What are some mutual fund NAV common myths?

by Kanika Shelatkar Insurance Consultant

The price of mutual fund scheme units, are known as NAV, depends on the value of the underlying securities of the scheme portfolio. The NAV mutual funds is computed on a daily basis post the market closure.

Even though the common understanding about NAV is that this is the price at which you can buy or sell mutual funds, but there still are misconceptions prevailing among investors about NAV. We will discuss some of these misconceptions.

Schemes with low NAVs are better than the schemes with high NAVs: The NAV of a mutual fund scheme is derived from the price of each of the market instruments and the total quantity held in the scheme portfolio. While new fund offers or NFOs is launched at par value NAV of Rs 10 and their scheme current NAVs reflects the growth in the asset value since launch of the funds. That means, logically, the older schemes will have higher NAV and the new schemes lower. Having said that, it does not indicate that older schemes are expensive and the new ones cheap. The NAV is never indicative of the scheme performance. For scheme performance you should look at the appreciation of the NAV but not at the NAV itself.

NFOs are cheap as units are available at Rs 10 NAV: The launch of a NFO has nothing to do with your investments. You should invest in a NFO only if it is unique or new in terms of a fund category that you do not own. Of course, a fund that has been in the market for some time will have appreciation in NAV, and thus the price will be high. A NFO with Rs 10 NAV and an older fund with higher NAV may have the same portfolio but difference in NAV due to the difference in launch date times. Therefore, clearly the differences in the NAV of two schemes is not indicative of the fund’s performance.

Booking profits in schemes which give good returns: investment in mutual funds and shares cannot be treated in the same manner as they are fundamentally different investment instruments. In share market, investors may tend to book profits when the share prices go up, however, following the same logic, investors in mutual funds should not end up redeeming funds that have performed well and the NAV has risen. In fact, in case of mutual funds, it is the opposite. If your fund is performing well and the NAV is rising, you should continue to hold that scheme for longer period and benefit from compounded returns.

Now that we know about NAV mutual funds, should we also think of NAV mutual funds when we are planning to start a SIP? The answer is no!

This is simply because, NAV has nothing to do with your SIP investments. SIP investments is more about reaching your financial goals by saving in a systematic manner over the years. SIP investment needs planning and SIP return calculator can be helpful in that.

SIP return calculator is a free online tool in which if you input the monthly SIP amount, expected rate of return and the time period, it will tell you the amount that you can accumulate at the end of the SIP period. Through the SIP return calculator, you can also know the exact amount that you have to save monthly to reach a financial goal after certain number of years based on some return assumption.