Does NAV matter in Mutual Funds?

Mutual Fund investments are a popular investment avenue for diversifying and growing your portfolio. Amid the various factors to consider before investing, the relevance of a Mutual Fund scheme's net asset value (NAV) stands out. Understanding if high NAV matters in the performance of your Mutual Fund investments can help you make informed decisions.

What is NAV?

NAV represents the value of each unit of a Mutual Fund scheme. It is calculated by subtracting the fund’s liabilities and expenses from its total asset value and then dividing the answer by the number of outstanding units. Typically, NAV starts at ₹10 when a new fund offer (NFO) is launched and grows as the assets in the fund start growing.

For open-end Mutual Funds, NAV is declared daily, reflecting the end-of-day value. Understanding NAV is important when you assess a fund's performance and determine its current worth.

NAV in Mutual Fund investments

1. Irrelevance of NAV in returns

A Mutual Fund having a high or low NAV does not impact its investment returns. A high NAV means the fund has been successful in the past, while a low NAV might indicate a newer fund or one that has paid out dividends. When assessing returns, what counts is how much the NAV percentage changes, not its exact value.

2. Direct plans vs regular plans

Direct plans typically have slightly lower expense ratios as there are no distributor commissions included in the price you pay. This results in such plans having a higher NAV than regular plans.

3. Dividend myth

You may have a misconception that a fund with a higher NAV provides better dividends. The distributed dividends are dependent on the fund's performance in terms of its income and profits, but not the NAV. When you get the dividend payments, the NAV of your fund declines. You need to keep this in mind when you determine how well your investments are performing.

Formula to determine the NAV of a fund

NAV = Total assets - total liabilities / total amount of outstanding shares

The assets of Mutual Funds include investments, receivables, cash, equivalents and accrued income. These are calculated daily based on closing prices, including liquid assets, interest payments and dividends.

The liabilities of Mutual Funds include outstanding payments, money owed, fees, foreign liabilities and accrued expenses like utilities, salaries, and operating costs, all calculated daily to determine NAV.

Key takeaways for investors

• Look beyond NAV: While NAV measures the fund's value, it should not be the sole factor in your investment decision. You will need to look at the fund's track record, management quality and investment strategy before choosing the fund. Also, it is a common myth that funds with a lower NAV are cheaper and better investment options.
• Understand the role of NAV: NAV represents the worth of a fund's unit at any given time but does not predict any future performance. You can use the NAV to compare similar fund options within a specific category but a high or low NAV won't matter to your Mutual Fund investments.
• Focus on portfolio quality and management: You need to evaluate the quality of the fund's portfolio and the expertise of its management team. A well-managed fund with a diverse portfolio having a strong track record can get you better returns regardless of its NAV. Asset allocation, stock selection, and timing of buy / sell actions will matter more.
• Systematic investment plans: You can invest through monthly SIPs that help mitigate market volatility. SIPs allow you to buy units at different NAVs, averaging the cost over time and reducing market timing risk. You can use the Axis Bank SIP Calculator to align your plan with your financial goals.

Also Read: How to invest in Mutual Funds in 7 easy ways

Conclusion

The answer to 'does NAV matter in Mutual Funds?' is that even though it is a valuable metric for understanding the value of a fund, it should not be the primary consideration in your investment decisions. Remember, NAV indicates the fund's performance, not its profitability. You can buy Mutual Fund units at the NAV price, plus any applicable fees. NAV fluctuates daily with changes in the market value of the fund's holdings. You need to prioritise the fund's performance and management quality and check if it aligns with your investment goals.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.

Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.