Does a high NAV mean a costly Mutual Fund?

Vidhya S July 24, 2019 0 Comments

If there is the myth that most investors believe, it is that mutual funds with higher NAV should be avoided as they are expensive.

But the truth is that the NAV makes no difference to the returns.

Let’s first clarify what the Net Asset Value (NAV) is. The NAV is the value of a mutual fund scheme’s assets minus the value of the liabilities per unit. It is the price at which you buy the unit of a scheme. You also sell your fund at the NAV minus any exit load, if applicable.

Many investors confuse NAV with the stock price. Stock price depends on the fundamentals and future prospects of the company. After the company goes public and starts trading on the exchange, its price is determined by the supply and demand of its share in the market. The NAV on the other hand, is not decided by any market action. The NAV just reflects the current value of the portfolio. The fund house takes into account the market value of all the assets on a daily basis to calculate the NAV.

Comparing the NAV of any two mutual fund schemes, does not tell you anything about the mutual fund performance.

Illustration:

  • Consider two schemes, Fund A and Fund B
  • NAV of Fund A is Rs 90 and NAV of Fund B is Rs 110.
  • Both Fund A and Fund B have identical portfolios and you invest Rs 10,000 in both the funds
  • In Fund A you will get 111.11 (10000/90) units and in Fund B, 90.91 (10000/110) units
  • For example, if both their NAVs go up by 10% that year
  • NAV of Fund A will grow to Rs 99 and NAV of Fund B will grow to Rs 121
  • The value of your investments will grow to Rs 11,000 (99*111.11) in Fund A and Rs 11,000 (121*90.91) in Fund B as well.
  • In both the funds, the value of your investment remains the same

So, the NAV makes no difference to the performance of the fund. Next time when you want to evaluate a fund, look at its performance track record, portfolio and how it suits your profile. NAV is inconsequential.

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