Mutual Fund NAVs – Ignore Them!

By | January 8, 2010

Mutual Fund NAVs are often confused by new as well as old investors.

Mutual Fund Agent to Client: “The New Fund Offer (NFO) is priced at Rs. 10/-. It is Cheap! Buy! Buy! Buy!”

Mutual Fund Investor:

“Is it advisable to buy mutual funds with a high NAV?”

“Mutual Fund ABC has a high NAV of around Rs 423. Is it a better option? How much more can this go up?”

“What is the maximum value to which a NAV can go to?”

Common questions? Unfortunately yes.

The NAV of a Mutual Fund is not the same as the price of a share or commodity. It is the net value of the assets of the fund minus its liabilities like AMC fees etc divided by the number of units of the fund sold to its investors.

NAV = (Assets of the Fund – Liabilities) / Number of Units

So what does that mean? It means that you can safely ignore the NAV of a Mutual Fund when trying to decide whether it is good investment.

Lets see why:

Lets say we have two funds, ABC & XYZ. Also, lets say you have invested Rs. 10,000/- in each and that both funds go up 5%.

Okay, now for the numbers…

The fund with the “Expensive NAV”…

Mutual Fund: ABC
NAV: Rs. 200/-
Investment: Rs. 10,000/-
No. of Units you Own: 10,000 / 200 = 50 Units
Increase (5%): Rs. 10/- (5% of 200)
New NAV: Rs. 210/-
New Value of Investment: 50 Units * 210 = Rs. 10,500/-

Now for the fund with the “Cheaper NAV”…

Mutual Fund: XYZ
NAV: Rs. 20/-
Investment: Rs. 10,000/-
No. of Units you Own : 10,000 / 20 = 500 Units
Increase (5%): Re. 1/- (5% of 20)
New NAV: Rs. 21/-
New Value of Investment: 500 Units * 21 = Rs. 10,500/-

What does this show us?

That we gained 5% in both funds. Our investment of Rs. 10,000/- grew to Rs. 10,500/- in both cases!

So you can safely ignore the NAV of a Mutual Fund. It has no meaning in terms of “Expense”.

To determine whether a particular fund is a good buy you must look elsewhere:

  • What are your investment objectives? What is the fund’s investment objectives? Is there a match?
  • What is the fund’s investment style? What is the Risk versus Return? Does it match your risk profile?
  • What is the fund’s track record? Has it down well in all kinds of markets?

Ultimately you must decide what you are looking for and compare that with what the fund offers.

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3 thoughts on “Mutual Fund NAVs – Ignore Them!

  1. ranjan

    The example and calculations you have given goes equally well with equity as well. If we replace the word NAV with ‘Share Price’ then it would be exactly same with individual stocks too. Then why do we call a stock overpriced and other under-performing ? Can you please clarify.

  2. gautamsatpathy Post author

    Hello Ranjan,

    That is not really correct. What is known as the “Share Price” in the secondary markets is actually a reflection of what buyers are willing to pay for a share of the company. It does not really / only reflect the assets of the company as does the NAV of a mutual fund. Rather it reflects a number of factors such future earnings, prevalent and expected future economic conditions, the company’s order book and future business outlook etc. Actually a host of items that contribute to the “Share price” in the secondary market.

    In the case of Mutual Funds the NAV is calculated from the “Actual Assets” of the fund on the day minus any liabilities.

    We say a Share is “overpriced” when the price is higher than the company’s business will justify. Say a company “ABC” has a good track record, favorable economic conditions, a sound business, a nice order book and hence good possibilities of future earnings. Now if people start paying more and more for the shares of the company the share price will go up. It might reach a stage when the underlying fundamentals no longer justify the price of the share. That is when it is called “Overpriced”.

    Note that this is subjective. What is under-performing to one person might look perfectly sound to another. The share price is not a “absolute” reflection of anything tangible like in the case of a Mutual Fund’s NAV.

    In the case of equity MFs the NAV is actually a factor of prices of the shares it holds / invests in. But the net assets can be accurately calculated by multiplying the “number of shares held” by their “share price”. If the share prices fall the MF’s assets will fall and hence the NAV will fall too. And vice versa.

    This is a rather simplistic view of the concepts involved but I hope it helps to clarify the differences.

    – Gautam

  3. Arun


    You are right that NAVs can be ignored while comparing two funds at any given point in time. It is true that by buying a fund with cheaper NAV, you have NOT done anything smart – because NAV is nothing but the value of the underlying assets.

    However, NAVs do matter when you look at their history. Because the history of NAVs for any fund gives an indication of how efficiently the fund is managed and how the underlying assets are growing. Therefore, comparing the history of NAVs (and dividend payouts) between two funds is what one should do instead to pick a good fund.

    Also, NAV is a reflection of the market valuation of undelying securities (especially in equity funds) held by the fund. Therefore, NAVs again do matter to pick the timing of when to invest.


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