6 mins read . 13 Nov 2023
It is quite common to see mutual fund investors opting for funds with lower NAV. The logic in many (albeit erroneously) is that a fund with a lower NAV is more attractively priced. For instance, the general belief is that a fund with a NAV of Rs22 is better than a fund with a NAV of Rs85. However, such a perception can force you to make sub-optimal decisions. Remember, the NAV just reflects the value of the fund per unit. Whether you buy the fund with a NAV of Rs22 or Rs85, your performance from here on will depend on how the asset class performs and your fund manager does. Let us quickly dwell on NAVs a bit more.
Net asset value (NAV) of a fund is the price at which you buy the fund and represents what the value of the fund assets are worth. For instance, if you bought a fund scheme at a NAV of Rs10 and it is up to Rs12 in 1 year, then it is a 20% return. It is essential to remember that the NAV is slightly different from stock price. Stock price represents the present and future prospects of the company, which is why P/E ratio assumes importance. However, in the case of NAV, it represents the market valuation of the fund scheme.
Mutual funds have costs, so these costs are debited to the fund NAV in the form of total expense ratio (TER) and debited on a daily basis.
NAV of a Fund = (Market Value of stocks – Total Expense Ratio) / No. of units issued
The TER (total expense ratio) includes costs like brokerage expenses, administrative expenses, registrar fees, statutory charges, marketing and distribution costs etc. These are charged on an annual basis but apportioned and debited on a daily basis.
A lower NAV or higher NAV has little relevance to the attractiveness of the fund. What matters are the CAGR returns, portfolio quality and fund manager quality?
The point is that the level of the NAV does not really matter in your fund choice decision. Instead, focus on the composition of the fund portfolio and how well your fund manager is able to delivery risk-adjusted returns.