Should High or Low NAV Impact My Investment Decisions?

Ans: Before diving into whether a high or low NAV (Net Asset Value) should influence your investment decision, let's clarify what NAV actually represents. NAV refers to the per-unit price of a mutual fund, which is calculated as the total value of all assets in the fund minus liabilities, divided by the number of units outstanding. It reflects the price at which investors can buy or sell units of a mutual fund.

Many investors believe that a lower NAV means the fund is cheaper or a better investment, while a higher NAV implies that the fund is expensive. However, this understanding is not accurate. NAV should not be the deciding factor when choosing a mutual fund. Here’s why.

Why NAV Should Not Impact Your Investment Decision
1. NAV Reflects Past Performance, Not Future Returns

NAV primarily reflects the value of a mutual fund’s existing investments. A high NAV usually indicates that the fund has performed well in the past. However, past performance does not guarantee future returns. A fund with a lower NAV might just be newer or have experienced market volatility, but that doesn’t necessarily make it a better buy.

In mutual fund investing, what matters more is how well the fund’s assets are managed and whether the fund aligns with your financial goals and risk appetite. The NAV is just a number that reflects the current value of the fund, not its potential for future growth.

2. NAV Does Not Indicate Fund’s Market Value

Unlike stocks, where a lower price may indicate a bargain, a low NAV in mutual funds does not mean the fund is undervalued. Similarly, a higher NAV does not mean the fund is overpriced. The NAV is simply a reflection of the current per-unit price based on the fund’s portfolio. Whether the NAV is Rs 10 or Rs 100, it doesn't affect the proportionate share of assets you hold in the fund.

3. The Fund’s Track Record and Strategy Matter More

When choosing a mutual fund, you should focus more on:

The fund’s performance over time relative to its benchmark.

The experience and strategy of the fund manager in handling the fund’s assets.

The fund’s investment philosophy, whether it is aligned with your risk profile and investment goals.

A fund with a high NAV could have a consistent history of good returns, but that doesn’t mean a low NAV fund won’t catch up or outperform in the future.

4. Fund Returns Are Proportional to Your Investment

The returns you earn from a mutual fund are a percentage of your invested amount. Whether you invest Rs 10,000 in a fund with a high NAV of Rs 200 or a low NAV of Rs 20, you are buying a proportional share of the fund’s total assets. The number of units you get may differ, but the actual investment remains the same, and so does the potential for returns, assuming both funds perform equally well.

When Should NAV Matter?
1. For Dividend and Growth Options

In certain scenarios, NAV can play a role when comparing dividend and growth options within the same mutual fund. In the dividend option, NAV reduces after a payout, which might give an impression that your wealth has decreased. However, the reduction is due to the payout, not a loss in the fund’s value.

For growth options, where no payouts are made, the NAV reflects the compounding effect over time, so you should focus on the overall returns rather than short-term fluctuations in NAV.

2. For Tax-Saving Mutual Funds (ELSS)

In tax-saving mutual funds, also known as Equity Linked Savings Schemes (ELSS), investors sometimes prefer to invest when the NAV is lower, thinking they are getting a bargain. But again, this mindset is misplaced. What matters in ELSS funds is the long-term growth potential and tax benefits, not the immediate NAV.

Final Insights
When investing in mutual funds, NAV is not a meaningful indicator of the fund’s future performance or suitability. Whether a fund has a high or low NAV should not be the primary factor in your decision-making process. Instead, focus on:

Fund consistency in performance over different time periods.

Alignment of the fund’s risk profile with your investment goals.

The track record and strategy of the fund manager.

By focusing on these key factors, you can make more informed decisions that lead to long-term financial success, rather than getting distracted by the fund’s NAV.

Best Regards,

K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in