The indicators for understanding share markets are different from that of Mutual Funds. Investors of share market look at share prices to determine how expensive a stock is, while the same logic does not apply to Mutual Fund. Even though the common understanding is that the Mutual Fund NAV indicates how expensive or cheap the mutual fund scheme is, this is a misconception prevailing among Mutual Fund investors.
But before you embark upon the misconceptions, you should first know what is NAV of Mutual Fund.
The price of a mutual fund scheme unit is known as the mutual funds NAV, depends on the value of the underlying securities of the scheme portfolio. The NAV is computed on a daily basis, once the markets have closed. The closing value of the underlying stocks and securities, along with the profits that have been accumulated are all taken into account for declaring the Mutual Funds NAV on a particular day.
You can see the NAVs of any and all mutual fund schemes in India from the research section of our website – Latest NAVs of Mutual Funds in India
Now let us see some common Mutual FundsNAV myths:
- New Fund Offers are cheap because they are available at Rs 10 NAV: The launch of a fund and the duration for which they have been in the market, determines the NAV of the fund. A fund that has been in the market for a long period of time say five or years will have a higher NAV than a NFO. This could be happening for two funds which have the same investment portfolio but difference launch times. The differences in the NAV of two schemes are not indicative of the fund’s performance. Therefore, in lieu of Mutual Funds NAV, the investor should look at annualized risk adjusted return which might be a better benchmark to understand a fund’s performance.
- Schemes with low NAVs are more investment friendly than schemes with high NAVs: The value of a Mutual Fund scheme is derived from the share and market instruments which also act as the underlying investments. New Fund Offer (NFO) launched at par value of Rs 10 and the current NAV reflects the growth in the asset value since inception. Older schemes by this logic will have higher NAVs and newer schemes will have lower NAVs. This does not indicative that older schemes are expensive and newer schemes cheap. A newer scheme may invest in richly valued stocks or high performing stocks and still have lower NAV compared to an older scheme because it is a new fund. Hence, the Mutual Funds NAVis not indicative of its performance or intrinsic value of the scheme.
- Booking profits in schemes which give good returns: Mutual fund schemes and stocks cannot be treated in the same manner as they are fundamentally different. In stock markets, some investors book profits when share prices go up to a make the best of rising markets. However, following the same logic in Mutual Funds, investors may end up redeeming funds that have performed well and retain funds which have performed poorly. The rise in Mutual Funds NAV is not indicative of a fund’s performance. Hence booking profits on the basis of a rising NAV may lead to a bad investment decision. During fund selection investors should choose or retain funds that have performed well over a period of time and sell the underperformers. The Mutual Funds NAV has nothing to do with the performance.
- Investing in schemes which declares regular or big dividends gives higher returns: As per SEBI regulations, dividends can be paid only from the profits made by the scheme. Dividends are adjusted from the NAV of scheme. As an investor, if you are looking to make long term investments, then dividend declared is immaterial to your investment goals. Hence, making dividend declaration to be the criteria for evaluating a fund maybe flawed.
You may see the historical dividends of any mutual fund scheme from here