Common Myths about NAV in Mutual Funds
As an Indian, you assess the price of a product or service before buying and eventually map the worth of a mutual fund investment based on its NAV, the cost of each unit. However, the NAV or net asset value of mutual funds is the current worth of each unit of your chosen mutual fund. Generally, it is ascertained by deducting the liabilities from the assets of your mutual fund scheme. The NAV of a mutual fund scheme changes daily, making it difficult for investors to understand the concept. Most investors make assumptions about NAV and take unwise decisions because of incomplete understanding.
Here are some of the common myths about NAV in mutual funds:
Myth 1: Invest in mutual funds with low NAV
Investors, especially new investors, think buying a mutual fund with a low NAV is better to get more units. They relate higher units with higher returns, whereas the functioning is different. NAV is the asset value of each mutual fund unit. This value increases or decreases according to the performance of the mutual fund scheme. The NAV does not impact the future returns; the portfolio composition does. For instance, a mutual fund with Rs. 10 NAV can generate the same returns as a scheme with Rs. 100 NAV. As an investor, make your investment decision based on the past performance, investment theme, fund manager’s experience rather than the NAV to get good returns.
Myth 2: Low NAV implies a cheap mutual fund scheme
Generally, new mutual fund offers have a NAV of Rs. 10. Therefore, investors assume that such schemes are cheap and have better returns due to a low NAV than when the NAV rises to Rs. 30 or more. However, this is not entirely true. For instance, you could invest in a mutual fund with Rs. 10 NAV and have Rs. 60,000 in 10 years because the NAV is rising six times to Rs. 60. Alternatively, you could have Rs. 60,000 even if the NAV was Rs. 30 initially and grew to Rs. 180 in ten years. As an investor, it is advisable to start investing early, but there is no right time for investment.
Myth 3: NAV can also be negative
Sometimes, investors consider a fall in NAV as the NAV turning negative. However, in reality, the NAV changes daily and can be harmful for the day. But in absolute value, the NAV cannot be negative. Even if you buy through the SIP (Systematic Investment Plan) mode, your NAV will fluctuate with every due payment. For instance, the NAV of a mutual fund can fall from Rs. 20 to Rs. 17, registering a -15% one-day decline, but in absolute terms, you will not see a mutual fund with a NAV of Rs. -1 or -5.
Myth 4: Higher NAV = high returns
Usually, investors assume the fund with a higher NAV would have performed better than the lower NAV scheme. However, that is not necessarily true. The NAV of a mutual fund rises if it has been in the market for a long time. The NAV of a mutual fund could be increased even because of its period of existence rather than performance.
Overall, when investing in mutual funds, it is best to have a holistic understanding of your scheme and related terminologies and their implications. You can use the Tata Capital Moneyfy App to study mutual fund schemes and make an informed investment choice.