Net asset value of mutual fund scheme, what to make of it?

“Price is what you pay and value is what you get”, remains one of the Warren Buffett’s most cherished remarks. This clearly reveals that price and value are not always the same. But for most investors, they both mean the same thing. This is also the case with mutual fund investors. They consider net asset value (NAV) as the sole criteria for the fund’s performance; however, it can result in poor investment decision-making and give rise to unintended consequences. For them, funds with lower NAV means funds that are available at a cheaper price.

This was one of the reasons why there used to be a good response to the new fund offer (NFO). A large section of investors rushed to invest in the fund just because they are available at Rs 10. Similarly, when an existing mutual fund scheme’s NAV is low, many believe it is a good buying opportunity.

Nonetheless, you need to know how a fund’s NAV is calculated, which will help you take an appropriate decision. NAV is calculated by taking the total net assets of the fund and dividing it by the total number of shares outstanding. For example, if a fund has Rs. 100 crore in assets and 25 lakh units outstanding, the fund’s NAV is Rs. 40.

If we assume that an NFO maintains a similar portfolio like that of an existing scheme with NAV of Rs. 100, the returns would be the same irrespective of the NAV. So instead of concentrating on a “low” NAV and more number of units, it is worthwhile to consider other factors such as risk profile of the fund, its suitability to your financial targets, the fund manager managing the fund, its performance track record are some of the important choices to be made instead of focusing on NAV alone.