Mutual Funds: Invest with Lower or Higher NAV?
While buying a mutual fund investment plan for the portfolio, NAV, i.e., Net Asset Value plays a pivotal role. Investors often get confused about whether they should buy a fund with higher or lower NAV. Here we have elaborated the entire concept that would assist you in taking a better decision to buy mutual funds online.
The NAV of the scheme is the market price or the value of its assets minus liabilities per unit. The formula which is used to compute NAV of a mutual fund scheme is (Value of assets - value of liabilities)/number of units outstanding. By putting the values, one comes out with the NAV which represents the fund's intrinsic worth in market.
While making the choice of scheme among the various alternatives which fall in the same category, you might invest in the scheme that has lower NAV. The reason being is that you will be allotted with more number of units. A larger number of units is obviously what every investor will prefer. But is it so beneficial from investing point of view? Not really. Let elaborate how!
Suppose there are two schemes of the same category and same portfolio, one of which has a lower NAV while the other has higher NAV. Yes, lower NAV will help you in gaining more number of units for sure, while higher NAV will give you fewer units. But one thing that needs to be considered is that your investment value shall remain same. Both the schemes would get the same returns as the appreciation or depreciation of investments would be same due to identical portfolios. To let you understand in more depth, here we have an example for your reference:
There are two schemes A & B of the same kind, and you invest Rs.10,000 in them.
Scheme A has NAV of Rs.50 while B has NAV of Rs.100. Accordingly, the units allotted to you would be 200units and 100units in each case.
Now the market goes up by 10%, and the NAV for A & B comes to be Rs.55 and Rs.110, respectively. With this, the market value of your investments would be:
Scheme A- Rs.55*200= 11000
Scheme B- Rs.110*100=11000
Thus, you can conclude here that the value of your investments is Rs.11000 in both the cases. And hence, it does not matter with what NAV you bought the scheme for your portfolio.
But can you ignore the net asset value completely while buying a scheme? Certainly not. This is because at times when the dividend is distributed on your investment a scheme you bought with high NAV acts against you as the number of units you owe is less. Accordingly, you get a lower dividend on your investments. However, it must be remembered that the returns and investment values do not get affected.
So, in short, NAV cannot be considered as the best parameter while deciding the scheme to buy for investment in mutual funds.
Now the next question is, how to determine which scheme should be opted for investing? For that, we recommend that you must evaluate the performance of the plans, the services offered by mutual fund houses and the experience and skills of the fund manager.
Moreover, if you need further assistance in making the right choice of fund for your portfolio, you must avail the advisory service of our fund advisors. They will help you in buying the right scheme as per your investment objective. MySIPonline and its team are focused on serving the investing needs of a large number of investors, and they will definitely provide you with the best solution for your portfolio.
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