mutual funds

Do you know, NAV is essential when you are choosing mutual funds?

The net asset value (NAV) of a mutual fund is not essential in the selection of mutual funds.

Here’s why: The NAV of a mutual fund is the net worth of the shares held by the mutual fund. That is the price per unit fund on a given day. Given the stir in the market, share prices are going up and down. Since mutual funds are selected in stocks, the price of a mutual fund fluctuates daily according to market movements.

For example, A and B, take two mutual funds, one can say that NAV of A is Rs 55, while the value of B is Rs 100. Now, one might think that he might be able to afford more units of mutual fund A, but that would not be the right comparison.

Mutual fund A may be cheaper, but the stock quality in its portfolio may deteriorate. So a low mutual fund may be better off buying B units because it has better stocks and is therefore likely to give better returns to its investors.

Some investors tend to prefer a plan that is available at a lower NAV than the one available at a higher NAV. Occasionally, they prefer a new scheme, issuing units on whereas 10, whereas existing plans in the same category are available on much larger NAVs.

Investors should note that lower or higher NAVs of the same type of schemes of different mutual funds are irrelevant in the case of mutual fund schemes.

On the other hand, investors should select a plan based on their merit keeping in mind the performance track record of the mutual fund, service standards, professional management, etc.

If you think about the Indian automotive industry, then Maruti Suzuki is the first company that comes to mind. The reason for this is that it is a reputable, trusted brand, as reflected in its stock price – which is undoubtedly expensive for other auto players. But this is the price you pay for having a share of the market leader.

So, let’s look at mutual fund NAVs in the same vein. NAVs are not parameters that you have to look at when comparing mutual funds. Some critical parameters you use to analyze mutual funds are fund performance (over three, five and ten years), exit load, expense ratio, fund manager’s track record, and more.

Note: As far as I know, when selecting a mutual fund, it is vital to know the NAV value. However, the net asset value of the scheme is irrelevant when it comes to generating returns. The difference in NAV will vary between two schemes with the same portfolio and other items, as long as the plan gives the same result. NAV funds have only one cost per share. Just as stock has a share price, a mutual fund has a net asset value. While NAVs do not change like full day stock prices, they are updated at the end of each trading day.

I hope you understand that NAV is not essential when you are selecting between mutual fund options.

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