Low or high NAV: Deciding between the two for your mutual fund investment? Let's put an end to the confusion!

One common misconception is that a low NAV implies a cheaper fund

When it comes to investing in mutual funds, the debate over whether a high or low Net Asset Value (NAV) should influence your decision has been a longstanding one. However, it's time to debunk the myth and shed light on why NAV might not be the golden metric investors often perceive it to be.

1. It's not about being cheap:

One common misconception is that a low NAV implies a cheaper fund. In reality, this is far from the truth. The NAV alone does not determine the value or cost-effectiveness of a mutual fund.

2. Why NAV doesn't matter:

Let's break it down with a simple scenario. Imagine two friends investing in two different mutual fund schemes with identical portfolios but differing NAVs. One fund, launched years ago, boasts a higher NAV of Rs 100, while the other, a relatively new entrant, has a NAV of Rs 10.

Both friends invest Rs 5 lakh. The older fund investor gets 5000 units at a NAV of Rs 100 per unit, while the new fund investor gets 50,000 units at a NAV of Rs 10 per unit. Although the lower NAV yields more units, it's crucial to look beyond this.

3. The Value Comparison:

Assuming both funds experience an identical 15 per cent rise in the short term, the appreciation in the value of the investment is what matters. The older fund's NAV increases from Rs 100 to Rs 115, and the newer fund's NAV increases from Rs 10 to Rs 11.5.

While superficially, it might seem like the older fund has risen by Rs 15, and the newer one by only Rs 1.15, the actual value of the investment tells a different story. The older fund investor with 5000 units witnesses their investment grow from Rs 5 lakh to Rs 5.75 lakh, mirroring the new fund investor's growth despite having 50,000 units.

4. The Irrelevance of NAV:

This scenario underscores the irrelevance of NAV when evaluating mutual funds. What truly matters is the future percentage increase in NAV, not whether it's high or low. Mutual fund selection should hinge on performance, fund manager expertise, investment philosophy, and other critical evaluation tools.

5. The Stock Price Fallacy:

The confusion surrounding low vs high NAV arises from investors erroneously treating NAV like stock prices. However, these are distinct entities with different dynamics. A low NAV doesn't equate to a cheaper fund, and a high NAV doesn't signify an expensive one.

In conclusion, investors should look past the NAV hype and focus on the efficiency of fund manager. Making informed decisions based on a mutual fund's performance and other essential factors is key, steering clear of the misguided notion that low NAV translates to a better deal. It's time to shift the conversation from high or low NAV to the factors that truly drive a mutual fund's success.