Higher NAV doesn’t mean Premium Buying of Funds

By Ashish Kyal –

Net Asset Value (NAV) is the price at which a single unit of Mutual fund is traded. In simple terms we can say every stock have a face value the same way every Fund have its NAV. There are some of the fund distributors who love to promote that, a fund with high NAV is costlier.

NAV formula 20160728

In reality, NAV is irrelevant and should not be considered while investing in funds.

Confused? Let’s say, there are two identical funds in which one of the fund is around for a while were as second is newly launched. As the value of their holding (identical) increases, the NAV will rise by the same percentage. So investor of both the funds will be benefited equally.

Let’s take a broader view, let’s say the NAV of the two funds is Rs.10 and Rs.50 and they rise to Rs.11 and Rs.55, respectively. So, it might appear that one has just rise by a rupee while the other by Rs.5, but in reality both the funds have shown a 10 percent of rise. Of course, number of units held would differ. A low NAV would fetch higher number of units while high NAV would have low number of units.

The cost of the scheme in terms of NAV has nothing to do with its return. What you want to buy is its performance and not the NAV. The only instance where a higher NAV will affect is when a dividend has been received. This happens because higher NAV results into less number of units which leads to lower dividend. But in case of funds with low NAV will get huge amount of dividend. Here, the investor is not really benefited as his own money is given in the form of dividend. Infact, after the dividend is paid-out, NAV is adjusted accordingly.

That means whichever angle we see, NAV does not interfere in the returns of the fund; it is only the performance which indicates the returns. Here the case in point is rather than comparing the NAV of the fund it is better to compare the performance for a great outcome.

 

Thus, Invest in Funds which are appropriate to you and your investment type and not as per their NAV.

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