Mutual Funds: Which is better higher or lower NAV?

Life is all about choices. While some choices are easier to make, others are not. For instance, if you have to choose between the same category scheme of different MFs, which would you choose?

Ideally, most would say the one with the lower NAV would work better. After all the lower the NAV, the larger the number of units you get, isn't it?

But is it so?Not really. Assuming that both the schemes belong to the same category and have an identical portfolio, it wouldn't really matter whether the NAV is higher or lower. Yes, a lower NAV would give you more units, and a higher NAV would put lesser number of units in your hand, but remember the value of your investment in both cases would be same.

 Mutual Funds: Which is better higher or lower NAV?

Reuters

So how is that you should decide between the two if NAV does not really matter? You should ideally look at the performance of the scheme, the customer service provided by the MF and the fund manager.

Let us see some numbers:

Both schemes are the same kind and you invest Rs 9,000 in both.

Scheme 1: The NAV here is Rs 20. You will get 9000/20 = 450 units here.

Scheme 2: The NAV here is Rs 90. You will get 9000/90= 100 units here.

Now assume that the market moves up 10 percent.

Scheme 1: The NAV goes up to Rs 22.

Scheme 2: The NAV goes up to Rs 99.

Now let's see the market value of the investments.

The market value of investments of the Scheme 1 would be 9,900 = (450*22) and it would be the same amount of 9900 in scheme 2 = (100*99). This shows that you get the same returns of 10 percent in both the schemes. So, the NAV (higher or lower) should not be an important factor, while choosing between schemes.

But can you ignore the NAV completely? Certainly not. Keep in mind that a higher NAV would probably work against you when you get dividends as the payout is on the face value of the scheme. What this means is that a scheme with higher NAV has fewer number of units. Hence when you have a higher NAV you get a lower absolute dividend. But remember that the total returns will not be affected.

So in short, NAV is not the best parameter to decide which scheme to buy.

Updated Date: Dec 21, 2014 03:47:52 IST