Low NAV doesn't mean cheaper fund
The net asset value of a fund makes no difference to its returns. Consider a fund for its performance, not its NAV
By Research Desk | Aug 30, 2018
If there is one myth that fund distributors love to propagate, it is that a fund with a low net asset value (NAV) is cheaper. 'The NAV is just Rs10,' is their sales pitch. As a result, investors flock to new fund offerings (NFOs) to exploit this so-called cost advantage.
In actuality, the NAV is totally irrelevant and should not even be considered when making an investment. Not convinced? Let's say that two funds have identical portfolios. One has been around for a while and the other is a newly-launched fund. As the value of their (identical) holdings increase, the NAV will rise by the same percentage. So investors in both will benefit equally.
To put it numerically, let's say the NAV of the two funds are R10 and Rs50 and they rise to R11 and Rs55, respectively. So it might appear that one has just risen by a rupee while the other by Rs5, but in reality, they have both shown a 10 per cent rise.
Of course, the number of units held would differ. A low NAV would imply a higher number of units and a high NAV would indicate a lower number of units. So let's say you invest Rs5,000. It would get you 500 units with an NAV of R10 but only 100 units if the NAV is Rs50 (assuming no entry load). Yet, in both cases, the value of the investment is identical. So Rs5,000 invested in each would show the same gain. The 500 units (for which you paid Rs10/unit) would rise to Rs5,500 at Rs11 per unit. The 100 units (for which you paid Rs50/unit) would rise to Rs5,500 at Rs55 per unit.
The 'cost' of a scheme in terms of its NAV has nothing to do with returns. What you want to buy in a scheme is its performance, not its NAV.
The only instance where a higher NAV may adversely affect you is where a dividend has to be received. This happens because a scheme with a higher NAV will result in a fewer number of units and as dividends are paid out on face value, higher NAV will result in lower absolute dividends due to the smaller number of units. But even here, total returns will remain the same. So from whichever angle you see it, the NAV makes no difference to returns. Mutual fund schemes have to be judged on their performance. And the simplest way to do this is to compare returns over similar periods.
The confusion over NAV arises simply because investors view a fund's NAV like a stock price. Nothing could be farther from the truth. The current price of a stock could be much lower or higher than its actual value. But the NAV just reflects the current value of the portfolio as it is.
Next time you are evaluating a fund, take a good look at the portfolio and returns over various time periods. Remember, it is the stocks that the fund manager has invested in that determine the returns. The value of the NAV is immaterial.
This story originally appeared in August 2007.