Does NAV determine your returns?
First time mutual fund investors often get confused with a myth that funds with higher NAV are costly and have reached their levels and should be avoided. But while analysing the same, it can be seen that NAV is just a value, it won’t suggest you any kind of saturation point or peak.
The NAV is nothing but the per unit market price of assets. The NAV is different from the price of stock or security and one should be aware of this. If the prices of major securities held in the portfolio moves up then the NAV of the fund rises and vice versa. It is believed by investors that funds with higher NAV will not provide more returns which creates confusion for them. But we observe that the NAV of the fund is irrelevant while investing because it is just going to affect only on the number of units, it cause any effect on the returns.
For instance, if A and B are the same kind of funds following similar investment strategy but with different NAV’s like Rs. 10 and Rs. 20. If an investor invested in the scheme A, a sum of Rs. 1000 and received 100 units and for Scheme B with the same amount, he will receive 50 units. If in later phases, the respective index moved by 10 per cent for both the schemes. Then NAV will be at Rs. 11 for scheme A and Rs. 22 for scheme B. So by calculation, we can observe that returns for both the schemes will be 10 per cent less exit load if any.
NAV of the fund is just the total value of the portfolio which is held by the fund manager under the scheme. This value is determined by the stock prices of respective securities which is decided by buyers and sellers in the stock market by considering the fundamentals of the company, future prospects of the company, etc.
Therefore, it is not advisable to measure your fund investment decision on the basis of NAV of a scheme. Comparison between the NAV of two mutual fund schemes won’t give you insight into the fund's portfolio or future prospects. So, investor are advised to remain wise and choose funds on the basis of its portfolio rather than relying on the NAV of the fund.