Understanding a mutual fund scheme’s Net Asset Value, or NAV, can take time and effort for new investors. Most of them need help choosing between purchasing a fund with a higher or lower NAV. A high NAV in mutual fund is typically thought to be pricey and is mistakenly believed to offer a low rate of return on investments. However, because they feel that investing in additional mutual funds will increase their returns, investors occasionally choose mutual funds with low NAVs. However, there is even more to the NAV notion. Is NAV the best criterion for selecting the right investment strategy? Check it out.
The NAV, Net Asset Value, is the market price of a mutual fund scheme or the value of its assets less its liabilities per unit, known as net asset value. NAV is the cost of the fund you are investing in. For instance, if you purchased a mutual fund at a NAV of Rs. 20 and it reaches Rs. 35, you will have received a return of 50% at that time. However, you should note that any relevant withdrawal charges and the Securities Transaction Tax (STT) on redemptions of equity funds would reduce your net profits.
NAV in mutual fund differs from a stock price because a stock price reflects the company’s current and future potential, whereas there is no such representation for mutual funds. The NAV is the asset value of the mutual fund plan you invest in. Additionally, you must note that the NAV needs to reflect the scheme’s potential.
High NAV or Low NAV in Mutual Funds: Which is Better?
Generally, people would agree that a mutual fund with a lower NAV would be better because the lower the NAV value, the more the number of shares (units) one receives. Does this, however, hold true? Actually, no!
It would barely matter whether the NAV is higher or lower under the typical assumption that both schemes correspond to a similar bracket and have identical portfolios. So while it is true that a lower NAV will allow you to purchase more shares (units) and a higher NAV will allow you to buy fewer shares (units), the ultimate value of what you’ve invested will be the same in both situations.
It is factually incorrect to say that a plan with a NAV of Rs. 20 is less expensive than an Rs. 50 per unit price. In reality, larger NAVs imply that the schemes have a long history or have done better. It is because strong performance would have increased the fund’s net assets.
Financial experts say that a lower or higher NAV is not essential to investors. Whether a scheme’s NAV is higher or lower, both schemes would receive the same returns because their respective portfolios would see the same growth or decline over time. Therefore, if the mutual fund schemes have similar portfolios, NAVs should largely be ignored because the acquisition cost has little bearing on returns. Avoiding a higher NAV plan would be irrational because you would charge it for outperforming similar schemes.
Even if it makes sense to choose the least expensive alternative, your NAV level doesn’t matter; how the fund portfolio is managed with its risks and returns counts.
Therefore, one should compare schemes using their previous achievements and portfolio composition instead of NAVs. They should also evaluate the MF and fund manager’s level of client support. If you have never used mutual funds before, you can also seek the help of a qualified advisor.
Multiple authorised financial advisors have been helping investors maximise their investments with their knowledge and qualified advice. Connect with a trusted source immediately to learn about NAV in mutual fund, trade in mutual funds through a professional, and benefit from mutual fund schemes.