Does a Low/High NAV of mutual fund determine its performance?
The Net Asset Value (NAV) of a mutual fund indicates the market price at which its units are traded, representing the fund's market value after subtracting its liabilities. In simpler terms, NAV is like the per-unit value of a fund, similar to a share's price.
NAV is calculated daily by assessing the total value of the fund's portfolio, deducting all expenses, and then dividing the result by the total outstanding units to determine the NAV for that specific fund.
NAV (Net Asset Value) = (Assets - Debts) / (Number of outstanding units)
Here's a breakdown of the components:
- Assets include the market value of mutual fund investments, receivables, and accrued income.
- Debts comprise liabilities and accrued expenses.
When comparing different funds, investors sometimes fall prey to several misconceptions:
Myth 1 - Lower NAV Equals Higher Returns: Some investors believe that a lower NAV results in more units, leading to higher returns. However, this is a fallacy. The NAV doesn't influence a fund's returns, as returns are solely dependent on the performance of the underlying assets. A lower NAV doesn't guarantee better returns.
Myth 2 - Dividend Option NAV Is Better Than Growth Option NAV: Investors may debate whether the lower NAV of the dividend option is more advantageous than that of the growth option. In reality, NAV doesn't significantly affect returns. While the dividend option may be attractive for short-term investors, the growth option often yields superior long-term returns.
Myth 3 - Lower NAV Translates to Higher Dividends: Some investors believe that a lower NAV results in more substantial dividends, especially for regular income. However, a mutual fund's dividends are not tied to its NAV; they are paid from the fund's earnings.
Myth 4 - Higher NAV Indicates the Fund's Peak Growth: Many investors mistakenly assume that a fund with a high NAV has already achieved its maximum growth potential. This is a misconception. A fund's NAV doesn't reflect its growth potential, as it consists of a diversified portfolio managed by skilled professionals.
Myth 5 - New Funds with Lower NAV Are Superior: Some investors prefer investing in New Fund Offers (NFOs) with lower NAVs over existing funds. However, the NAV of an NFO versus an existing fund has little impact on performance. Other factors like the fund's portfolio, sector concentration, rebalancing frequency, expense ratio, and cash flow are more critical indicators of performance.
In conclusion, whether a fund has a high or low NAV has a relatively minor effect on its performance. Qualitative and quantitative factors, including the fund's portfolio, sector concentration, rebalancing frequency, expense ratio, and cash flow, hold more significance when selecting a fund for investment. Consider factors like the fund manager's experience, the fund's track record, and changes in fund house leadership in the decision-making process.