Net asset value (NAV) is one of the main metrics used by investors while taking an investment decision on a mutual fund. Mutual funds invest the money collected from investors in the capital markets. Since the market values of securities change every day, the NAV of a scheme also varies on day-to-day basis.
The performance of a particular scheme of a mutual fund is reflected in its NAV. The NAV is the common denominator used to sum up the performance of a mutual fund. This measure is a key performance indicator for any mutual fund. It is the market value of the securities held under the scheme.
The NAV of a unit is the market value of securities held by the scheme divided by the total number of units in the scheme on any particular date. For example, if the market value of securities held by a mutual fund scheme is Rs 3 crores and the mutual fund has issued 10 lakh units at Rs 10 each to investors, the NAV per unit of the fund is Rs 30 (3 crores divided by 10 lakhs). Mutual funds are required to disclose their NAVs on a regular basis.
Many investors have the tendency to pick a scheme that is available at a lower NAV compared to one available at a higher NAV. Many a time, they prefer a new scheme that is issuing units at Rs 10, while existing schemes in the same category may be available at much higher NAVs. In reality, in case of mutual funds schemes, lower or higher NAVs of similar schemes of different mutual funds don't have much relevance. As against the NAV, you should choose a scheme based on its merits considering performance track record, dividend history, scrips in the portfolio, service standards, fund manager's track record, professional management etc.
For example, Scheme A is available at a NAV of Rs 10 and Scheme B at Rs 100. Both schemes are diversified equity-oriented schemes. If an investor has put Rs 10,000 in each of the two schemes, he would get 1,000 units (10,000 divided by 10) in Scheme A and 100 units (10,000 divided by 100) in Scheme B. Assume the markets go up by 20 percent, and both the schemes perform equally well and is reflected in their NAVs. The NAV of Scheme A will go up to Rs 12 and that of Scheme B to Rs 120. Thus, the market value of investments will be Rs 12,000 (1,000 multiplied by 12) in Scheme A and the same Rs 12,000 in Scheme B (100 multiplied by 120) too.
The investor gets the same returns of 20 percent on his investment in both the schemes. Thus, lower or higher NAV of a scheme and allotment of higher or lower number of units within the amount an investor is willing to invest, should not be the main factor for guiding the investment decision.
It is quite possible that a better-managed scheme with a higher NAV may give higher returns compared to a scheme which is available at a lower NAV but is not managed efficiently. An efficiently-managed scheme at a higher NAV may not fall as much as an inefficientlymanaged scheme with a lower NAV. Therefore, you should give more weightage to the management of a scheme instead of NAV. You may get more units at a lower NAV, but the scheme may not give high returns if it is not managed efficiently in the long run.
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