- Date : 13/02/2023
- Read: 3 mins
Explore the potential rewards and risks of choosing a high NAV mutual fund SIP for your investment portfolio. Understand the significance of the NAV and make an informed decision.
When investing in mutual funds, there are many things to consider - entry and exit loads, expense ratio, type of fund, lock-in period (if any), etc. Another factor is the Net Asset Value (NAV) of the fund. Some investors favour mutual funds with a high NAV, while others gravitate towards a fund with a low NAV. Before you choose one over the other, make sure that you understand the role and significance of NAV on the value of your mutual fund investments.
What is the Net Asset Value of a mutual fund scheme?
The NAV is the per-unit price of the securities held by a mutual fund. It can vary depending on the value of securities and fluctuate on a daily basis. As a result, mutual fund houses declare the NAV at the end of each trading day after the market shuts down.
NAV can be calculated by using the following formula:
Total assets = Total liabilities ÷ Total number of units
Does NAV affect the performance and returns of a mutual fund?
Unlike stocks, where the share price indicates the stock's performance, mutual funds work differently. A high NAV does not necessarily indicate a better-performing fund, as the NAV is simply a reflection of the market value of the fund's underlying assets. It also does not guarantee future performance.
On the other hand, a low NAV does not necessarily indicate a poor-performing fund since the fund's underlying assets may have significant growth potential in the future.
Another common misconception about NAV is that investing in a fund with a low NAV offers you more units and is hence cheaper, while a fund with a high NAV is expensive. However, you must understand that NAV fluctuates frequently and may not play any significant role in long-term investments, especially if you are investing through a Systematic Investment Plan (SIP).
Here’s an example:
Let's say you start an SIP mutual fund investment of Rs 500 per month. The NAV of the scheme in the first month is Rs 10, so you get 50 units for Rs 500. The next month, the NAV increases to Rs 50, and you get only 10 units for Rs 500. Assuming the return remains the same at 12% each month, you will earn a profit of Rs 60 in both cases. Hence, the changes in the NAV have no consequence on your returns over the long term.
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What is the impact of NAV on investors?
NAV has little to no impact on your SIP investment in India. Therefore, it may not be advised to focus too much on it. Instead, you stand to benefit more by looking at other factors. These can include the fund's portfolio, the reputation or AUM of the asset management company, the qualification of the fund manager, etc. Moreover, if you are looking at capital appreciation, your basic personal finance habits, such as consistency in saving and investing, can play a far superior role than the NAV.