Source: IRIS (23-APR-12)

There is no such thing that is costly or cheap NAV.

I decided to invest in mutual funds. There were two choices before me; Fund A with an NAV of Rs 13 a unit and Fund B with a NAV of Rs 22 a unit.

Was Fund A a better choice because it was cheaper? This is a question which plagues many first- time investors in mutual funds.

Well it is irrelevant how high or low the NAV is. This seems difficult to accept but it is better explained by understanding what is NAV.

NAV stands for Net Asset Value. At the simplest level it is the sum of all assets held by the scheme divided by the number of units. Let`s take an example. When markets plunged to abysmal depths the NAV of this fund was 22. Another Fund B, holds the same stocks, its NAV was much lower at 13.

As I could not make up my mind whether a lower NAV was better or not, I invested Rs 20000 in both schemes. I received 909.0909 units from a scheme A and 1538.462 from Scheme B.

By the eve of Budget 2002 markets had risen considerably. The NAV of scheme A had risen to 34.93 while that of scheme B was 20.64.My investment in scheme A was worth Rs 31,754.55.Surprisingly my investment in Scheme B was worth Rs 31,753.85.The return on both these investments was 58.76% which is the same as the change in NAV.

A person with a sharp eye would say that the returns are same as the stocks in both portfolios are the same. A finer search would disclose that the proportion of stocks is the same in both portfolios.

So it seems that it is the underlying stocks in a portfolio which determines the returns from a fund. The value of the NAV is immaterial.

Another way of looking at this is when we consider two schemes which have been launched at the same time. At a particular date one scheme has a higher NAV than the other. Assuming that both schemes have not paid out dividends this implies that the scheme with higher NAV is better. This is because the higher NAV shows that this scheme has grown more than its counterpart launched at the same time. So based purely on past performance it seems that the scheme with higher NAV is the one which holds potential for higher returns.

Here it should be pointed out that the description of one scheme is costlier than the other, based on the NAV is also erroneous.

The only instance where higher NAV may adversely affect is where dividend has to be received. A scheme with a higher NAV will result in a fewer number of units. As dividends are paid out on face value (Rs 10 for most types of mutual funds) the higher NAV will result in lower quantum of dividends due to the smaller number of units.

Here the NAV has relevance in terms of the amount of the dividend received.

If two funds with different NAV’s give the same percentage of dividend, then taking the ex dividend NAV into account, the return is the same.