Decoding Common Mutual Fund NAV Myths

This is a very common misconception among many investors. You will come across several people who will suggest selecting mutual funds based solely on their NAV.

Following this can be hazardous to your investment strategy. NAV or the Net Asset Value is simply the per unit price of a mutual fund. This depends on several factors like their assets under management and total outstanding units.

Let's bust this myth with a simple example. For instance, you are investing in two mutual funds. In both the funds, you have invested ₹10,000 each. The NAV of Fund ABC is ₹20 and the NAV of Fund X is ₹50. The NAV here represents that you are holding 500 units from Fund ABC and 200 units from Fund X.

This proves that the net asset value of a fund influences the quantity of shares you will own after investing. Instead of making a judgement based only on a mutual fund's NAV, consider checking other parameters. This includes the fund's ROI over some time, say, 1 year, 3 years, or 5 years. You can also check the fund's portfolio, and benchmark indices and compare them with its peer funds.

While making a mutual fund investment, many of your peer investors might suggest you invest in mutual funds with lower NAVs. It is a common mutual fund NAV misconception that most investors hold. NAV influences the quantity of assets you hold depending on your investment. This implies that the appreciation of mutual funds depends on the appreciation in percentage and not in absolute terms.

For instance, you invested ₹5 lakhs in a scheme which has an NAV of ₹10, so you will purchase 50,000 units. If this fund performs well, there are chances that in the coming years, it’s worth will double. Then, its NAV will become ₹20 and your total investment amount will be ₹10 lakhs.

But it will work in the same pattern even if the fund’s NAV is ₹100. In this case, you will purchase 5000 units. If the fund’s value doubles, your total assets will become ₹10 lakhs just like in the previous example.

This implies that the value of the NAV does not determine the performance of a mutual fund and eventually your returns.

Many investors think that investing in funds with lower NAV is better as you can hold more units. As a result, some investors choose to invest huge amounts in newly launched funds or NFOs. However, what people miss out on is that the NAV is not the reflection of the market price of a mutual fund but it represents the fund market value. Thus, the current NAV of a fund does not impact the returns at all.

It is very important to note that a mutual fund scheme functions on many other factors other than NAV. This includes the rate of return on your investment. Therefore, making a decision relying on how many units you can hold could be a bad idea and you might not earn the expected capital.

Some investors consider that a fund’s NAV turns negative whenever the asset value drops from a certain percentage. This is a common mutual fund NAV misconception. The daily change in the NAV can be positive or negative. You will notice that the NAV of a mutual fund may rise or fall without prior warning every day. However, the absolute NAV of a mutual fund can never be a negative value.

The formula to calculate the NAV of a mutual fund is:

NAV = (Total assets - liabilities)/number of outstanding units

These parameters define the funds available with the AMC to fulfil the redemption requests of investors. Practically, the value of underlying investments will always be more than a fund's current liabilities. This keeps the NAV of a mutual fund positive.

This is another common misconception surrounding mutual fund NAV. The NAV of any mutual fund does not influence its expense ratio. The latter is the annual fee that an AMC charges annually as a payment for asset management.

The expense ratio can affect the NAV of a fund as it gets subtracted from the fund's assets. This means any company with a high NAV can have a lower expense ratio and vice versa. Therefore, before choosing a mutual fund, consider its expense ratio and not just NAV.