Should you look at mutual fund NAV while investing?

Posted On: 07 August 2023

Mutual funds are a popular investment choice for individuals across all stages of their investment journey. Before selecting a mutual fund, investors typically look at the scheme’s objective, the industries it invests in, and how well the fund aligns with their risk appetite and financial goals.
However, one parameter that many investors remain unsure about is the Net Asset Value (NAV) of a mutual fund. Is the NAV of a mutual fund an important factor to take into consideration before investing?
Let's clear up the confusion surrounding mutual fund NAV.

Table of contents

What is a mutual fund NAV?
Low vs. high mutual fund NAV
Why you should not look at mutual fund NAV
Key takeaways
Opportunities that you can benefit from
FAQ

What is a mutual fund NAV?

According to the Securities and Exchange Board of India (SEBI), the net asset value or NAV of a mutual fund is the market value of the fund's assets, minus its liabilities, divided by the number of outstanding units. In simple terms, the NAV of a mutual fund can be understood as the per-unit price of the fund. The NAV of a fund is recalculated at the end of each trading day, which is why it can keep changing.
Just as a company's share price alone cannot tell you about its internal functioning, the NAV of a mutual fund does not offer a comprehensive picture of the fund's potential or fundamentals. Simply put, NAV is the price at which an investor purchases a unit of the fund. It may also be the price at which one would sell the unit (minus any exit load if applicable).

Low vs. high mutual fund NAV

Although the NAV of a mutual fund represents the price of a single unit of that fund, it is important to bear in mind that this does not tell you the cost of the fund. A fund with a higher NAV does not necessarily mean that it is more 'expensive' than one with a lower NAV.
While it is common for investors to assume that a mutual fund with a low NAV is cheaper (and therefore offers higher potential returns – this is a misconception, because the performance of a fund relies on its underlying assets, not on the NAV.

Why you should not look at mutual fund NAV

The performance of a mutual fund is neither reflected nor determined by its NAV at a given point in time. What’s more relevant is how the NAV of the fund has changed over a period of time. You can track the change in the NAV of a fund over a period of time to assess whether or not the fund has offered expected returns over a period of time. It can be said that it is not the absolute value of the NAV that matters as much as the relative growth or decline in the NAV over a period of time.
Moreover, the NAV only impacts the number of units one may purchase with a given capital. You will receive fewer units if you select a scheme with high NAV but the value of your investment will still remain the same. Any change in market conditions will have impact on the NAV based on change in price of underlying securities and the High or Low NAV will not make any difference in this regard.

Key takeaways

While NAV is an important data point representing the value of a mutual fund at a specific moment, it should not be the key factor driving your investment decisions. Thus, a mutual fund with a lower NAV isn't inherently more lucrative or less risky than a fund with a higher NAV.
Instead of examining the NAV of a fund at the time of purchase, focus on aspects such as the portfolio of the mutual fund scheme, it’s investment objective and strategy, and the credibility of the fund manager. As always, it is recommended that you consult a financial advisor who can understand your investment goals.

Opportunities that you can benefit from:

At this point in time, the Indian market is booming with investment opportunities. Bajaj Finserv AMC has recently launched some new funds:

Bajaj Finserv Liquid Fund is an open-ended liquid scheme, suitable for investors looking for regular income over the short term.
Bajaj Finserv Overnight Fund is an open-ended debt scheme investing in overnight securities with relatively low interest rate risk and relatively low credit risk.
Bajaj Finserv Money Market Fund is suitable for investors who are seeking income over the short term.
Bajaj Finserv Flexi Cap Fund, an open-ended equity scheme investing across large-cap, mid- cap, and small-cap stocks.

Each of these investment vehicles provides professional management, and risk mitigation depending on asset class. However, it is important for investors to assess their objectives and risk tolerance - and consult a financial advisor - before making any mutual fund investments.

FAQs:

Are there any disadvantages to considering NAV as a sole investment criterion?

Yes, the NAV might not give a complete picture of a fund’s performance. It is better to consider other factors like fund managers expertise, expense ratio, investment objective, etc.

Can a fund with lower NAV be better than a fund with higher NAV?

Yes, there is a possibility that funds that have given higher return over a period, have lower NAV than the one’s with a higher NAV. Any fund’s performance depends on the returns provided over a period and not the current day NAV.

Can NAV be used as an indicator of fund’s risk level?

No, NAV does not reflect on the risk level of a fund. This is usually dependent on asset allocation, investment holdings, past performance, and the variety of securities in which investments have been done..

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.