Why You Shouldn't Rely on NAV When Selecting Mutual Funds

PNN
New Delhi [India], September 29: NAV stands for Net Asset Value, which refers to the cost of a single mutual fund unit. It's like a label that indicates the value of one unit of a mutual fund at a specific moment.
Mutual funds gather investments from people like us and channel them into different assets such as bonds, stocks, etc. The NAV reflects all the assets owned by a mutual fund.
Misconceptions about NAV
1. Lower NAV means cheaper, right? Wrong. A common misconception is that a mutual fund with a lower NAV is cheaper and, hence, a better investment.
This is not true. A mutual fund's NAV reflects its assets' current value. An older fund might have a higher NAV than a newer one, but more is needed to make the newer one a better choice.
2. Higher NAV means better performance, right? Again, wrong. A higher NAV doesn't necessarily mean the fund has performed better. It might just be older.
Why NAV Shouldn't Be Your Go-To Metric
1. NAV Doesn't Determine Fund Performance
Let's take an example. Consider two mutual funds: HDFC Nifty 50 Mutual Fund (Fund A) with a NAV of ₹20 and IDFC Sensex Mutual Fund (Fund B) with a NAV of ₹50.
If both funds have 20% of their assets in a particular company's shares and these shares rise by 10%, the NAV of both funds will increase by 2%.
So, Fund A's NAV becomes ₹20.4, and Fund B's becomes ₹51. While it might seem like Fund B's NAV increased more, the percentage growth is the same for both.
2. NAV is Not Influenced by Demand and Supply
A mutual fund's Net Asset Value (NAV) does not provide information regarding the valuation of the stocks in its portfolio.
It is possible for a newly established fund to invest in overvalued stocks and still have a low NAV, while an older fund might invest in undervalued stocks and have a higher NAV.
3. NAV Doesn't Reflect Underlying Asset Value
A mutual fund's Net Asset Value (NAV) does not provide information regarding the valuation of the stocks in its portfolio.
It is possible for a newly established fund to invest in overvalued stocks and still have a low NAV, while an older fund might invest in undervalued stocks and have a higher NAV.
4. Focusing on NAV Can Lead to Wrong Decisions
Considering more than just the NAV when evaluating mutual funds is essential. Solely relying on this metric could lead to selling a fund performing well or holding onto one underperforming.
Keep in mind that mutual funds are designed for long-term growth. You could miss significant long-term gains if you only focus on short-term NAV fluctuations.
What Should You Look At Instead?
1. Fund Manager's Track Record: A fund manager's past performance can give you an idea of their investment strategy and how well they can navigate market ups and downs.
2. Fund's Historical Performance: While past performance isn't an indicator of future results, it can give you an idea of how the fund has done over the years.
3. Fund's Investment Strategy: Does the fund invest in large-cap stocks? Small-cap? Bonds? Understanding this can help you determine if the fund fits your investment goals.
4. Expense Ratio: This is the fee you pay to the fund manager. A higher expense ratio can eat into your returns.
5. AUM (Assets Under Management): This represents the total assets the mutual fund controls. A larger AUM can indicate trustworthiness and stability.
Conclusion
Although NAV is an essential measure in the mutual fund industry, it should not be the only factor to base your decision on when selecting a fund.
Taking a comprehensive approach, considering additional metrics, and making a well-informed choice is essential. Remember, mutual funds require a long-term strategy, and making intelligent decisions is crucial.
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