Net asset value represents the value of each unit in the portfolio. It is the book value. NAV of a mutual fund always varying depends on the market fluctuations. NAV of any portfolio can be calculated after deducting all liabilities from the total asset value of the portfolio. NAV helps an investor to measure the performance of his investments very easily. Nowadays NAV is becoming very familiar to us with the rapid growth and expansion of mutual funds and insurance industry.
The general formula for calculating NAV is…….
NAV = total asset value – total liabilities
Total no of units
Yes, this is all about NAV. But my dear readers, today I would like to discuss on certain myths and misconceptions around the concept of NAV.
I started my career with selling of insurance and Mutual Funds, and I faced many situations where the clients were very particular about NAV. And of course, they were very keen on investing in low NAV funds. Many a times I did convince them but the misconception what many of us have sometimes ends up with low returns or loss on investments. Even I got many queries from my readers as well as from my clients that -
“Is low NAV cheap?”
Is a fund with lower NAV a better investment option than a fund with a higher NAV? Since you can buy more units, is it cheaper? Should mutual fund schemes with a higher NAV be avoided?
These are some other questions I faced from my clients and readers. The answer to these questions is that it is irrelevant how high or low the NAV of a mutual fund or a ULIP plan is. And, whatever may be the NAV you invested with, the amount you invested remaining unchanged. Because, high NAV means less number of units and low NAV means more number of units. I can prove the same with ‘N’ number of examples.
Let us take an example, where there are two investment options –
- One with the NAV of 10 and
- Other with the NAV of 100.
Ordinary investors always look at first option as the NAV is very low when comparing to option two. But if you look at it with little practicality, you will understand it better that both the option will yield you the same if the investment strategies of both are same. Please go through the below illustration which proves the same-
Let us take the initial investment as 10000 and the NAV value as above. Then, an investor will get 1000 units in case of option one and 100 units in case of option two. If both the investment options yield 30% at the end of year, NAV of option one will become 13 and the second will become 130.
Therefore, the total fund value of option one has become 13*1000=13000 and the second has become 130*100=13000. And, if one sells those units in both the investment options he will get the same amount.
If you still have doubts, I can give you some more reasons to avoid measuring the funds in terms of its NAV. One of them is, low NAV schemes may be new to the market and it is very difficult to predict the future performance of the same as there are no past records to asses. But in case of high NAV funds which are in the market from long time will have their own performance records which help us to measure the performance in a better way.
Therefore, as a financial consultant my advice is kindly stop looking at NAV before investing; instead look at the quality and other performance records.