What is it?
Mutual funds (MFs) are marked to market, which means that their net asset value (NAV) is supposed to reflect the market movements of the stocks they hold. But how do you determine the value of a fund when it’s just launched and has no instruments linked to the market? Schemes, therefore, start their life cycle with a hypothetical value, called face value. A fund’s true market value, subsequently, is linked to its face value. Typically, the face value of MFs is Rs10. In liquid funds, it may be as much as Rs1,000.
Is it important?
If a fund’s NAV goes down soon after its launch, it is generally perceived to be a flop show. At least till the time it crosses the Rs10 mark and shows a good track record. If your fund’s NAV slips below Rs10, it’s considered really bad. This was the case with scores of information technology (IT) schemes soon after they were launched in 2000. Their values fell on account of the IT sector crash.
Is Rs10 cheap?
No. It doesn’t really matter whether a fund’s NAV is Rs10 or Rs50. Suppose, both these funds with NAVs of Rs10 and Rs50 invest, say, 10% in Infosys Technologies Ltd. If the company’s stock falls by 20%, the NAVs of both the funds will fall by 20% each. Similarly, if it goes up by say 10%, the NAVs of both funds will also go up by 10% each. What really matters is how your fund manager plays his cards and picks investments that work.
The dividend significance
The only time that the face value of a fund assumes some significance is when your fund declares a dividend. The quantum of dividend is declared as a percentage to the fund’s face value. For instance, if the face value of a fund is Rs10, 20% dividend would mean an income of Rs2 (20% of Rs10) per unit you hold.