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Why You Shouldn’t Rely on NAV When Selecting Mutual Funds
New Delhi (India), September 30: NAV stands for Net Asset Value, which refers to the cost of a single mutual fund unit. It’s like a label that indicates the value of one unit of a mutual fund at a specific moment.Mutual funds gather investments from people like us and channel them into different assets such […]
New Delhi (India), September 30: NAV stands for Net Asset Value, which refers to the cost of a single mutual fund unit. It’s like a label that indicates the value of one unit of a mutual fund at a specific moment.
Mutual funds gather investments from people like us and channel them into different assets such as bonds, stocks, etc. The NAV reflects all the assets owned by a mutual fund.
Misconceptions about NAV
- Lower NAV means cheaper, right? Wrong. A common misconception is that a mutual fund with a lower NAV is cheaper and, hence, a better investment.
This is not true. A mutual fund’s NAV reflects its assets’ current value. An older fund might have a higher NAV than a newer one, but more is needed to make the newer one a better choice. - Higher NAV means better performance, right? Again, wrong. A higher NAV doesn’t necessarily mean the fund has performed better. It might just be older.
Why NAV Shouldn’t Be Your Go-To Metric
- NAV Doesn’t Determine Fund Performance
Let’s take an example. Consider two mutual funds: HDFC Nifty 50 Mutual Fund (Fund A) with a NAV of ₹20 and IDFC Sensex Mutual Fund (Fund B) with a NAV of ₹50.
If both funds have 20% of their assets in a particular company’s shares and these shares rise by 10%, the NAV of both funds will increase by 2%.
So, Fund A’s NAV becomes ₹20.4, and Fund B’s becomes ₹51. While it might seem like Fund B’s NAV increased more, the percentage growth is the same for both. - NAV is Not Influenced by Demand and Supply
A mutual fund’s Net Asset Value (NAV) does not provide information regarding the valuation of the stocks in its portfolio.
It is possible for a newly established fund to invest in overvalued stocks and still have a low NAV, while an older fund might invest in undervalued stocks and have a higher NAV.
- NAV Doesn’t Reflect Underlying Asset Value
A mutual fund’s Net Asset Value (NAV) does not provide information regarding the valuation of the stocks in its portfolio.
It is possible for a newly established fund to invest in overvalued stocks and still have a low NAV, while an older fund might invest in undervalued stocks and have a higher NAV.
