Here’s why lower unit price of a mutual fund doesn't mean higher returns
- Generally investors tend to think mutual fund schemes with low
net asset value( NAV) are more attractive and may give higher returns.
- NAV is decided by the fund house and depends on the assets held by the company.
- NAV represents a MF fund’s unit price at which investors buy fund shares from MF houses and sell them. The NAV of a fund is basically like the share price of a company.
Firstly, a mutual fund (MF) is a pool of money collected from many investors, which later gets invested in buying stocks, bonds etc, by a professional fund manager on behalf of investors. SIPs are considered as an ideal way to invest for retail investors.
Currently, there are about 44 registered mutual fund companies in India offering a variety of schemes to satisfy the dynamic needs of diverse investors. Each MF scheme has a different objective towards investment. So, an investor needs to pick the mutual fund that suits his/her needs and risk profile.
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Picking low unit mutual schemes doesn't always mean higher returns
While investing in mutual funds, investors tend to think mutual fund schemes with low net asset value (NAV) are more attractive and may give higher returns.
NAV represents a MF fund’s unit price at which investors buy fund shares from MF houses and sell them. The NAV of a fund is basically like the share price of a company.
The story starts when one has to choose among thousands of schemes. To put it straight, if you were to pick up ones of these mutual funds on the basis of NAV which one will you pick:
A) NAV - ₹100
B) NAV - ₹10
Gill explains how the correct answer is neither.
“Let’s say you invest ₹10,000 in both of these funds then in fund A you will get 100 units and fund B you will get 1,000 units. After one year both funds give a return of 10% and your holding value in both the funds will be ₹11,000. This means a lower NAV does mean more units but it doesn't mean more returns.”
NAV is total assets managed by the company divided by total number of units. So more units means lower the NAV and fewer units, higher the NAV.
A fund may have a low NAV if it is not too old or could be because of the poor performance of the market in the past. But it does not predict how the fund will perform in the future.
“In fact, a fund with a higher NAV has a proven track record that it has generated returns and you have more data to trust such a fund,” said Gill.
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