Does NAV of a Fund Matter While Buying Mutual Funds?
Selecting a mutual fund to invest is a tedious task. With way too many funds and suggestions thrown at one’s way its obvious people get confused and often take a wrong step. Mutual funds cannot be judged on one sole parameter before one decides to invest in it. There are a set of parameters to consider and NAV of a fund (Net Asset Value is definitely not one of them.
What is NAV?
NAV of a fund is the price at which a unit of a mutual fund is bought and sold. It is the market value of the fund after deducting its liabilities. From this value, the expenses are deducted and then divided by the number of units to get NAV per unit.
Funds with lower NAVs vs Higher NAVs
Net Asset Value of a fund represents the value of assets of the fund per unit. Hence a fund cannot be judged based on a higher or lower NAV. Here are a few reasons why.
Value Remains The Same
A fund with lower NAV will give more number of units and higher NAV will give less number of units. Buying 100 units in a mutual fund with value Rs 50 is same as buying 25 units in a mutual fund with a value of Rs 200. The value of the investment will remain the same in both the cases, which is Rs 5,000. The number of units will vary and so will the NAV but the initial investment will remain the same. If the first fund’s NAV increased from Rs 50 to Rs 55 and second fund’s NAV increased from Rs 200 to Rs 220, the gain is the same in both which is 10%. Furthermore, the value after the gain is the same for both the funds at Rs 5,500.
Direct Plans vs Regular Plans
Direct plans have higher NAV when compared to regular plans. So does that mean choosing a direct plan is beneficial for investors? Choosing a direct plan should not be based on the NAV of a fund alone. There are various other factors to choose a direct plan over a regular plan and this is definitely not one of them. One can choose a direct plan only when they are confident about taking care of their investments on their own and they do not need any expert advice regarding them. Else it’s better to choose a regular plan as the distributor will help you throughout your investment journey.
One can get higher absolute dividends on funds with lower NAV as they have a higher number of units and the fund’s NAV is reduced leading to the purchase of more number of units in the next SIP. This is a myth. Dividend payout reduces the NAV. A fund with Rs 200 NAV reducing to Rs 160 is same as a fund with Rs 50 NAV reducing to Rs 40. Hence the value remains the same. Therefore the returns are unaffected.
NAV of a fund cannot just be the sole parameter to judge a mutual fund. There are other including performance, fund manager, strategy, portfolio etc affect a fund’s performance. Therefore one should always consider all the parameters while choosing a mutual fund and not just buy a fund because it has higher or lower NAV.
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