What is NAV? Introduction to Net Asset Value – Axis Direct
Jan 31, 2019 | Source: www.valueresearchonline.com
All About NAV (Net Asset Value)
Mutual fund investors inevitably come across the term 'NAV'. No matter how hard they try to stay away from investment jargon, this one term refuses to leave them. Every time they buy or sell mutual fund units, they come across this beast called NAV. Little wonder, there are many misconceptions regarding this term. Here we tell you all you need to know about NAV as a mutual fund investor.
The NAV formula
NAV, or net asset value, is the sum total of the market value of all the shares held in a portfolio, including cash, less liabilities, divided by the total number of units outstanding. Thus, the NAV of a mutual fund unit is nothing but the 'book value' of a unit.
Is a low NAV good?
Many investors feel that a fund with a low NAV is 'cheaper' than the one with a higher NAV. At the time of a new mutual fund offer, many distributors push the new fund by saying that its NAV is low, thus indicating that it's available at a bargain. The truth is that NAV itself is immaterial for an investor.
The idea that a low-NAV fund is cheaper stems from the fact that many investors compare NAV with the stock price. A low stock price (when seen in terms of valuation) means a stock available at a bargain. But this is not true for a fund's NAV. NAV doesn't tell you whether a fund is cheap or expensive. It just reflects the current value of one unit of the portfolio as it is.
The following example will make it clear that returns are independent of NAV. Say, you have Rs 10,000 to invest. You have two options. You can invest in either of the two funds, Fund X and Fund Y, whose portfolios are the same but whose NAVs are different. Fund X has an NAV of Rs 10 and Fund Y has an NAV of Rs 50. You will get 1,000 units of Fund X or 200 units of Fund Y for Rs 10,000. After one year, both funds will have grown equally as their portfolios are the same.
Let's assume that the funds grew by 25 per cent. Then the NAVs after one year will be Rs 12.50 for Fund X and Rs 62.50 for Fund Y. The value of your investment will be 1,000*12.50 = Rs 12,500 for Fund X and 200*62.5 = Rs 12,500 for Fund Y. Thus, your returns will be the same, irrespective of the NAV.
When we buy a mutual fund at its NAV, we are buying it at its book value. And since we are buying it at its book value, we are paying the right price for its assets, whether it is Rs 10 or Rs 100. What you want to buy in a scheme is its performance, not its NAV. And the simplest way to do this is to compare returns over similar periods.