Why Buying A Mutual Fund For Low NAV Is A Bad Idea

Many investors think, lower net asset value or the market price of the fund minus its liabilities, makes it cheaper to buy more units of the mutual fund. But lower NAV in isolation is no indicator of the performance or value of the fund. Here is why-
1) Let us understand this with a simple example-

  • Hypothetically, You have Rs.10,000 to invest in either of the two fund schemes. The two identical funds have similar portfolios. Let us assume-

  • Fund A has an NAV of Rs.50. So you can buy 200 units.

  • Fund B has an NAV of Rs.100. That can fetch you 100 units.

  • Assume market prices appreciation of 10 percent. This would then mean,

-NAV of Fund A rose to Rs.55 and

-NAV of Fund B rose to Rs.110.

  • But where does the market value of the investment stand?

The total market value of investments for Fund A is Rs.11,000 (Rs. 200*55 units)

Total market value of investments for Fund B is Rs.11,000 ( Rs.110*100 units)

This shows returns remain the same in both the schemes.

2) Lower NAV counts when funds give big dividends since dividends are paid out on per unit basis. You might gain if you bought more units of such a fund.

3) If stock prices rose too much, their value may not grow further, but this does not hold true for mutual fund units, making NAV of a fund irrelevant.

4) Instead, you could look at factors like-

-fund performance of the fund,

-sectors and quality of stocks the fund invests in,

-historic returns,

-pedigree of the mutual fund company

-price to earnings ratio or fund’s earning potential,

-expense ratio

-exit load