Mutual funds investments are a simple way of growing your wealth over time. However, before investing through these instruments, you need to understand what Net Asset Value (NAV) is.
What is NAV?
When you invest money in mutual funds, your money is invested in stocks, securities and bonds. NAV is the total value of funds in a mutual fund divided by the number of units where the money is invested. Therefore, net asset value can also be referred to as the price per unit in a mutual fund investment scheme.
Now that you know what is NAV, you should also understand what AUM stands for. AUM or Asset under Management is the total asset that a particular mutual fund is managing. While you may calculate NAV for each fund manually before investments, some online websites allow you to see this value directly, regardless of whether you pick large cap mutual funds or the small cap ones.
How does NAV affect mutual fund returns?
Net Asset Value does not affect mutual fund returns in any way. However, most new investors, incorrectly attach a lot of importance to a fund’s NAV. Older mutual funds have higher NAV, and vice versa. While most people feel buying a mutual fund with lower NAV is better, it is not so simple. You should never determine the potential of a scheme by its NAV and instead focus on its past performance.
Why NAV should not be a determining factor for picking mutual funds
Consider an example where you are investing in two mutual fund schemes (A and B), where asset held, investment style, fund manager, etc are all the same. The only difference between the two is their NAV. The NAV for scheme A is Rs. 20, while the NAV for scheme B is Rs. 50. Now, consider that 20 percent of the assets from these funds are invested in the same company.
After the investment, the shares of the company appreciate in value by 10%. Therefore, the new NAV for A will be Rs 20.4, while for B it will be Rs. 51. Even though it seems that the returns in B would be higher, this is not the case.
Suppose the initial investment in both A and B was Rs. 100 each. Therefore, at Rs. 20 per unit, you would be able to buy 5 units of fund A with your initial investment. Similarly, you would have been able to buy 2 units of fund B at an initial NAV of Rs. 50.
Now, taking into account the updated NAV, when you sell all shares of A, you would be able to make Rs. 20.4×5, which is equal to Rs. 102. Similarly, from fund B, you would be able to make Rs. 51×2, which is equal to Rs. 102. Therefore, regardless of the NAV, you would end up with a profit of Rs. 2 from both funds A and B.
This is why you should compare the past performance of mutual funds and not the NAV, as the NAV does not play an important role in the fund’s performance.
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