₹10 NAV mutual fund looks cheap? Here’s why that could be a costly mistake
NAV, or Net Asset Value, is often described as the ‘price’ of a mutual fund unit. Understanding what NAV actually means can help investors make better-informed decisions while selecting a mutual fund (MF) scheme.
An NAV represents the value of one unit of a mutual fund scheme. It is calculated based on the market value of the scheme’s investments and other assets, after deducting liabilities and provisions, and then dividing the resulting amount by the total number of units outstanding. This is broadly the principle prescribed by SEBI for NAV calculation.
What does NAV tell investors?
NAV tells an investor what each unit of a mutual fund is worth. However, it does not indicate how well the scheme is likely to perform in the future. Similarly, a higher NAV does not mean that a mutual fund is more expensive or less attractive than a fund with a lower NAV.
Consider two mutual funds that have identical portfolios. Suppose one has an NAV of ₹10 while the other has an NAV of ₹500. If you invest ₹5,000 in each fund, you will receive 500 units of the first fund and just 10 units of the second.
Now assume the underlying portfolios rise by 10%. The value of your investment in both funds would increase from ₹5,000 to ₹5,500.
The number of units you own is different, but the investment value is the same because the performance depends on the underlying portfolio. Therefore, the NAV itself does not determine whether a fund will generate better returns.
Why the ₹10 NFO can be misleading
The perception that a mutual fund with a ₹10 NAV is ‘cheap’ is a common misunderstanding. It can also make newly launched schemes easier to market, particularly to investors who are entering the mutual fund market for the first time.
New Fund Offers, or NFOs, often attract attention when market participation is increasing and more investors are looking for opportunities to enter mutual funds. For a new investor, the ₹10 offer price can create the impression that the fund has greater room to grow simply because its starting price is low.
But the initial NAV should not be used as a reason to select a fund.
Whether a fund has an NAV of ₹10, ₹100 or ₹500 does not, by itself, tell you anything about its future return potential. Investors should instead examine factors such as the fund’s investment strategy, portfolio, risk level, costs, consistency of performance and the fund manager’s track record.
Choosing a mutual fund simply because it has a low NAV can therefore lead to a misguided investment decision.
Understanding an NFO
NFO stands for New Fund Offer. It refers to the initial subscription period when an Asset Management Company (AMC) launches a new mutual fund scheme and invites investors to purchase its units.
During the NFO period, investors can subscribe at the specified offer price. After the NFO closes, an open-ended scheme generally reopens for regular purchases and redemptions, with transactions taking place at applicable NAV-based prices.
