is declared by fund houses daily. Below we attempt to bust 2 popular NAV related myths.


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

Sometimes investors tend to link 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 sure is a tool to measure performance but NAV is not a performance indicator in itself. It is change in NAV of two dates that reflects performance of the fund in the period between those dates. However it is true that with age NAV increases; that’s why older funds tend to have higher NAVs.


For instance suppose you invest in a fund with NAV 10 which grows to 60 in 10 years. At the same time your neighbor invests in another fund with NAV 150 which grows to 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.


NAV at startNAV after 10 yearsAnnual return (CAGR)
106020%
1502505%

Disclaimer: Table above is for illustrative purpose only. NAVs used are imaginary.

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 (NFOs) are cheaper since NAV is Rs.10

Most new fund offers (NFOs) have NAV of Rs.10. The myth - believed to be mainly 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 30 or 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 from there and the NAV grows say by 6 times to reach Rs.60, in 10 years then 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 6 times and reach to Rs.180 in 10 years.


NAV at startValue of investment at starthNo. of units you get (10,000/start NAV)NAV after 10 yearsValue of investment at end (no. of units* end NAV)
1010,0001,0006060,000
3010,00033318060,000

Disclaimer: Table above is for illustrative purpose only. NAVs used are imaginary.

The fact is any time is good to invest in a good fund when the investment is for a long term (Not less than 5 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 might go 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.



Disclaimer, Statutory Details & Risk Factors:


The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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