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While there are a lot of things that one should know about before investing in mutual funds, the NAV of the fund is one of the most important. Read this post to understand what is NAV and find answers to some of the most common NAV-related questions.
From the type of fund, the risk they carry, their portfolio, to the fund manager handling the fund, there are several things that you need to take into consideration before investing in a mutual fund. But if you are new to the world of mutual funds, one thing that you’ll commonly come across is the NAV of the funds.
What is this NAV? Will funds of lower NAV generate better returns in future? Let us try to understand NAV and answer some FAQs related to it.
What is NAV?
The NAV (Net Asset Value) is the value which determines the performance of a mutual fund. It is the market value of all the securities held by a scheme minus all the liabilities divided by the total number of outstanding units of the fund. In simple words, it is just the book value of a mutual fund scheme.
For instance, if the NAV of a fund is 100, you’ll pay Rs. 100 to purchase 1 unit of that fund. Same is the case when you want to sell a unit. The computation of the fund is done daily at the end of the day on the basis of the closing prices of the securities held by the fund.
Let us now answer some common questions related to the NAV of mutual funds.
1. Does a Fund with Lower NAV have Better Chances of Generating Higher Returns?
No, the NAV of a fund is irrelevant to the returns generating potential of a mutual fund scheme. Two funds that have a NAV of say Rs. 10 and Rs. 50 respectively and exactly similar portfolio are same. While it is possible for the fund with NAV of Rs. 10 to perform better than the other fund, the NAV itself is immaterial and does not guarantee better returns.
2. Is NAV of a Fund Different from the Price of a Share in the Stock Market?
Yes, in case of the stock market, the book value of a share can be different from the market price of the share. But the concept of market value does not exist in mutual funds. There is just the book value or the NAV of the fund unit, and you buy the unit by paying its correct price.
3. Why Does the NAV of a Fund Change Every Day?
The fluctuations in mutual fund NAV are nothing but cumulative fluctuations (as per weightage) in the price of securities held by a mutual fund. Unlike the stock market where the market price of the stock matter, the daily fluctuations in NAV of a fund is not a major concern if your goal is long-term wealth generation. Investors should check the annualised returns of a fund over multiple time frames to monitor the performance of a fund rather than focusing on daily movements.
Now that you’ve understood what NAV of a mutual fund means and probably found answers to your queries, you can now focus on other vital aspects of mutual fund investments. It is only through right knowledge that you can pick the right scheme and generate returns that’d help you achieve your investment objective.
