A Mutual Fund with a Lower NAV Gives a High Return

Last Updated: 11 Oct 2024

A Net Asset Value or NAV plays a major role when buying a mutual fund investment. The latter is still considered as one of the most popular safe investment choices worldwide. Thereby, knowing key aspects related to it is essential. There is mostly confusion about whether to buy a high NAV mutual fund or a low NAV mutual fund. A common belief is that a lower NAV offers higher returns. However, the truth is far from it. This article thus aims to clear the conceptions and theories surrounding a low NAV mutual fund and higher returns to help you make a proper decision.

What is a NAV?

In technical terms, NAV is calculated by dividing the total number of assets by the total number of liabilities. The assets can be shares, equity, bonds, gold, etc. The liabilities include marketing and distribution costs and professional money managers’ management fees. The NAV per share of a mutual fund can be computed by dividing the difference between the two by the total number of units held. NAVs are not a constant while being an important feature.

Every day, they alter. This is due to the fact that the underlying assets are exchanged daily, meaning that their value varies throughout market hours, in contrast to stocks or other direct investment choices. To put it another way, NAVs are determined to ascertain the ultimate worth at the end of the day following market hours. As a matter of fact, NAVs are not limited to mutual funds. As long as they understand the ideas of assets and liabilities, any business should be able to compute its NAV.

Low NAV Mutual Fund: Better or a Myth

There are several theories regarding low NAV mutual funds, and is a mutual fund with low NAV better? Consider the examples below for a better understanding.

Consider a buyer of 200 shares at an NAV of ₹ 50. The stock market rises by 10%. Thus, the NAV is currently ₹ 55.

The total investment value = (55 * 200) = ₹11,000

In the alternate scenario, the stock market rises by 10% once again after the person purchases 100 shares for an NAV of ₹ 100.

Here, the New NAV is equal to ₹110.

Value of the Total Investment = 110 * 100 = Rs. 11,000

The entire investment value stays the same in all scenarios. Thus, the fund’s performance is not solely dependent on the NAV value. A lower NAV will enable you to acquire more units, whilst a higher NAV will result in fewer units being awarded to you. However, one thing to keep in mind is that the value of your investment won’t change. In general, a low NAV mutual fund can be a result of low popularity, bad prior performance, or the fund’s youth. In the same manner, strong performance isn’t always guaranteed by a higher NAV.

Low NAV Mutual Funds: Risks

A Higher or a low NAV mutual fund doesn’t really matter in terms of the fund’s true worth. In fact, the answer to is a mutual fund with a low NAV better? It is a prominent no. There are a few basic misconceptions associated with low NAV mutual funds. These are explained below.

• More Units: The first misconception is that you will be given more units of a fund if its NAV is lower. It doesn’t really matter. It is the same whether you have 2,000 units of Rs. 15 or 300 units of Rs. 100.
• Better Prices: When direct plans have greater NAVs than regular plans, investors frequently notice this difference and mistakenly assume that the lower NAV reflects better prices. Don’t choose a regular plan over a direct plan just because the NAV is lower; consider other factors, like lower marketing and distribution costs compared to conventional plans.
• Agility: Consider that two funds have comparable investment strategies. The second fund has issued more units than the first, and that is the sole difference. As a result, the second fund’s NAV per unit will be lower. How the corpus and portfolio are handled will determine how well they perform. Therefore, it makes no difference how high or low a fund’s NAV is.
• Dividends: Dividend payments lower a mutual fund share’s net asset value (NAV). However, this does not imply that fund investors lose money.

Conclusion

A mutual fund’s return is never determined only by its net asset value. It is preferable to concentrate on studying the market and asset price changes. It all comes down to understanding how to ride the market wave and taking measured risks. The secret is to comprehend how the market functions and how it operates. Move past the myths regarding a low NAV mutual fund and theories on a mutual fund with a low NAV and high return. Focus on the structure of the fund portfolio and its management in relation to risk and return parameters to make an informed decision.

Frequently Asked Questions

What happens if NAV is low?

Higher numbers of units would be implied by a low NAV, and smaller numbers would be indicated by a high NAV.

Do dividends lower NAV?

Important lessons learned. When a dividend is paid, a fund’s NAV decreases as the fund’s worth diminishes.

Is a low NAV mutual fund superior?

Investors frequently mistakenly think that a mutual fund with a lower NAV is more affordable and, thus, a better investment. It is not valid.

What is a good mutual fund NAV?

NAV is essentially meaningless when it comes to mutual funds.

What is a reasonable price-to-NAV ratio?

The division of the share price by the corporation’s net asset value per share yields the price-to-net asset value. Generally speaking, a price-to-book ratio of less than one is a favourable multiple since it can suggest that the shares are cheap.