BackAbsolute value of NAV should not matter for an MF investor
It is the relative NAV that matters: how the NAV has moved since the date of investment
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How do net asset values (NAVs) work and what, as a mutual fund (MF) investor, can I understand from them? Does it have any impact on the returns?
—Supriyo
As we know, an MF is a financial instrument where investors collectively give different sums of money to a fund manager to manage. The fund manager takes this money and invests it in different markets (this can be stock market, bond market, and so on), or in different segments of a market (say, large-cap or mid-cap stocks, or government securities or bonds of varying maturities).
When an investor invests money, she is given a set of notional tokens in return called units of the MF.
At any point of time, a fund has two things. On one side, it has assets, and on the other, it has units that have been handed out to investors (also called ‘unit holders’).
The total value of all the assets divided by the number of units that are outstanding is called the NAV per unit, or simply the NAV of the fund. The value of the assets held by the fund changes every day based on market movements and the various investment decisions taken by the fund manager. The number of units of the fund also changes every day as investors enter or exit the fund. So, this number, i.e., the NAV of the fund, is modified every day to reflect these changes.
When an investor chooses a fund for investment, she is required to do so at its current NAV. When an investor chooses to redeem her investment, she again has to do so at the prevailing NAV.
For an MF investor, the absolute value of an NAV should not matter at all. It does not matter if a fund’s current NAV is 500 or 50. It is the relative NAV that matters when investing—how the NAV has moved since the date of investment.
Investors often choose to invest in new fund offers since they think they are getting a bargain when they buy an NFO at the face value NAV of, say, 10. That is not right since if the fund does not perform well, the NAV could well go down below the face value.
The proper way to look at and evaluate an MF scheme is to analyse its performance in terms of compounded annual return (in percentage) and other parameters such as the risk level, portfolio churn, expense ratio, and so on, and the role it will play in your portfolio.
Queries and views at mintmoney@livemint.com
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