Do mutual funds with lower NAVs give better returns?

Sponsored Post 11 June 2024

You might have heard several myths surrounding mutual fund Net Asset Value (NAV). Does a low NAV guarantee good returns? Does it indicate higher value? Read on to find out whether a fund’s NAV is linked to its performance.

What is NAV, and how is it linked to a mutual fund’s performance?

The NAV of a mutual fund is the per-unit value of its assets. You can calculate the NAV of a mutual fund by subtracting the liabilities from the total assets of the fund and dividing it by the total number of units. Hence, a fund’s NAV is the price of one unit of the fund at the end of a trading day.

Several first-time investors link a fund’s NAV to its performance. You must remember that a mutual fund’s performance depends on various factors like the quality of the fund’s portfolio, the effectiveness of its management, and whether or not the fund aligns with its investors’ investment objectives. Mutual funds with lower NAVs do not inherently translate to better investments.

Breaking the myths surrounding mutual fund NAVs

You must know the following facts about mutual fund NAVs:

The absolute value of a fund’s NAV is not linked to its returns: You can evaluate your returns by calculating the percentage change in NAV over time, but the absolute value of a mutual fund’s NAV is not linked to its returns. In other words, it does not matter if the change in NAV values is 14 to 18 or 100 to 140 as the percentage change (40%) remains the same.
Lower NAVs do not indicate better value: A commonly held myth is that mutual funds that have a lower NAV have higher value. This is untrue. Direct plans of mutual fund schemes have higher NAVs when compared to regular plans. This difference, however, is due to a lower expense ratio in direct plans. Lower NAVs also do not indicate better performance.
A higher dividend percentage on a fund with a higher NAV does not provide higher value: A mutual fund pays out dividends to its investors through its assets. This reduces the fund’s NAV. Therefore, regardless of the NAV’s absolute value, there will be a proportional reduction in a fund’s NAV after dividend distribution. That higher dividend percentages on a fund with higher NAV offer higher value is therefore a myth.

Do mutual funds with lower NAVs offer better returns?

The previous section has countered this myth effectively. However, let us understand how the absolute value of a fund’s NAV does not impact its returns through an example.

Suppose an individual buys 150 units of an equity mutual fund at an NAV of 55. Now, the stock market rises by 10%. So, the new value of their NAV will be 60.5. The total investment value is 60.5*150 = 9,075.

In an alternative scenario, suppose another individual buys 75 units of another equity mutual fund scheme at an NAV of 110. If the stock market surges by 10% again, the new NAV will be 121. Now, the total investment value in this case is 121*75 = 9,075.

Hence, in both cases, despite the NAV values being different, the total investment value remains the same. The absolute value of NAVs, therefore, is not linked to mutual fund returns.

To sum up

In conclusion, please remember that the absolute value of a mutual fund’s NAV is not linked to its performance in any way. Therefore, mutual funds with lower NAVs do not necessarily offer better returns. What you should look at, when evaluating a mutual fund scheme, is its asset allocation, performance, fund manager, expense ratio, and risk level instead.

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