All of us take into consideration the price of any product or service before purchasing it. As human beings, we are wired to check if there is any cost advantage in something that we are buying. So naturally, some investors apply the same logic to mutual funds as well. As a result, there are multiple myths around the price of a mutual fund unit, also known as NAV or Net Asset Value.
In this blog, we will bust some of the most common myths related to the NAV of a mutual fund scheme and help you make better-informed decisions when it comes to investing in mutual funds.
Myth 1 – Low NAV Is Better As You Get More Units
One of the popular myths about mutual fund NAV is that it is better to invest in schemes with lower NAV, as you get to buy more units in these schemes. This myth about mutual fund NAV is probably why most investors pour their money to purchase units in newly launched funds (New Fund Offers or NFOs). The logic is that since the NAV is Rs. 10 in the NFOs, it is better to invest in them and accumulate more units rather than investing in a fund that has a higher NAV. However, this is far from the truth. Let’s understand with an illustration.
Why there is no advantage if you get more units?
Take the example of two Large Cap Funds – BNP Paribas Large Cap Fund and Kotak Bluechip Fund. The NAV of BNP Paribas Large Cap Fund was Rs. 102.79 on August 18, 2020, and the NAV of Kotak Bluechip Fund was Rs. 262.35 on the same day.
Assume you invested Rs. 20,000 each in both the schemes on August 18, 2020. You would have got 194.571 units in BNP Paribas Large Cap Fund, which is significantly higher than the 76.234 units that you would have received in Kotak Bluechip Fund.
Let’s check if there is any advantage of accumulating more units.
|Particulars||BNP Paribas Large Cap Fund||Kotak Bluechip Fund|
|NAV On Aug 18, 2020||₹102.79||₹262.35|
|No. Of Units You Own||194.571||76.234|
|NAV on Aug 11, 2021||₹146.14||₹393.771|
|Final Value Of Your Investment||₹28,434.60||₹30,018.74|
|Gain From Your Investment||₹8,434 (28,434 – 20,000)||₹10,018 (30,018 – 20,000)|
As the table shows, despite accumulating more units in BNP Paribas Large Cap Fund, the gains you earn from this scheme are lower as compared to Kotak Bluechip Fund. This is because gains you make from a mutual fund scheme are purely a function of the rate of return that you earn.
So there is no benefit if you invest in funds with lower NAV and get higher units. What matters is the rate of return you get from the scheme. After all, you want better returns, not more units, when you redeem your investments from mutual funds.
Myth 2 – Higher NAV indicates Good Performance
The historical NAV of a Mutual Fund is Rs. 10 at the time of its NFO, Thus, many investors compare the NAV of two funds and jump to the conclusion that the fund with higher NAV must have performed better between the two schemes in the past. But that is not necessarily true. The NAV of a fund could be higher just because the fund has existed for a longer period.
Let’s understand with an illustration. Take the case of Mirae Asset Tax Saver Fund, whose NAV is Rs. 29.17 as of Aug 11, 2021. Let’s compare it with HDFC Tax Saver Fund, whose current NAV is Rs. 672.13. HDFC Tax Saver Fund has a significantly higher NAV, but does that mean it has performed better than Mirae Asset Tax Saver Fund? Certainly not.
|Does Higher NAV Indicate Good Performance?|
|Particulars||Mirae Asset Tax Saver Fund||HDFC Tax Saver Fund|
|Inception Date||Nov 20, 2015||Dec 18,1995|
|Average Annual Return Since Inception||22.80%||13.04%|
|NAV on Aug 11, 2021||₹29.17||₹672.13|
Mirae Asset Tax Saver Fund has delivered average annual returns of 22.72% since its inception on Nov 20, 2015. On the other hand, HDFC Tax Saver Fund has delivered average annual returns of 13.04% since its inception on Dec 18, 1995.
Even if you check the last 5 years’ performance of HDFC Tax Saver Fund, it has delivered close to 11% average annual return, while Mirae Asset Tax Saver Fund has delivered close to 20.6% return.
Yet, HDFC Tax Saver Fund has a higher NAV simply because it was launched nearly 20 years earlier than Mirae Asset Tax Saver Fund.
So the takeaway here is to not compare the NAV of two funds and decide which fund would have delivered better returns in the past.
Myth 3 – NAV Can Be Negative
Often investors see that the NAV of their fund has fallen by a certain percent and think that their NAV has become negative. This is certainly not the correct way to look at NAV. Yes, the daily change in the NAV can be negative, but the absolute NAV number can never be negative.
For example, the NAV of a fund may have fallen from Rs. 15 to Rs. 12 in a day, which means a -20% 1-day change in the NAV of that fund. But you will never see a fund with a NAV of Rs. -1 or Rs. -5.
We say this with certainty because of the way the NAV of a mutual fund is calculated. The formula to calculate NAV of any mutual fund scheme is the following:
NAV = (Total Assets ‐ Liabilities)/No. of Outstanding Units
Here assets are the market value of the investments, and liabilities include payments that the fund needs to make, say, towards redemptions. In practice, the value of the underlying investments is always more than the current liabilities. Hence, NAV always stays in the positive zone.
The only purpose of NAV of a mutual fund scheme is to compare a fund’s NAV to its past NAV and evaluate the scheme’s performance. NAV has no other practical purpose for you. So the next time you come across a Whatsapp forward or sales pitch that urges you to invest in a fund because of low or high NAV, you know how to deal with them.
Well explained with examples
Dear Mohan, thank you for your kind words. You made our day.