Low NAVs do not imply cheaper funds

Low NAVs do not imply cheaper funds

One myth that fund distributors lover to propagate for some reason is that a fund with a low net asset value or NAV is cheap. Their common pitch is that the NAV is just INR 10 or so. And as a result, investors rush to these New Funds Offerings (NFOs) to take full advantage of this situation. 

In reality, the NAV is irrelevant and should not even be considered when investing. 

Consider for instance two funds that have identical portfolios but different NAVs. One has been around for some time, while the other has only been newly launched. However, as and when the value of their holdings increases, the NAV will also rise by the same percentage. Thus, in both situations, investors will benefit equally. 

Let us out this numerically. Let us say that the NAV of two funds in INR 10 and INR 50, and they rise to INR 11 and INR 55 respectively. While it may appear that one has risen by just a rupee and other by INR 5, in reality, both of them have only shown a 10 percent raise. 

Of course, the number of units that you can hold will differ. A low NAV implies that a higher number of units can be held, while a high NAV indicates the exact opposite. Let us say that you invested INR 5000. With a NAV of INR 10, you can get 500 units, while with a NAV of INR 50, you can get only 100 units. However, in both cases, the amount invested is the same. Thus, the investment would also show the same gain. The 500 units that you paid for would rise to INR 5,500 at INR 11 per unit. The 100 units that you paid for would also rise to the same amount at INR 55 per unit. 

The cost of a scheme concerning its NAV has nothing to do with its returns. What you are looking at in a scheme is not the NAV, but the performance instead. 

The only case where a high NAV might have adverse effects on you is where the dividend is to be received. This is because a scheme with a high NAV would result in a fewer number of units, and since dividends are paid on face value, a high NAV would result in lower absolute dividends, since you hold a smaller number of units. But even here, the total returns will remain the same. Thus, whichever angle you view it from, NAV makes no difference to returns in real-time. MF schemes should, therefore, be judged on their performance, and the best way to do it is to compare returns over similar periods. 

The entire confusion arises only when investors view a fund’s NAV as its stock price. The current price of a stock could be much lower or higher than the actual value. The NAV simply reflects the current value of the portfolio. 

Thus, the next time you are evaluating a fund, take a look at the portfolio and returns over different periods.