High NAV (or) Low NAV mutual fund - Which one is better to invest?
High NAV (or) Low NAV mutual fund -
Which one is better to invest?
Lot of people believe that a high NAV fund is not a good one to invest!
Only reason: "It's NAV is high"!
As far as MFs, the NAV doesn't matter at all as it is just a notional number & does not reflect the "PRICE" of the fund. MFs invest in many stocks & it is the performance of the underlying stocks that matter. All mutual funds start with a NAV of 10 when they launch the fund (they can start with NAV of 100 or 40 or any number too - but for standardization it is launched at 10/- NAV - that is all. It does not mean that 10 is cheap or 100 is costly).
Let us consider 2 funds:
Fund A: 10/- NAV (a new fund in the market)
Fund B: 100/- NAV (an existing similar fund in the market which has been there for years & hence the NAV is high).
Both obviously will invest in a set of stocks - we will assume that both invests in the same stocks & hence the same stocks will give the same return in both the funds. Assuming both invest in different set of stocks & hence their performance will then be based upon the performance of the stocks they invest & not on the price of NAV.
For ex. if you invest 1 lakh each in Fund A & Fund B, then:
Fund A: No. of Units Allotted: 100000/10 = 10,000 units
Fund B: No. of Units Allotted: 100000/100 - 1000 units
When the market goes up by 10%, then:
Fund A: Unit price goes up to 11 (10% increase from 10)
Fund B: Unit price goes up to 110 (10% increase from 100)
Fund Value (Unit Price * No. of Units) after the increase in the market:
Fund A: 11 * 10000 = 1.10 lakhs
Fund B: 110 * 1000 = 1.10 lakhs
Both are the same!
Learning: NAV price does not matter in MFs - it is the performance of the fund that matters which is dependent on the underlying stocks where they invest & how the fund is managed. NFOs are launched at 10/- NAV & many lure that as the cheapest price to invest. This is pure mis-selling & investor should not fall into this trap. In the above example, when market falls by 10%, NAV of Fund A will be 9 & NAV of Fund B will be 90. Again the fund value in both these cases are the same - 90,000/-. So when market rises, NAV rises & when market falls NAV falls - & it is good to invest when market falls (NAV is also lower then).
