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Do Mutual Funds With Lower NAVs Give Better Returns?

11 July 2022

At a time when individuals are looking to make profits through returns from various investments like stocks, cryptocurrency, NFTs, etc., mutual funds happen to be the safest and most popular option around! But while investing, many people assume the NAV (Net Asset Value) to be an imperative factor that decides the return on their investment. But one may ask – Why? 

Let’s read further to understand. 

NAVs

Mutual funds allow for diversification, hence effectively mitigating risk. Also, besides professional management and expert guidance, they remain affordable and are liquid. 

Secure investment, some calculated risks, and voila! You can earn high returns.

Technically speaking, NAV is the difference between the total number of assets, for example, the shares, equity, bond, gold, etc., and the liabilities (management fees charged by the professional money managers, the marketing and distribution expenses), divided by the number of units held by all the investors. 

The difference between the two divided by the number of units held gives the NAV per share of the mutual fund. Although an important aspect, NAVs are not constant. They change daily. This is because, unlike stocks or other direct investment options, the underlying assets are traded daily, and thus their value fluctuates during market hours. So, to speak, NAVs are calculated after market hours to determine the final value at the end of the day. 

In fact, NAVs are not just isolated among mutual funds. In theory, any company can calculate its NAV as long as they deal with the concepts of assets and liabilities. 

Do mutual funds with lower NAVs give better returns?

NAVs remain surrounded by a lot of myths, a popular one being  – Funds with lower NAV provide scope for growth in the future!

  • To give some perspective, let’s take an example –

Let’s take a person who buys 200 shares at a NAV of Rs. 50. The stock market surges by 10%. Therefore, now, the NAV is Rs. 55

Total investment value = 55* 200 = Rs 11,000.

  • Now in an alternative scenario,

The person buys 100 shares at a NAV of Rs. 100, and the stock market surges again by 10%.

In this case, New NAV = Rs. 110

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

In both cases, the total investment value remains the same. Thus, the NAV value is not decisive in how the funds perform.

In general, NAV may be low because of a number of reasons like the fund could be young or it has performed poorly in the past, or because of low popularity. Similarly, a higher NAV doesn’t always ensure good performance. There might be reasons in contrast to those mentioned above; the fund may have been around for a longer tenure, better performance in the past, or even renowned goodwill of the company. NAV, therefore, is never decisive in how the fund is going to perform in the future!

Conclusion

The return on a mutual fund is never decided only by the NAV of the fund. It’s better to focus on analyzing the market and the price fluctuations of the assets. It’s all about taking calculated risks and learning how to stay with the flow of the market. The trick lies in understanding how it works and how the market works. Consult your financial advisor before investing in any scheme or fund. 

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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