There is often a sort of misconception so to say among investors when it comes to high net asset value (NAV) of mutual fund schemes. A mutual fund scheme with a high NAV is regarded as expensive and perceived, albeit wrongly, to provide a low return on investments.
Taking this into account, an investor tends to opt for mutual funds with a low NAV. That’s because an investor believes that more number of mutual funds units would mean higher earnings. However, it is important to note that the price of an NAV doesn’t make any difference in earnings.
Returns: Performance is the key when an investor invests in a mutual fund. Whether it has a high or a low NAV doesn’t actually matter.
For instance, an investor has Rs 10,000 to invest. There are two mutual fund schemes available having identical portfolios: Scheme X has an NAV of Rs 500, at the same time, Scheme Y has an NAV of Rs 100. An investor goes for 20 units of the Scheme X and 100 units of Scheme Y. Now, if both schemes grow by 10%, Scheme X’s NAV would rise to Rs 550, while Scheme Y’s would increase to Rs 110. The investment for an investor would’ve witnessed a rise as follows in both cases:
Scheme X: Rs 550 × 20 units = Rs 11,000
Scheme Y: Rs 110 × 100 units = Rs 11,000
For an investor, it is important to note the NAV should ideally be ignored if the mutual fund schemes have identical portfolios. The cost of purchasing a mutual fund scheme has nothing much to do with returns. It is always the performance that really matters.
In addition, there are several other factors that are relatively more crucial than NAV. The returns on a mutual fund scheme should ideally not be calculated on the basis of the NAV. There are other parameters that need to be considered, which include a fund manager’s expertise, past performance, and expense ratio, among others.
A fund manager’s expertise ensures the quality of assets that comprise a mutual fund. An experienced fund manager will ensure better performance of a mutual fund scheme.
At the same time, the expense ratio has an influence on a fund’s returns. This includes management fees, administrative fees, and operating costs, among others.
Similarly, past performance does not prove to be an indicator of future returns, yet it could highlight to an investor the mutual fund scheme’s track record.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
