As human beings, we are wired to check if there is any cost advantage in something that we are buying. So naturally, some investors apply the same logic to mutual funds as well. As a result, there are multiple myths around the price of a mutual fund unit, also known as NAV or Net Asset Value.

In this video, we will bust some of the most common myths related to the NAV of a mutual fund scheme and help you make betterinformed decisions when it comes to investing in mutual
funds.

Topics covered:
00:00 Introduction
00:56 Net Asset Value
04:32 Myth 1: The NAV is the price
06:30 Myth 2: NFOs are cheaper since the NAV is just ₹10
08:02 Myth 3: Lower NAV = More Units = Better For You
09:51 Myth 4: Higher NAV indicates good performance
11:21 ETMONEY Opinion


The net asset value or NAV represents a fund’s per unit market value on a particular date. In other words, the NAV is the number at which investors can buy mutual fund units from an AMC and likewise sell units to an AMC on a particular date

How is a NAV calculated?
The NAV of a fund is the total asset value of the fund minus the expense ratio, which is then divided by the number of outstanding units in the fund

When is NAV calculated?
Now, since the market value of investments changes by the minute consequently and in an ideal world, the NAV too should be changing at a rapid pace. However, since it’s not possible or practical for the fund house to compute it in realtime .. a fund’s NAV is calculated and published at the end of every market day

MYTH 1: THE NAV IS THE PRICE
The NAV is not the price of a fund. A more powerful variant of this misbelief is where some investors equate a NAV with the market price of shares .. often assuming that they both work on the same principle. But that’s not true

After all, the price of a share is nothing but the collective view of all market participants who buy and sell that stock at different prices. This makes the determination of a share price a classic demand and supply situation with a higher interest in a stock leading to a higher price in the stock exchanges. On the other hand, none of this matters when it comes to computing the NAV of a fund

And that’s because the forces of demand and supply don’t work in this case and one can buy or sell as many units of a fund at the given NAV without impacting the NAV in any way. Unlike a share, the NAV merely reflects the weighted average value of all stocks and other assets that are held in its portfolio and the growth in NAV is reflective of the fund manager’s skill in managing the portfolio through the ups & downs of the market

MYTH 2: NFOs ARE CHEAPER SINCE THE NAV IS JUST ₹10
NFOs are cheaper than other schemes because the NAV is just 10 rupees. It really does not matter if a fund’s NAV is at 10 rupees or if it is at 100 rupees. When we invest in a mutual fund we invest for future returns .. and what really matters here is the growth in NAV and not the absolute value

Now, another related misconception is that funds with a higher NAV have already peaked and hence, offer a much lower scope for growth as compared to NFOs. As one can see, this flawed notion is promoted by some agents to gullible investors to make the NFO not only cheaper but also something that has a lot more upside attached to it.

MYTH 3: LOWER NAV = MORE UNITS = BETTER FOR YOU
The lower the NAV .. the higher is the number of units, one would receive. But, it doesn’t matter.

The point is clear NAVs and units are the same sides of the coin .. and having a lower NAV or a higher number of units in isolation is not likely to have any consequence on your ability to generate wealth on your invested capital. What really matters is, how these funds grow in the future and the rate of return they are able to deliver to their unit holders.

MYTH 4: HIGHER NAV INDICATES GOOD PERFORMANCE
The biggest argument made by misinformed investors or deceitful agents is that funds that have high NAVs are also the better performing funds.

ETMONEY OPINION
1. The NAV is not the price and funds cannot and should not be compared on the basis of their NAV
2. The concept of a NAV and a share price is very different and definitely not comparable
3. An NFO is cheap at 10 rupees is nothing more than a trick
4. A lower NAV might give more units .. there is nothing to indicate that it is a better deal for the investor
5. a high NAV fund does not mean a better performing fund



Resources:
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