Humans have a common tendency to assess the prices of the product and evaluate them against other similar products before buying. Be it any bike, or any household merchandise, or even any financial product, our basic instinct to compare with other products just instantly jumps in. As humans, our next step is to achieve a rational value that may help one form an opinion about the product to understand if the product is expensive or affordable or perhaps even offers a fair price and value for their money. This gets extended to investment choices including mutual fund investments as well. An investor often looks at the price before evaluating the right investment option for their portfolio. In the mutual fund sector, the price equivalent is the NAV of mutual funds or net asset value of the fund. But does the NAV of a scheme have the same implication as price? In this article, we will understand whether one should consider NAV of a particular scheme before choosing the right plan for their investment portfolio.
What is NAV?
NAV of each mutual fund units refers to the market value of all the assets and securities held by a particular scheme. In simple words, NAV is simply the price at which an individual buys or trades their units of mutual fund schemes. Irrespective of the type of mutual funds, the net asset value of the scheme is announced by the fund house on a daily basis. In fact, as a matter of fact, the Indian market’s regulator – SEBI (Securities and Exchange Board of India) has mandated all mutual fund schemes to disclose the NAV of the mutual fund scheme on the AMC’s (asset management company) website by the end of the day.
How is the Net Asset Value of a mutual fund scheme relevant to investors?
Often investors commit the mistake of choosing mutual fund schemes with a lower NAV as they believe that lower NAV would mean that they are accumulating higher units of mutual fund schemes. However, this is a myth and investors are often misled into believing that. Let’s understand this better in detail. Sure, a scheme would lower NAV would help you attain higher number of mutual fund units as compared to a scheme with a higher NAV. However, if both the funds appreciate somewhere similarly in value, the net returns on both the mutual fund schemes would be similar. So now, the question arises, if comparing NAV of two mutual fund schemes is irrelevant in determining the net returns of the schemes, what other factors should one consider? The performance of the scheme over a specific period of time would be a good indicator in determining the expected returns of the mutual fund scheme.
So, it is a wise decision to not base your entire investment decision solely on the NAV of the fund. This is because NAVs do not properly reflect the prospects of the fund as it is merely just net value of the scheme after subtracting liabilities and expenses. Happy investing!