BEYOND NAV: EVALUATING MUTUAL FUNDS THE RIGHT WAY

When evaluating mutual fund investments, many first-time investors are often puzzled by the concept of Net Asset Value (NAV). A common question that arises is whether it is better to invest in a fund with a higher NAV or a lower one. This confusion typically stems from a misunderstanding of what NAV actually represents and how it impacts investment returns.

Simply put, NAV is the per-unit price of a mutual fund scheme. However, NAV by itself does not indicate whether a fund is good or bad, expensive or cheap. For example, a fund with an NAV of ₹30 is not inherently better or worse than one with an NAV of ₹130. The absolute number alone does not determine the fund’s quality, performance, or growth potential.

WHY NAV DOES NOT DETERMINE RETURNS

What matters to investors is percentage growth in NAV, not the NAV itself. If a fund rises from ₹10 to ₹14 or from ₹100 to ₹140, both deliver a 40% return — the wealth created is proportional.

At Investaffairs, our experts always guide clients to focus on CAGR, long-term consistency, portfolio quality, and risk-adjusted returns, rather than the NAV figure.

A mutual fund’s success depends on :

• Portfolio strength and diversification
• Fund manager expertise
• Investment strategy
• Alignment with your financial goals

In short, NAV doesn’t determine performance — effective asset management does.

UNDERSTANDING DIRECT VS REGULAR PLANS

Investors often notice that Direct Plans of mutual funds show higher NAVs than Regular Plans. This difference arises due to the variation in expense ratios. However, a higher NAV does not make a Direct Plan inherently superior.

DIRECT PLAN VS REGULAR PLAN

Apart from the differences highlighted above, investing through regular plans with Investaffairs offers several additional advantages:

• Professional guidance from experts with over 30 years of experience
• Portfolio rebalancing conducted at least twice a year
• Carefully researched and curated mutual fund recommendations
• Our clients save time
• Comprehensive risk assessment
• A personalised boutique style approach in portfolio creation
• Support with tax planning, asset allocation, and goal-based investment planning

DEBUNKING THE NAV HIGH VS NAV LOW MYTH

The misunderstanding stems from the assumption that a lower NAV means higher growth potential. NAV is merely a numerical value; it does not indicate a fund’s future performance or the strength of its underlying portfolio. What truly drives returns is the fund’s ability to generate capital gains over time.

Consider this:

₹5 lakhs invested at ₹10 NAV → 50,000 units

If NAV doubles to ₹20 → Investment becomes ₹10 lakhs

Now:

₹5 lakhs invested at ₹100 NAV → 5,000 units

If NAV doubles to ₹200 → Investment still becomes ₹10 lakhs

The growth rate matters—not the starting NAV. Lower NAV does not mean higher returns.

Often, the primary difference between two funds with different NAVs is their age. A fund that has been around longer has had more time to accumulate gains, resulting in a higher NAV. In such cases, the higher NAV may simply reflect a longer and potentially more successful track record—not a limitation on future growth.

Further, while the NAV may rise or fall depending on market movements, the total value of assets in a mutual fund will always exceed its liabilities. Hence, NAV remains positive.

HOW TO CALCULATE NAV?

The formula to calculate the NAV of a mutual fund is:

Net Asset Value = [Total Asset Value— Expense Ratio] / Number of Outstanding units

In the above formula:

• Total Asset Value (TAV), refers to the mutual fund investment’s market value and the accrued income, receivables less accrued expense, outstanding creditor debts, liabilities, etc.
• The Expense Ratio refers to the fee you pay to the AMC for managing your investments. The expense ratio directly impacts the investors’ returns.

N.B: According to the SEBI guidelines, mutual funds must display their NAV publicly by regularly updating them on the AMFI and AMC websites on business days.

WHEN IS NAV CALCULATED?

Since the price of the security, such as stock or bonds, fluctuates often, the NAV of a mutual fund cannot be determined during stock market hours.

NAV can be determined after the trading day has ended and the closing bell has rung. It is determined using the fund’s shares’ daily closing prices.

NAV GROWTH DATA (HYPOTHETICAL)

The graph illustrates the growth of a Net Asset Value (NAV) over a 20-year period, assuming a consistent annual growth rate (e.g., 12%) and the reinvestment of all returns (Growth Option).

The data displayed below, which is purely hypothetical, was utilized to create this visualization:

KEY DRIVERS OF NAV APPRECIATION:

1. Sustained Compounding: As returns are generated, they are added back to the principal. In subsequent years, returns are earned on the original amount plus the accumulated gains, leading to exponential growth.

2. Growth Option Continuity: Unlike dividend options where a portion of the fund's value is paid out to investors (reducing the NAV), a Growth Option retains all profits within the fund, allowing the entire "pool" of capital to compound.

3. Longer Fund History: As the fund matures, the effect of compounding becomes more pronounced. As seen in the graph, the slope of the curve becomes steeper in the later years (the "hockey stick" effect).

4. Fewer Dividend Payouts: Every dividend payout effectively "resets" a portion of the compounding process. By avoiding payouts, the NAV reflects the full cumulative performance of the underlying assets.

Here’s a simplified and reframed guide to the most common NAV concepts every investor should understand:

1️.NAV (Net Asset Value) is just the per-unit price of a mutual fund.

A higher or lower NAV does not indicate whether a fund is good or bad. Judging a fund purely on NAV can lead to flawed investment decisions.

2️.Returns depend on percentage growth—not the absolute NAV value.

3️.Should You Book Profits When NAV Rises?

Not necessarily.

Profit booking should align with:

• Your financial goals
• Rebalancing strategy
• Changes in fundamentals

Important- A rising NAV alone is not a reason to redeem.

4️.NAV has no connection with expense ratio.

The expense ratio is the annual fee charged by the Asset Management Company (AMC). It is deducted from the fund’s assets and impacts returns—not the NAV directly. A fund with high NAV may have a low expense ratio and vice versa.

5️.NAV vs AUM – What’s the Difference?

NAV (Net Asset Value): Price per unit of a mutual fund.

AUM (Assets Under Management): Total market value of all investments managed by the fund.

Both are important—but neither alone determines performance.

6️.Which NAV Applies When Buying Mutual Funds?

Orders placed before 2.30PM (working day) → Same day’s closing NAV

Orders placed after 2.30 PM → Next working day’s closing NAV

*For liquid/overnight funds- cut off time is 1pm

7️.Which NAV Applies When Selling Units?

Orders placed before 2:30 PM (working day) → Same day’s closing NAV

After 2:30 PM → Next working day’s closing NAV

Holidays → Next working day’s NAV

8️.When Is NAV Updated?

Mutual funds update NAV at the end of every working day.

As mandated by SEBI, NAV is generally published by 9 PM daily.

9️.Should You Invest in a Fund with High NAV?

Yes—if the fund’s fundamentals are strong.

NAV is not like a stock price. It cannot be overvalued or undervalued because it is not driven by market demand. It simply reflects the underlying asset value.

10.Is NAV Similar to a Stock Price?

Partially—but with a key difference.

Stock prices move based on demand and supply. NAV changes only based on the value of underlying assets.

Demand does not influence NAV. Therefore, it cannot be overpriced or underpriced.

1️.What Is the NAV of an SIP?

It is the same as the fund’s NAV.

SIP (Systematic Investment Plan) and lump sum are just modes of investing. The NAV remains the same for all investors on a given day.

2.Can NAV Fall Like Stock Prices?

Yes. Since mutual funds invest in stocks, bonds, and other instruments, their NAV will fluctuate with market movements. A temporary fall in NAV does not automatically mean you should exit.

Investment decisions should be based on:

• Long-term goals
• Fund performance
• Asset allocation
• Risk tolerance

KEY TAKEAWAYS FOR THE INVESTORS

The Net Asset Value (NAV) of a Mutual Fund should not be the sole deciding factor in your investment decision. More important considerations include the fund's historical performance that provides insight into how it has managed market fluctuations and its portfolio composition, which should align with your investment objectives and risk tolerance. A fund's NAV does not tell you about its potential; hence, focusing solely on this aspect can be misleading.

NAV is simply a number—it does not define quality, affordability, or future returns.

Mutual fund investments should be guided by thorough research and informed decision making. Generating consistent returns often requires expertise and market understanding, especially if you’re not deeply familiar with investing. If you’re unable to dedicate sufficient time to research and monitor the markets, it’s generally wiser to avoid direct investments. Taking a disciplined and informed approach can help minimize potential losses and manage risk more effectively.