Should you consider the nav while choosing the mutual fund schemes?

There is a misconception amongst investors that they should try to analyze the NAV of mutual fund schemes that they are planning to invest in. However, the fact is that beyond indicating how the fund’s AUM has grown over the years, since its inception, the NAV mutual fund should not be a reference point for the performance of mutual fund schemes.  

What is the NAV mutual fund? 

The Net Asset Value or the NAV of mutual fund schemes refers to the per unit price of the scheme. So, it is the price you pay to buy one unit of the mutual fund. The formula for NAV is - 

NAV= (Total Assets - Total Liabilities)/ outstanding units

What should you consider while choosing a mutual fund scheme? 

NAV of a mutual fund depends on the market value of the assets under management in the fund. So, a rise in NAV mutual fund indicates that the fund has historically done well. This may give you some confidence in the fund managers' expertise and the probability of the fund repeating its historical performance. 

However, there are other measures that should be considered while choosing mutual fund schemes like its tracking error that tells you the difference between the performance of the fund and its benchmark, the rolling returns, the alpha generated by the fund etc. which are far more accurate computations of the fund’s sustained performance. Besides these statistical measures, you should also consider the fund’s objective, the fund manager’s track record, as well as your own risk appetite and investment needs before choosing the mutual fund schemes.  

Is it not necessary to buy your Mutual Fund Schemes based on the NAV mutual fund? 

It is evident from the discussion so far that NAV should not be considered while choosing a mutual fund. Let us understand why. 

1. A fund’s lower or higher NAV could be a result of the age of the scheme since inception as well. Most new mutual fund schemes have a starting NAV of Rs 10/- As time goes by, new assets are bought by the fund and new capital is invested and the NAV increases. Is this the reason why you want to invest in the fund? Your concern should be the returns that these underlying securities can give you. So, NAV is not the right measure for a decision to invest in a fund. 

      2. Let us take an example to understand this further. Suppose there are two funds Fund X and Fund Y. Now Fund X has a NAV of Rs 100 and Fund B has an NAV of Rs 50. Let us assume that both the funds have the same investment objective and both the mutual fund schemes invest 20% of their assets in the same securities PQR. Due to market changes the stocks of security PQR rose by 10%. Due to the rise in the stocks of PQR, the NAV of both Fund X and Fund Y rises 2%. Look at the table below to see the returns from both the investments for Preeti who invested Rs 500 in each fund. 

As you can see, even though the fund X NAV was twice that of Fund Y, Preeti made just Rs 10 on her investment in both funds. You can deduce that other things remain the same, NAV is not of much consequence in the performance of the fund.  

Therefore, consider the other things mentioned earlier, that are more important in choosing mutual fund schemes instead of the NAV mutual fund.